This Is Obama's Market, Good and Bad
While stocks staged a relief rally leading up to the presidential election, U.S. share indices have mostly been down ever since. Major media accounts would suggest that weak markets have revealed themselves thanks to economic indicators pointing to an unfortunate economic outlook.
The above is an easy explanation, but it’s also a faulty one. If we ignore how inaccurate are the measures of economic health calculated by the federal government, it should also be said that they’re frequently backward looking, and as such, they’re often priced by investors well ahead of their release.
So instead of pricing in the present, stock markets are most useful for offering a snapshot of what things will look like in the future. Treasury Secretary Hank Paulson surely isn’t helping the Obama market with his disastrous imposition of TARP, but then it should also be said that Barack Obama is not helping himself.
It was surely gracious of our president-elect to acknowledge that there’s only one president at a time, but the problem there is that his relative quietude until recently has allowed the media to somewhat define what an Obama economic program will look like. Judging by the overall decline in share prices since, investors aren’t impressed.
Investor fear is well-founded. With Obama tucked away in Chicago, here’s how a Wall Street Journal article from last week described the Obama economic program:
“From autos to energy to banking, President-elect Barack Obama is promising to intervene in the economy in ways that Washington hasn’t tried since the 1970s, favoring some industries and products while hobbling others.”
“Under his financial policies, banks seeking government assistance would be forced to lend and halt foreclosures. Automobile companies would be pushed to change their product lines to more advanced, fuel-efficient vehicles. Billions of federal dollars would promote solar, wind and biomass energy, while dirty coal power could be priced out of business.”
Looked at from an historical perspective, notwithstanding market strength over the last two sessions, it’s no surprise that stocks are buckling at present. In promising to intervene in the economy in ways not seen since the ‘70s, Obama is implicitly promising to take us back to a decade in which stocks were flat in nominal terms, and well down in real terms due to dollar debasement.
Japan most famously engaged in the industrial favoritism, federal bailouts, and massive infrastructure spending meant to expand its economy beginning in the late ‘80s, and that Obama seemingly supports today. The result after twenty mostly recessionary years is a Nikkei average that is 79% below its all-time highs.
And while there’s some consensus that non-economic lending brought us to this unfortunate economic period, Obama promises more of the same given his desire to continue the politicization of the bank lending that has proven so unsuccessful under President Bush.
Perhaps not surprisingly, Obama didn’t run from the generalized assumptions about how he would conduct economic policy over the weekend. Indeed, he seemed to embrace the industrial policies and stimulus spending that has only served to weaken the economy, and which has rewarded the Bush administration with some of the lowest approval ratings on record. Obama would do well to change his tune.
That is so because “stimulus” is non-stimulative. Governments can only spend to the extent that the private economy provides tax revenues. When governments spend money taken from the private sector, that spending is merely a tax on real growth for capital being redistributed by the inefficient hand of the federal government as opposed to invested by private economic actors.
The above in mind, many on the left and right persist with the myth that if governments spend enough, economies grow. That World War II led to the end of the Great Depression is used as evidence supporting this faulty idea. Readers should not be fooled.
The spending wrought by the 2nd World War in no way saved the economy. Instead, it should be noted that the Laffer Curve is a dynamic one. With the U.S. at war, the willingness of Americans to work and produce rose. In short, the high tax rates imposed during the Hoover and Roosevelt years were no longer a work disincentive given a generalized desire among Americans to provide the federal government with revenues to fight the war. As always, economic growth is a function of productive work effort, and the war years drove Americans to work much harder irrespective of the tax rate.
Returning to the present, markets continue to price in the certain unfortunate results of Paulson’s disastrous TARP plan, and worse, they’re forced to account for more of the same from a president-elect who promised change. Far from change, the Obama economic plan so far seems to insure that we’ll get more of the same economy-enervating policies that historians will surely point to when they describe why a small market correction turned into a rout.
So with the markets clamoring for reassurance, it’s essential that Obama talk about the economy, and in doing so cheer his base of support without offending investors. Some would say that’s an oxymoronic task, but it’s really not.
About the dollar, he should promise a reversal of the weak-dollar policies of the Bush administration that eviscerated the paychecks of the average American, all the while setting the stage for the mal-investment in property that drove capital away from the wage economy. The dollar’s health and stability is arguably the greatest driver of presidential success, so Obama must not wait to clarify his desire for change in this area.
When it comes to trade, Obama must make clear that tariffs hurt the poorest among us the most for making life’s essentials more expensive. Owing to a desire on his part to increase the real value of the average paycheck, Obama should make clear that he will not tax the free exchange of goods that regularly enhances the lifestyles of poor and rich alike.
About regulation, Obama should note that it’s always the regulated companies that fail such that taxpayers are left to clean up the mess. Rather than allowing big corporations to hide behind regulations, he should make plain that in the future big firms will have to fend for themselves; their failure their own.
As for taxes, some of Obama’s most energetic support comes from young adults who’ve recently entered the work force. With their future in mind, Obama should take tax increases off the table given his desire not to penalize the future success of a significant portion of his base.
If Obama clarifies his stances with growth policies wrapped in populist rhetoric, markets and the economy will rally. And while spending on government programs is surely a tax too, it’s safe to say a growing economy will make some of the more offensive social-welfare legislation that he seeks to pass less of an issue.
So with stock markets uncertain since November 5th, it’s necessary for Obama to talk more in order to remove some of the fear and uncertainty in the markets about what his policies might look like. Lacking clarity, investors can only guess about what’s ahead based on Obama’s decidedly anti-business rhetoric used during the campaign. Whatever direction he takes, it should be clear that today’s stock market is the Obama stock market, so it’s up to him to decide its basic direction.