Economic and Market News

All data last week provided upside surprises, a rare event over these past few months when the overwhelming dynamic was the economy’s adjustment to the overhang of excess inventory. The data not only suggest an turning point but also support the notion that the weakest quarter in the cycle was Q2.

This week brought more evidence the economy is beginning to shake off its slump.  On Monday the National Association of Purchasing Management announced its index increased to a 7-month high of 44.7 last month from 42.1 in May. Last month’s reading was the highest since November, and was boosted by gains in new orders and production. Demand for durable goods such as appliances jumped 1.2% in May, suggesting that a string of interest-rate reductions by the Federal Reserve this year is starting to have an effect on purchases of manufactured goods. Prices paid were lower in May than in April and were lower than expected by economists as they came in at 42.3 vs. April’s 45.2. A reading of less than 50 signals that factories are paying lower prices than during the previous month. The June new orders component of the index rose to 48.6, the highest since September, from 45.5 in May. The production index rose to 46.2, the highest since November, from 42.7.

The consumer sector of economy remains healthy as spending rose by a half of a percent in May, the same as in April and more than the .4% percent gain forecast by analysts. Incomes grew at .2% in May, the same as the month before. However, manufacturing wages declined for a second straight month and pay in other industries slowed in May while pay increased in the service sector of the economy. Manufacturing accounts for one-fifth of the economy.

The easing of price pressures has made it easier for Fed policy makers to lower the benchmark overnight bank lending rate six times this year to help keep the economy from slipping into recession. At 3.75%, the rate is the lowest in seven years. The economy grew between October and March at a 1.4% annual rate, the slowest six-month pace since the second and third quarters of 1991 when the economy was emerging from the last recession. A separate Commerce Department report showed U.S. construction spending rose at an annual rate of .3% in May after a .4% percent increase in April. Spending on housing and public works led the increase.

Unnatural Monopolies

The most important piece of economic legislation pending before Congress turns on issues so obscure that even the multi-million-dollar ad campaigns from both sides avoid mentioning them. But confused voters shouldn’t feel bad; apparently the Bush administration does not understand any better.

The bill in question, Tauzin-Dingell, would allow local phone companies–essentially the remaining Baby Bells–to transform the local copper wires that link their customers to national long distance networks into high speed Internet connections, aka “broadband.”

Broadband’s arrival will trigger the next advance in the technology-driven boom that started with Reagan, but it will take a critical mass of connected consumers to achieve lift-off. Without broadband, most users experience the World Wide Web as the World Wide Wait, and neither they nor the economy benefit from the wealth of opportunities it could provide.

The problem is the copper-based telephone infrastructure, the asset the Telecom Act of 1996 considered so valuable that it bestows on its owners a “natural monopoly.” It is now all but obsolete. The Baby Bells face at least three competing technologies–coaxial cable (as in cable TV), wireless and fiber optics–each of which carries higher data rates than copper-based digital suscriber lines. A fourth, satellite, equals many DSL facilities and covers markets DSL will never reach.

The obvious answer is to let the cable and phone companies compete freely. The feds naturally have done precisely the opposite, shackling AOL Time Warner and AT&T, America’s two cable behemoths, with the same sort of open-access nonsense that plagues DSL.

The current regulatory scheme tries to ensure competition on a “level playing field.” But in an innovation-driven capitalist economy there are no level fields. Crucial new ideas, decisively superior to the competition, always establish monopolies, allowing the entrepreneur and his investors to extract “inordinate” profits to compensate for extreme risks. These momentary monopolies dissolve under the next technological advance–that is, unless government steps in to freeze the players in place.

Rep. Billy Tauzin’s bill, co-sponsored by the Commerce Committee’s top Democrat, John Dingell of Michigan, would substantially relax the current regime. To make the game worth the candle, however, the administration should go even further. The “natural monopolies” which alone justified the entire structure of telecommunications regulations, including those on cable TV, no longer exist. The entire regime should be repealed.

Now that the Bush administration has blown the tax cut, leaving us with changes that will cost most of $1.3 trillion while adding minimally to growth, Bush’s last best chance for a successful presidency depends on re-igniting the New Economy. The communications revolution, allowing us the power to transmit any amount of information, from anywhere to anywhere, instantly and at trivial costs, will complete what computers began. It could be largely completed on Mr. Bush’s watch if he takes steps now to let it happen, jump-starting the stalled technology sector and turning the 20-year boom into a 30-year boom. Or he could do nothing and let the matter drift, and perhaps turn his presidency into a four-year distraction.

–From “Unnnatural Monopliies” by Bret Swanson and Richard Vigilante, in The American Spectator’s annual Summer Reading issue.

Author Sam Bass Jr.

Sam founded Beacon Wealthcare in 1998. He has thirty five years' experience investing money for his clients. In 2006 he changed the focus of his firm from asset/return to a client/goal-centered and adopted state-of-the-art planning and management systems to deliver the best fully integrated planning service available. Sam holds a BA in English Literature from Hampden-Sydney College, 1975 and an MBA from Wake Forest University, 1981. He concentrated in International Finance, and did research for an International Finance textbook which included a summer at the London School of Economics. He is married to Sharon, a talented pleinAir oil painter, They enjoy being with their three children, their spouses, and five beautiful grandchildren as often as they can. Sam loves Jesus, sailing, cycling, and writing.

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