Commentary: The You-Asked-For-It Economy

Low inflation, soaring productivity, and a capitalist China. Why aren't we happy?

Economics is the science of worry. It frets about deficits, jobs, growth, income, mobility -- there's always something. But 10 years ago, who would have thought that today we'd be wringing our hands over inflation being too low, productivity too high, or China too capitalistic? If ever there was a "be careful what you wish for" moment in economic history, this is it. We've made enormous progress on some of the biggest economic problems of the day -- problems that have plagued us for decades. And what has happened? The progress begat new problems, bedeviling us once again.

It's not that we shouldn't be grateful for what we have accomplished. Low inflation is a blessing, raising real wages and incomes, lowering home mortgage rates, and cutting the cost of capital to business. Higher productivity growth, of course, is the foundation of prosperity, lifting output while lowering costs. And integrating China into the global economy by bringing it into the World Trade Organization is all to the good. It forces Beijing to be more open to U.S. and foreign investment; to play by established rules of trade; and to become a partner, rather than outlier, with the established international order. These are all economic dreams fulfilled. So what's not to like?

PLENTY, AS IT TURNS OUT. Really low inflation has scrambled corporations' pricing power. One reason the recovery was so lackadaisical for so long was that companies couldn't get bottom-line traction. We hadn't had low inflation for decades, so we forgot, when it occurred, that consumers just won't accept higher prices for goods and services -- unless they're forced to pay them by monopolies such as cable TV or Ivy League colleges. Profits finally zoomed in the third quarter, but companies got there the hard way: through painful cost-cutting, not price increases. For the past two years, in fact, lower inflation has meant feeble pricing power. Despite the growing recovery, that phenomenon shows little sign of abating in many industries. Achieving low inflation? No good deed goes unpunished.

Ditto for higher productivity. No one -- neither the best economists nor the smartest government policymakers -- predicted that U.S. productivity would grow at an incredible 3% to 4% annual clip, gaining strength right through the downturn and into the recovery. But this unprecedented economic achievement allowed companies to do much more with far fewer employees. So after struggling for three decades to get back to the high-productivity halcyon days of the 1950s and '60s, success brought higher unemployment -- and the need for a permanently higher rate of gross domestic product growth to ameliorate that joblessness. Certainly, more positions will be generated as the recovery gains steam. But will higher productivity and its cost-cutting cousin, outsourcing, keep a significant dip in unemployment at bay? This remains a crucial question.

WHICH BRINGS US to that other paradox of plenty: China. Integrating China into the West has been the foreign policy goal of Republican and Democratic Presidents alike. Having pushed China kicking and screaming into the WTO, we now are the ones kicking and screaming. Outsourcing today is as fashionable a business strategy as Six Sigma was in the '90s. It's the solution to what ails just about anything in Corporate America. But made-in-China translates to lost-in-America (as in jobs), and that wasn't supposed to be part of the bargain. Sure, it's great that consumers can go to Wal-Mart (WMT ), Best Buy (BBY ), and other stores to get inexpensive made-in-China TVs, DVDs, tables, lamps -- even American flags. But that's small comfort to the growing ranks of unemployed factory workers in Ohio, Pennsylvania, Illinois, and South Carolina. China in the WTO? Great idea.

The lesson might be this: Of all the serious economic theories put forth these days -- supply-side, demand-side, macro-this and micro-that -- the law of unintended consequences may be the most potent. It's not that low inflation, high productivity, and globalization aren't good things. They are. Achieving them after so many years of struggle should be a source of pride. It's just that sometimes, it may not feel that way.

By Bruce Nussbaum

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