The U.S. stock market may be shaky, but the American economy is a lot healthier than some analysts perceive it to be.
Nevertheless, the stock market fell 40 percent since the summer of 2000 and corporate profits for companies in the S&P 500 dropped 27 percent over the last year.
Some economists attribute the weakness in profits to increased competition from abroad. They also point to the role of the Internet in lowering barriers to entry in sectors such as book and computer retailing and removing the lucrative friction from transactions like obtaining mortgages or buying machinery. Finally, deregulation has ended the government’s protection of monopolies in areas such as telecommunications.
These developments are good for consumers, but can be bad for individual businesses that fail to get out of their rut and innovate. Many are responding by trimming operating costs a smart move. But others have also cut back on capital expenditures, which observers call a big mistake. In a more competitive era of hard-won profits, more research and development and capital spending are necessities, economic observers warn.
Source: James K. Glassman (American Enterprise Institute), Invest, Innovate, or Die, Wall Street Journal, December 9, 2002.
For text (WSJ subscribers) http://online.wsj.com/article/0,,SB1039384478995387593,00.htm
For more on Productivity http://www.ncpa.org/iss/eco/
FMF Policy Bulletin/11 December 2002
