10 basic laws of economics

Jeffrey Dorfman's recent column in Forbes ("10 Essential Truths Liberals Need to Learn") is not a partisan attack on liberals. It is a clear-cut summary of some basic laws of economics that hold no matter what your political beliefs happen to be. Unfortunately, too many Republicans, Democrats, and bureaucrats are guilty of ignoring these laws. In my experience, it's also true that too many investors fail to understand these fundamental truths. I've only listed the laws here; for an explanation of each be sure to read the whole thing: (HT: Mark Perry)

1) Government cannot create wealth, jobs, or income.

2) Income inequality does not affect the economy.

3) Low wages are not corporate exploitation.

4) Environmental over-regulation is a regressive tax that falls hardest on the poor.

5) Education is not a public good.

6) High CEO pay is no worse than high pay to athletes or movie stars. 

7) Consumer spending is not what drives the economy.

8) When government provides things for free, they will end up being low quality, cost more than they should, and may disappear when most needed.

9) Government cannot correct cosmic injustice.

10) There is no such thing as a free lunch.

I'll add one to the list: Monetary policy can facilitate the creation of jobs only to the extent it fosters low and stable inflation. 

Solid gains in household net worth

U.S. households continued to enjoy strong gains in net worth in the first quarter of this year, according to just-released data by the Federal Reserve. Thanks mainly to gains in financial assets and rising real estate prices, net worth rose to a new high in nominal, real, and per capita terms. In the 12 months ending March, 2014, household net worth increased almost 11%, or almost $8 trillion. (For purposes of comparison, consider that the market cap of global equities rose by $9 trillion over the same period.)

Household debt has not increased at all in over 7 years. Since their recession lows, real estate valuations have increased by almost $5 trillion, while the value of financial asset holdings have increased by more than $20 trillion.

Real household net worth now stands at a new high, and is on track with its long-term average annual growth rate of just under 4%.

Gains on a per capita basis have been a little less (population has grown by a little more than 1% a year), but are still impressive. Real per capita net worth has now exceeded its 2006 high.

A few trillion here, a few trillion there, and you have the makings of some serious gains in prosperity. Since 1950, real per capita net worth has more than quadrupled.

Service sector remains healthy

The May ISM Service Sector report beat expectations (56.3 vs. 55.5), but its apparent strength is probably due in part to a bounce back from the weather-related slump of prior months. Nevertheless, it is one more indicator that the economy is almost certainly continuing to grow, albeit at a modest rate.

Like the Service Sector Composite, the Business Activity report was also strong, right up there near the top of the current recovery's range.

The Employment report, however, was lackluster. This suggests that the strength reflected in the overall index was only temporary, a bounce back from earlier weakness. Without more aggressive hiring intentions on the part of business, economic growth is unlikely to ramp up to a higher level.

It's encouraging, nonetheless, to see that the Eurozone service sector continues to improve after emerging from a recession last summer. Taken together, the U.S. and Eurozone service sectors haven't been this healthy for several years. Synchronized global recoveries are almost always better than the alternative.

Jon Hilsenrath reports in today's WSJ that the Fed is concerned about the low level of equity market volatility ("Fed Officials Growing Wary of Market Complacency"). I made a similar observation last week, but I suggested that rather than implying that the market is complacent or vulnerable to bad news, it might be a sign that the market is vulnerable to good news. It's not hard to see why volatility is low, considering that almost all the economic indicators point to continued, modest growth. There is no sign of any disturbing increase in inflation, no sign of overheating, no sign of excessive optimism, and almost no chance that monetary policy is going to upset the apple cart any time soon. Low volatility means the market is confident that we're going to continue to experience a disappointingly slow recovery, and that's not unreasonable at all given the evidence.