Sooner or Later This Fake Economic Boom Will End

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Standing for reelection that year, the President motored up to Capitol Hill for the annual tradition of the State of the Union. Having come into office under tumultuous circumstances, he wished for Congress and the nation to know that so much progress had been made, a not-so-subtle message to kickstart the coming campaign. After all, he implied, the American people must have originally elected him for a reason.

The country needed some big fixing.

“I recall these troubles not to point any fingers of blame. The nation was so torn in those final years of the '60s that many in both parties questioned whether America could be governed at all.”

Just over three years earlier, Richard Nixon had been handed the keys to the White House in November 1968 amidst obvious fury and turmoil. On the foreign policy front, Vietnam. Here at home, the Great Inflation.

So, President Nixon seeking another electoral mandate in 1972 proudly declared an end to both. A new era of peace and prosperity was at hand here and abroad. Peace talks were underway with the Vietnamese and very soon the President would personally visit China and the Soviet Union.

He had as much good to say about the economy, too. The US had experienced a recession in 1970, but the economy had seemed to be steadily digging its way out from it. Stubborn inflation had been the key concern heading into the contraction, a huge concern, and the President telling Congress the measures his administration had undertaken the year before, 1971, were bearing fruit. 

“Industrial production, consumer spending, retail sales, personal income all have been rising. Total employment, real income are the highest in history. New home building starts this past year reached the highest level ever. Business and consumer confidence have both been rising. Interest rates are down. The rate of inflation is down. We can look with confidence to 1972 as the year when the back of inflation will be broken.”

The American public believed him, or at least believed in him when they decided to cut Nixon some slack in order to see how it would play out. The 1972 election was one of the greatest landslides in US history; his Democrat opponent, George McGovern, won just one state, Massachusetts, and finished with only 17 electoral votes and 37.5% of the “popular” vote compared to the President’s 520 electoral votes and 60.7%.

Most people remember the economic policies in 1971 because they were big things, or they had seemed to be.  In August of that year, Bretton Woods finally died (it had begun its death march in November 1960 when the London Gold Pool was formed, technically defaulting on the basic reserve provisions). To address growing instability in the dollar, the President cut all ties with gold money, the currency no longer convertible by anyone anywhere.

On the advice of nearly every economist of the time, he was told a regime of floating currencies was the only way out. And that’s the way he went.

It was not his only strike at the Great Inflation. The same day the dollar was defaulted, President Nixon told Americans in a nationally televised address that he was “ordering a freeze on all prices and wages throughout the United States.” The Economic Stabilization Act of 1970 had given him the authority to do something like that, and so he used it issuing Executive Order 11615.

Wage rates would be frozen for 90 days and then afterward raises would have to be approved by a Pay Board and companies would need the permission of a Price Commission in order to increase prices. It was as if Chairman Mao and President Nixon had swapped places several months before their historic February 1972 meeting.

Nixon, however, hadn’t won over everyone with his heavy handedness. Economist Milton Friedman said bluntly, “Sooner or later, and the sooner the better, it will end as all previous attempts to freeze prices and wages have ended, from the time of the Roman emperor Diocletian to the present, in utter failure and the emergence into the open of the suppressed inflation.”

Friedman was absolutely right. But it was hard to see before the 1972 election, and so George McGovern ran harder left right into the electoral buzzsaw. As with the New Deal, it wasn’t about being effective it was about a Presidential candidate connecting with working Americans and telling them that they were being heard loud and clear – the opposite of McGovern’s message.

The loss has haunted Democrats ever since. Why? In 2016, Joshua Mound wrote in the New Republic:

“But the Democrats’ fear of McGovernism is misplaced. McGovern didn’t lose because he was too far to the left. He lost because he was facing a popular incumbent presiding over a booming economy.”

That was indeed the perception. It just wasn’t true; it didn’t need to be true.

Nixon’s economy never actually boomed. In 1972, the US was experiencing an upswing, sure, but it was an isolated instance, a temporary reprieve before the gross malfunctions still smoldering in the malfunctioning economy roared back into the public’s consciousness. Milton Friedman was awarded the Nobel Prize in October 1976.

Small wonder the President was so unpopular by 1974, and not all of it had to do with Watergate. And what did Gerald Ford offer American workers in ‘76? A campaign slogan, a WIN button (Whip Inflation Now) to be thrown in the trash while on the way to vote for the unconventional Georgian Jimmy Carter.

None of this is unfamiliar territory. It was just four years ago when an upstart no one thought had a chance grabbed the election and rode the deep, underappreciated well of economic dissatisfaction to campaign success.

