Cart (0)
business newsWill This Presidential Election Change Our Economic Future All That Much?
Looking back, the economy would have been basically the same under any of the proposed presidents we've had to choose from, though a case could be made that there would have been less accumulated government debt.
PRINT
 |
|
2012 will be the eleventh time in my short life that I will be able to participate in the choosing of a president of the United States. While it may just be me, it seems like each and every election is cast as the most important election of our time and a defining moment for the American Experiment. The future of the republic was being weighed in the balance, and only the proper outcome (which would of course be the election of the candidate you supported) would assure its survival. This week we will continue our meditations on the economic choices that confront the world, this time focusing on the US.
We will start with a thought experiment, in which I invite you to think about alternate histories. Just how important are presidents (or leaders in general) to the success or failure of the economy? And then how critical is the coming election this fall? We will assault a few of our most cherished beliefs, both from the left and from the right. If I do not offend you in the first few pages, I invite you to keep reading; I will get to you somewhere.
(Warning: I risk upsetting more people than usual, as this letter is centered on the politics of economics. I will do my dead level best to be even-handed, but there is just no pleasing everyone. So better to write what I think and at least have one person happy. Which is pretty much what I do every week, anyway.)
As I continuously argue, the most important issue facing the US is dealing with its deficit, just as that is the defining issue in much of Europe and will soon be in Japan. The longer we put off the decision, the more difficult the task and the more serious the economic impact. Without action, Italy all too soon becomes another Greece, but with real impact. They realize that and are making the efforts. But would it not have been easier for Italy with about 40% less debt-to-GDP? Perhaps not politically, at that time when they should have been working on it, but in hindsight I bet the politicians now wish they had done more. It seems we accept change only in the face of necessity and see the necessity only in a time of crisis (as one Italian more or less put it, long ago).
So we discuss politics because the looming debt crisis (and its solution) is at its very core a political creation and must have a political solution. And once the bond market decides to provide its own solution by demanding much higher interest rates, it is too late. That's game over, and a prolonged recession if not a depression will ensue.
But before we go any farther, and quickly, if you are an accredited investor (or professional investment advisor or broker) in the US, let me invite you to a live discussion/webinar with myself and Tony Fenner-Letto of Winton Capital Management on Tuesday, February 14 at 10:00 a.m. Pacific / 1:00 p.m. Eastern. This presentation will be hosted by my partners at Altegris Investments. Winton Capital Management is the largest and arguably the best-known managed futures firm on the planet. We will discuss their strategy for dealing with today's market environment. I will also share my current thoughts on the global economy and its outlook. Hopefully we can talk about something besides Greece (are you tired of Greece yet?).
You can get an invitation to the webinar by calling your Altegris representative at 800-828-5225. If you have not yet opened a relationship with them, I will have them call you if you register at The Mauldin Circle. A replay will be available to registrants unable to attend. I apologize for limiting this discussion to accredited investors, but we must follow the rules and regulations. I am working on doing a webinar in the near future that will not be restricted. Stay tuned. (In this regard I am president and a registered representative of Millennium Wave Securities, LLC, member FINRA.)
One further note. At the end of the letter, I will give you information and a link to be able to register for my Strategic Investment Conference, May 2-4. I expect it will sell out, as always, so I would suggest making your reservation promptly.
Now, we start today's letter in South Africa, as I wonder which continent I will finish it on. In order for me to be able to hit the send button while on layover in London, we'd better jump in.
What Is a President to Do?
I have long maintained that presidents take too much credit for good economic times and get altogether too much blame for bad ones. That is not to suggest that they can't make a difference by promoting certain policies over others. Clearly they can. But I think we might find, if we think about what might have been if the "other guy" had been elected, that outcomes would often have been not very different. In fact, it is often not until after a president is gone that we see the results of his policies. Let's start with recent history and work backwards.Let me preface this by pointing out that we are dealing with just the economic outcomes of the election of a particular president. I readily admit that other areas, such as Supreme Court nominees, regulations, social policy, and foreign policy would, perhaps, change a great deal. These developments are important, and perhaps more important than mere economic outcomes, but for this letter, let's just focus on the economic aspects of a particular election.
