August 23, 2005
Tuesday

The largest retailer in the world, Wal-Mart, reported last week that sales and profits for the three months ending July 31 were a little worse than expected because "our consumer continues to be impacted by higher gas prices."

The New York Times could barely contain its delight. The economy is slowing down because of soaring energy costs!

"The pain that now seems imminent might have been avoided," said a Times sermonette. "Conservation could have reduced energy demand and prices," of course; there was the damage wrought by those "tax cuts for the rich."

A little perspective is in order.

First, Wal-Mart's sales for the quarter were up 10 percent compared to a year earlier to a record $77 billion. For all of 2005, the company's revenues will exceed the Gross Domestic Product of entire countries like Saudi Arabia and Sweden. Second, Wal-Mart noted that July results actually "came in stronger than expected." Retail sales are rising briskly across the board. The economy is not coming to a screeching halt because of oil.

In fact, the real story is that oil prices are having so little impact. Oil is up 40 percent a barrel this year, and natural gas, used in electricity generation, is up by about two-thirds. Prices at the pump for premium gas are exceeding three bucks a gallon.

It's the minimal effect of these higher oil prices that is so annoying to doomsaying politicians and journalists. The single best indicator of an economy's performance, GDP, the output of all goods and services, is currently about 3.5 percent, and it's not slowing. It's accelerating.

The United States has created 1.2 million new jobs in the past six months. The unemployment rate has dropped to 5.0 percent from 5.4 percent.

Compare those figures with Europe's, where energy conservation through taxation is the norm. In France, GDP growth is an anemic 1.2 percent, unemployment 10.1 percent. In Germany, GDP has flat-lined, and unemployment is 11.6 percent.

Yes, the United States has problems. A good rule - call it the Rule of Bigness - is that in any economy where 100 million families generate $12 trillion in GDP, there are bound to be problems somewhere - enough to fill many hours of woe on nightly news programs.

Congress still hasn't addressed the coming crisis in Social Security and Medicare. Iraq is consuming lives and tax dollars. Terrorism looms. Interest rates and producer prices are rising. Real estate bubbles have puffed up in some urban areas and resorts. Many consumers have borrowed too much, and poverty hasn't been eradicated.

But, on the other hand, the Rule of Bigness requires you to look at all the aggregate numbers, not just selected ones and convincing anecdotes. U.S. exports are increasing at an 8 percent clip. Home mortgage rates are still under 6 percent. Productivity remains buoyant. And the federal deficit is closing much faster than anyone expected. Corporate profits rose 14 percent, the 12th straight quarter of double-digit growth.

But back to gas prices. Why haven't they hurt more?

First, the United States has been making dramatically more efficient use of energy for the past 30 years. Each American uses roughly the same amount of energy he used in 1973, but the nation's economic output has risen 74 percent in real terms.

Second, the Rule of Bigness. The Bureau of Economic Analysis reports that in 1984, U.S. consumers spent about $95 billion on petroleum products; last year, we spent $203 billion. But in 1984, consumer income was $2.3 trillion; in 2004, it was $6.7 trillion. So, very simply, we're spending twice as much on oil, but our incomes are three times greater. Also, with much higher incomes, we meet our basic needs more easily, so we have the cash to pay the higher oil prices.

Paying more for oil, however, is a kind of tax, and, barring a miracle, that tax will rise in 2005 over 2004. At some point, oil prices will indeed bite seriously. But my guess is that, through free markets, efficiency and supply will increase, and prices level off or even decline, before that happens.

Again, think big. Despite terrorism, war and a devastating high-tech bubble, the U.S. economy has performed exceptionally well so far in this century. If we allow markets to tap the human imagination and operate with minimal government intervention, that progress can only continue.

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