The Economic Outlook Looks Good, Politics Aside
12:00 AM, Oct 19, 2013 • By IRWIN M. STELZER
The government re-opened, and there was no default. No surprise. This was the 18th shutdown since 1976, when the current budget procedure was established. The five shutdowns under Jimmy Carter were mostly over major policy issues such as abortion (he was for it) and the construction of a nuclear-fuelled aircraft carrier (he was against it). They averaged 11 days.
The seven shutdowns during Reagan’s presidency were mostly about money, over which it is easier to split the difference, and averaged two days. Compromise is also easier when the Republican president and the Democratic speaker of the House, Ronald Reagan and Tip O’Neill, respectively, share a taste for whiskey and fellowship. So far as we know, Carter did not and Barack Obama does not indulge in either. Nor is either the president or his Tea Party opponents, the latter seemingly intent on losing an opportunity to gain control of the Senate and retain control of the House, inclined to emulate the Reagan-O’Neill approach. Although the warmth of the relationship between these two politicians has reportedly been exaggerated, O’Neill’s son was probably broadly correct when he wrote, “What both men deplored more than the other’s political philosophy was stalemate, and a country that was so polarized by ideology and party politics that it could not move forward.”
Whatever the cause of the 17 previous shutdowns, whatever their length, the nation survived. Divided government, with one branch checking the other, is the U.S. version of European coalition governments, in which the junior members provide a check on the more outlandish desires of the senior members.
America has not only survived 18 shutdowns since 1976, and 10 battles over the debt ceiling since 2001. It has prospered, despite White House orchestrated predictions of doom from business leaders fearful of contradicting the President’s predictions of international financial collapse. With the current crisis solved by a bipartisan truce that expires early in the New Year—the now-proverbial can has been kicked a mere few months down the road, which is tomorrow to businessmen seeking certainty—a new crisis looms. When it does, consider the above-described history before joining the inevitable panic, and keep in mind that share prices rose 2 percent during the 16 days of the latest shutdown.
Meanwhile, lest we be completely diverted by these short-term attention-grabbers, let’s attempt a cool assessment of the fundamental strengths and weaknesses of the American economy.
Two important developments on the asset side of the national balance sheet are the improvement in consumers’ financial positions, and pent-up demand for big-ticket items such as houses and cars. Household debt has dropped to its 2003, pre-bubble level, and rising share and house prices have improved consumer balance sheets—not all but many, especially those of people who own shares and houses. Incomes have yet to rise at boom-creating rates, but they are moving in the right direction. Better-situated consumers are better customers for high-ticket items. William Dudley, president of the Federal Reserve Bank of New York, told a Syracuse University audience, “We are now experiencing a fairly typical cyclical recovery of consumer spending on durable goods,” among them houses and cars.
The housing market will always be affected by the level of mortgage interest rates, which remain attractively low despite a recent uptick. Builders complain of a shortage of skilled labor, and estate agents of an inadequate inventory of houses for sale. From the perspective of the overall economy, those are better problems to have than lots of unemployed workers and unsold houses. The housing market might not be as red hot as it was a few months ago, but it remains likely to be a source of growth, especially as the recovery encourages an increase in household formation.
The outlook for the auto industry is also reasonably bright. Cars are selling at about the same rate as before the recession. Automakers anticipate continuing to “move the metal,” the industry’s jargon for robust sales. The existing fleet is still quite old, prices and features of new models are attractive, interest rates on car loans are relatively low, and retirees are treating themselves to sporty models originally targeted for their grandchildren. In America, old age just ain’t what it used to be.
All of this should result in positive contributions from business investment. “The underlying fundamentals supporting business investment are … good. Profit margins have been high and cash flows strong for some time. Credit availability has been gradually improving,” says Dudley, although small businessmen are not so sure.
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