Thinking About President Gore
In what seems like an eternity, but was only a short time ago, we were learning more about "hanging chads" on punched election ballots in Florida than any of us ever wanted to know. The world marveled as the denizens of the last Superpower fought tooth and nail over whether a ballot counted according to whether the holes were punched correctly. The difference between President George W. Bush and a potential President Al Gore was in the end just a small number of votes in just one state. It was the closest of elections, with the results literally hanging by a chad. So, it is not at all far-fetched to imagine what would have happened if Gore had won the election. How much of an economic difference would there have been? I would suggest, not all that much.The market had already begun to collapse by the time Bush was inaugurated in January '01. Could Gore have prevented a recession? The answer is no because the weakness had already set in. There would still have been 9/11. That had been planned since Bill Clinton's presidency, when Gore was vice president. And Gore as president would hardly have deterred Osama bin Laden from his plans.
And the economic aftermath of the event would have been roughly the same. Then-Chairman Alan Greenspan and the Federal Reserve would have kept lowering rates and kept them low for too long, no matter who resided in the White House. Would Gore have nominated an old-school monetarist as Fed Chair? Hardly likely. Almost the entire establishment, both Right and Left, the latter of which Gore was a leading figure, were Keynesian to their core. And Greenspan (or Ben Bernanke, or whoever) was not going to allow deflation on his watch, not without a fight, with his main weapon being low rates and easy money.
The regulations that fostered the housing bubble and the subprime crisis were already in place. Both parties were in thrall to Fannie Mae and Freddie Mac. Greed was already running rampant on Wall Street. Did I somehow miss loud, insistent calls for a tighter home-lending regulatory environment from the partisan leadership on either side of the aisle? No, there weren't any.
Would consumers have borrowed less on their homes? Was anyone complaining (except those buying?) that housing values were climbing too fast? Indeed, my neighbors in Texas were lamenting our lack of participation in the seemingly nationwide skyrocketing of housing prices.
Would we have avoided a subprime crisis leading to a credit crisis under Al Gore? Did the Democrats protest the laws, passed by a Republican Congress, that allowed a few investment banks to massively increase their leverage? Or did they also take the lobby money and vote for the legislation?
The repeal of Glass-Steagall? That happened in 1998 under Clinton, with the full support, yea, the insistent urging, of the Republican leadership. (Shepherded by a certain Texas senator, who also called Alan Greenspan the "Greatest Central Banker in History." I still fondly recall Senator Phil Gramm, an economics professor in his prior life, who I think all in all was a very good senator, if just a tad overenthusiastic about Greenspan. (Side note: The conference I just spoke at here in South Africa voted overwhelmingly that the devil's actual surname was Greenspan, from a rather dubious list of choices. Ah, how we fall from grace. But back to our historical meanderings.)
Yes, we would not have had the Bush tax cuts, which some mathematically challenged individuals think are responsible for the whole deficit crisis. The tax revenues that were supposedly lost due to the cuts? Tax revenues were actually up just a few years later. To argue that the Bush tax cuts did not have a stimulative effect on the economy flies in the face of all credible nonpartisan research, which shows tax cuts do indeed provide a positive stimulus effect, so the recovery would have been even weaker without them.
But under Gore we would likely not have had the Bush spending increases (which is what he should be blamed for), as the Republican Congress would likely have continued policies started under Gingrich, which opposed spending wanted by a Democrat president and which resulted in the running of a surplus. It was only when Republicans could get credit for spending increases that they wasted the surplus. But my bet is that (sadly) they would have still figured a way to use up that surplus, post-2000.
Would a Gore presidency have reacted any differently to the credit crisis, in ways that mattered? There was initial bipartisan consensus (at least of a majority, although with some noted disagreements) of the need for a stimulus, although later there was serious disagreement as to what that stimulus should be.
Would Gore have launched a war in Afghanistan? To think he would not have is to ignore who Al Gore was. He was (and I assume still is) a very hard-nosed foreign policy and defense hawk, when he was in the Senate and as vice president. Would he have gone into Iraq? Probably not, but when all the world's intelligence agencies (even the French!) believed Saddam Hussein had weapons of mass destruction and was close to a nuclear weapon, who can say?
