We’ve mentioned the Recency effect several times of late. You can see no better example of this cognitive bias than in David Malpass’ WSJ editorial today, crowing over Friday’s NFP data.
To his credit, Malpass at least tries to contextualize the release into some historical framework, looking at the drivers of the global boom over the past few years. IMO, he downplays what’s significant and overemphasizes what is less significant, but give him credit for looking at the bigger picture.
"The sea change in global conditions toward fuller
employment has profound implications. This is an opportunity to build
on success rather than dwell on U.S. recession odds. Developing
countries could double their housing stock by adopting stable
currencies and market-based banking systems, the building blocks for
tapping into global liquidity and mortgage finance. Mexico, vital to
U.S. immigration concerns and behind in global job creation, has the
opportunity to take an economic leap forward, using today’s plentiful
liquidity to expand housing, raise living standards, and transform
energy exploration and development. Brazil, India, Israel, South Africa
and others could use part of their international reserves to reform
their anti-growth tax systems, a step blocked until now by the fear
that tax revenues from the existing system would decline before tax
receipts from the new system replaced it.
What’s driving the improvement in the global economic
and labor environment? In the 1990s, the strong and strengthening
dollar created a shortage of global capital and a crippling global
deflation as the U.S. drew liquidity inward. U.S. big businesses,
especially their stock prices, did well as global investors chased
after "king" dollar, but most of the rest of the world sank. Europe was
stagnant, while Asia suffered an extended deflation crisis.
But the post-9/11 switch in U.S. monetary policy
injected liquidity into the global economy, lowered real interest
rates, and brought the value of the dollar down, stopping deflation.
The 2003 tax cuts accelerated the expansion, adding
profits, jobs and asset price gains. These two key growth steps —
reflation and the reduction in the marginal tax rates on labor and
capital — are largely ignored in economic headlines dominated by
concerns about global imbalances and looming recessions. Meanwhile, the
global economy is adding more to jobs, output, literacy and government
tax receipts than ever in its history."
April 9, 2007; Page A13