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.
Then there is the nation’s energy resource base, an important recent addition to the asset side of the national balance sheet. Thanks to fracking, the nation is or soon will be the largest producer of energy in the world, and less at risk from upheavals in unstable, unfriendly producing countries. Energy prices are so low relative to those in Europe and Asia that foreigners are setting up factories here instead of overseas. Warning: we don’t yet know much about the productive life of all these new wells.
Finally, there is the financial sector. The big banks face stiff litigation costs and declines in trading and other income, but Warren Buffett nevertheless finds, “The banks are in the best shape I can remember. They have built up capital enormously, the loan losses have come down drastically, and the portfolios are in good shape.” That improvement is a plus for the economy.
Add all of these to the traditional American assets: the rule of law, an abundance of Keynesian “animal spirits,” risk-taking innovators and consumers receptive to new products.
Which brings us to the liability side of the national balance sheet, dominated by the labor market. And not only the unacceptably high portion—close to 14 percent—of the work force unemployed or underemployed. Equally disturbing is the decline in the portion of workers participating in the work force, down to 63.2 percent from over 66 percent when the financial crisis hit. We simply do not know how many jobs a recovering economy will create, how many workers will attempt to re-enter the labor market when economic growth accelerates, or how many have the skills required to hold down 21st century jobs. Those are areas in which policy can have an important effect, and given the recent performance of the President and the congress there is little reason to hope for agreement on pro-growth policies. Democrats and Republicans have far different views as to how to stimulate job growth, the former favoring higher taxes, more borrowing, more spending, and more regulation, the latter tax cuts, less borrowing, less spending, and fewer regulations. Both sides say they are not for turning, which puts the political process on the negative side of the national balance sheet.
That leaves it up to the private sector to battle through the political headwinds to the higher growth of which the economy is capable. My guess is that it will.
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