(I should note that they all believed that because they had tapped Saddam's communication lines. His top scientists told him they were closebecause they were afraid for their lives to tell him they were not. So even Hussein believed he was close to a nuclear device. It was all a colossal failure of the intelligence professionals – even those in Iraq! Without such "evidence," Hussein might still be in power today. If it was not so profoundly sad, with such a tragic loss of lives, the irony would be just too delicious.)
So, there would have been less accumulated debt, but not all that much in the grand scheme of things. The increase in debt under Bush just brought forward a few years the end of the Debt Supercycle. Instead of the necessity of dealing with the deficit in 2013, we might have gotten to 2016. But the math of the entitlement programs makes the Day of Reckoning a future certainty. However, that is not the point.
The point is that the main economic events would have happened under either president. Would there have been a difference in marginal tax rates? Yes, but I do not think tax rates were the cause of the debt crisis, or the subprime crisis. Would Republicans have avoided the temptation to spend under a President Gore? Not if Dennis Hastert and Tom DeLay were still in charge of the House, at least if they continued to espouse the same policies. Less deregulation? But the subprime problem was not caused by deregulation.
The economy would have been basically the same under either president, though a case could be made that there would have been less accumulated government debt. Differences? Sure, I can think of many, but not major ones.
Clinton on the Dole
Now let's go back to 1996. What if Bob Dole had won? (Remember Bob Dole?) We would be talking about the Dole surpluses, as he would have taken the credit for them. Seriously, can you imagine President Dole giving credit to former President Clinton for the surpluses that had accrued by 1998? Hardly. We were at the end of the bull market and in a roaring technology boom. Would Long Term Capital and the 1998 Asian crisis have happened under Dole? I certainly think so. The resident of the White House had no control over those events, and in any event was hardly likely to try and burst a technology and stock-market bubble. What politician runs against higher stock prices?
Let's push the clock back to 1992. What if Ross Perot had kept his charts to himself? George Bush Senior wins rather handily. What would have changed? The economy was already on the mend when Clinton took office. The technology boom and the resulting bull market would have happened under any president. Deficits would have continued to grow.
Perhaps the defining moment of the decade was not a presidential election but Newt Gingrich becoming Speaker of the House, with a new cadre of troops that actually wanted to cut spending and rein in government. At least until Gingrich was gone and they were in Congress for another decade.
It was precisely the partnership between Gingrich and Clinton that laid the foundation for the surplus. Would that have happened with Bush I? Hard to really say, but Gingrich was a true believer in smaller government back then, and was regarded as something of an oddity by much of the Republican establishment. He was just as much a firebrand back then as he is today, without some of the problems. In an odd way, if we want to revisit the differences in individuals and their importance to the economy, our economic future depended back then as much or more on Gingrich than the president. With a Republican President Bush, would he have had the same results? Could he have helped engineer surpluses? Would he even have become Speaker? Hard to say.
Without the reprieve of the surpluses we had for a few years, we would have been much closer to the end of the Debt Supercycle than we are today. Who knew we would be nostalgic for the economy fostered by the cooperation of Clinton and Gingrich?
If Bush I had lost in 1988? I can't think of anything that would have changed in the next four years. The recession was due. Michael Dukakis would have raised taxes, just as Bush did.
Ronald Reagan and Jimmy Carter? There you could argue that Reagan made a difference. But even then, Carter appointed Paul Volcker, and the die was cast under his watch. Volcker started his war against inflation under Carter, not under Reagan. Reagan benefited that it was early in his presidency that we had the double-dip recession. Did Reagan's tax reforms help spur growth? Yes, there is little doubt about that. Note that Reagan did not ask Volcker to stay on. Back then, Volcker was not very popular.
But Reagan also had the good fortune to start his presidency at the beginning of a bull market and a technology revolution. Stock market valuations were at historic lows, not because of Reagan but because of Volcker and the double-dip recession he caused. Reagan certainly helped the business climate by lowering taxes on small businesses and reducing the regulatory burden.
I would argue that the main effect of a Reagan presidency was felt after he left. It was his stamp on the economy, whether you liked it or not, that set the tone for the next 20 years.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
