Nominal vs. Real News
Americans relish self-pity, so only a spoilsport will note that the portion of consumer spending on energy has declined since 1980.
By George F. Will
Newsweek
Aug. 29 - Sept. 5, 2005 issue - It may seem a strange principle to enunciate as the very first requirement in a Hospital that it should do the sick no harm.
—Florence Nightingale, "Notes on Hospitals," 1863
And regarding news media, begin here: They should not subtract from the public's understanding. Yet subtract they nowadays do with endless headlines and talk about "record" oil and gasoline prices. For example, a recent headline in the Financial Times proclaimed: "New York investors take flight after price of oil hits record high." But the story's fifth paragraph read: "West Texas Intermediate for September delivery settled $1.83 higher at $64.90 a barrel—a new nominal record ..." The real meaning of the word "nominal" is: "The headline you just read is rubbish." As was the next day's page-one headline—"Oil price hits $66 for a fourth record of the week"—which was nullified by the story's first words: "Oil prices yesterday broke their fourth consecutive nominal record for the week ..."
For the price of oil—not in nominal dollars but real, inflation-adjusted dollars—to surpass the record set in January 1981, it would have to be $86.72 per barrel. Last Friday it was $65.35. For headlines about "record" gasoline prices to be accurate, a gallon would have to cost $3.12. Last week the national average reached $2.55—less, in real terms, than in March 1981, when the price in today's dollars was $3.11. Or, for that matter, in 1935, when the price was $2.67. Which explains one of the least mysterious "mysteries" of the moment—why, in spite of "sky-high oil prices" (Fox News) and "skyrocketing" gas prices (CNN), people are, according to AAA, driving more.
Fuming drivers should remember that the cost of a gallon of gasoline also contains a cost of government—18.4 cents federal tax and an average of 25.6 cents state taxes. So the cost of the gallon is what the pump tells you—minus about 44 cents.
Since the oil shocks of the 1970s, when the price of oil went from $1.80 a barrel in January 1970 ($9.80 in today's dollars) to $28.91 in December 1979 ($71.88 in today's dollars), the economy has become much more energy-efficient. Total energy consumption per dollar of gross domestic product has been cut almost in half since 1973.
But in America, every pleasure quickly becomes an entitlement, so Americans regard as a civil-rights outrage the fact that today's relatively low price of a gallon of gasoline—relative to prices in other years—is 67.5 cents higher than last year's very low price. Americans relish the pleasure of self-pity, so only a spoilsport will mention that since 1980 the share of consumer spending that goes for energy has declined from 9 percent to 6 percent.
Three days after The New York Times, ever the Cassandra, lamented the "outsized" budget deficit, the Congressional Budget Office forecast that the deficit for the fiscal year that ends Sept. 30 will be down $81 billion from last year, to $331 billion, which is 2.7 percent of GDP. The CBO also forecasts that next year, when the economy is expected to be 5.7 percent bigger, the deficit will be $17 billion smaller, and just 2.4 percent of GDP. Since 1946, the average deficit has been 1.6 percent, and the worst deficit, in 1983, during the recession when Ronald Reagan and Paul Volcker were wringing inflation out of the economy, was 6 percent.
Between 1945 and 1982, the economy was in recession 22.4 percent of the time. In the 272 months since November 1982, the economy has been in recession just 14 months—5.1 percent of the time. The economy is almost certainly in its 10th consecutive quarter of growth exceeding 3 percent. This is why, even after President Bush's tax cuts, federal revenues are 17.5 percent of GDP, just one point below the postwar norm. The average growth of the economy in the preceding nine quarters—4.1 percent—would double the size of the economy in 18 years.
Over the last 40 years productivity growth has averaged 2.1 percent. Since 2001 it has averaged 3.9 percent. One reason for this surge? A 1998 prediction by Paul Krugman, now a New York Times columnist, was spectacularly wrong: "By 2005 or so, it will become clear that the Internet's impact on the economy has been no greater than the fax machine's."
Remember the 2004 campaign rhetoric complaining about the "jobless recovery"? Even though rising productivity means production can increase without increasing employment, the economy has added 4 million jobs since July 2003. If memory serves, on "Fibber McGee and Molly," a radio program that began amusing Americans during the Depression, Molly used to say soothingly to her sometimes morose husband, "If it makes you happy to be unhappy, then be unhappy." If it makes America happy to be the crybaby of the Western world, well, the pursuit of happiness takes many forms. It is, however, hellishly difficult to keep cheerfulness at bay when the nation's unemployment rate is 5 percent, less than half that in France (10.1) and Germany (11.6).
Still, various voices warn that parts of the economy's improvement are "temporary." Well, yes—isn't everything? During a broadcast 14 years ago, Vin Scully, voice of the Los Angeles Dodgers, said, "Andre Dawson has a bruised knee and is listed as day-to-day." (Pause) "Aren't we all?"
© 2005 Newsweek, Inc.