In February of 2016, then-candidate Trump deployed his typical grandiose, exaggerated style after his win in the New Hampshire primary.

“Don't believe those phony numbers when you hear 4.9 and 5 percent unemployment. The number's probably 28, 29, as high as 35. In fact, I even heard recently 42 percent.”

The press had a field day savaging Trump as delusional. They missed the point; it was his usual schtick, his way of directly connecting to especially Rust Belt workers who had all along (since 2009) believed that very thing. The unemployment rate was fake, or at the very least not so neatly accurate.

It wasn’t just the Rust Belt. Donald Trump won by saying out loud what everyone else knew but wouldn’t talk straight about. Hemming and hawing, deferring to Ben Bernanke about “recovery.” Like Nixon in ’68, the message from Trump in ’16 was, “I’m here to clean up this huge mess.” He’d earned a ton of goodwill simply by admitting there was a mess.

To do so, Trump may have sounded unconventional to some but actually turned out to be very conventional. Tax cuts and deregulations. Good things on their own merits, but hardly the fault making the disconnect between the unemployment rate and popular perception. Then trade wars.

Again, it’s not about being effective it is about perception and connection. Trump is staying on message with the American worker. He’s working on their behalf; that’s what he’s showing them. They remain his Number One Priority.

Sort of. Also like President Nixon, President Trump can’t seem to make the progress he’s seeking. There isn’t a day that goes by where he doesn’t tweet about his “historic” economic “boom”, and I don’t doubt for a minute that it is a sincere goal for him, but, ironically, outside of the unemployment rate it’s exceedingly, shockingly thin.

When he called it fake four years ago, it was already pretty low. It hasn’t really fallen all that much lower since. It just sounds so much better being the lowest in 50 years even though the rate in 2016 wasn’t that far off from the same.

And that is why it has been embraced wholeheartedly. It might’ve been fake enough for New Hampshire, but this week it just so happened to find its way into Trump’s third State of the Union – seven times. You can see why pretty easily. Outside of this one statistic, there just isn’t much. When the President did stray from it, he was forced to rely on rhetoric.

“Since my election, we have created seven million new jobs — five million more than government experts projected during the previous administration. (Applause)…If we hadn’t reversed the failed economic policies of the previous administration, the world would not now be witnessing this great economic success. (Applause)”

The last part I quoted was true; the Obama Administration had performed terribly on economic matters. President Obama had been dealt an awful start to his first term, but then he had the balance of two full ones to pull out of it. It didn’t happen and people had developed the sense that he and the others in the “establishment” looked at it as a kind of fate, and were willing to just accept it. Thus, Trump.

But has Obama’s successor done any better? Is seven million new jobs (actually, 6.668mm) in three years a measure of success? Notice the (other) trick Trump deploys to frame it that way; compared to what the last guy’s guys said, we’ve blown away their estimates by five million!

Set aside the fact that 2019 is already estimated to have been the worst for the labor market since 2010, and that was before this week’s looming nasty benchmark revisions, seven million is only good in that it wasn’t less or negative. In Bill Clinton’s first three years, the US economy gained 8.5 million payrolls with a 25% smaller civilian non-institutional population (potential labor).

In Ronald Reagan’s first three years, the economy had only gained 1.2 million because of the second of two nasty recessions which had marked the final severe costs to the Great Inflation. But, in 1983 and 1984 during the two years before his 1984 reelection the US economy would go on to add 6.99 million payrolls – more in two years than Trump’s in three, and with only two-thirds the population.

The unemployment rate never got as low in the eighties or the nineties and no one cared because you didn’t have to go to extreme lengths in order to conjure some way to claim the economy was thriving. In that respect, the current period more closely resembles the seventies, only with the monetary condition underlying flipped around.

Back then, authorities had been desperate to stop inflation. These days, they can’t figure out where it went or how to get some.

The end result(s) remains the same. Gross economic dysfunction working its way through the electorate in its own way. Slowly.

None of this is meant as a political statement for one party or the other. They’re both wrong, as far as I’m concerned, a bipartisan failure unlike any we’ve seen before. Trump was the outsider who was going to shake everything up, and in a lot of ways he has. Just not in the one area where it was most required. Instead, the once fake unemployment rate has become his primary campaign symbol.

That’s pretty profound, probably not how he imagined in 2016 how 2020 would go.

I say this after having written many times before how it was a good thing that Trump came along – and Bernie Sanders who tapped into much the same gross discontent. I wrote all the way back in September 2015:

“Bernie Sanders is no more mysterious in his rise than Donald Trump…Earlier this week, Senator Sanders tweeted that, ‘it is unacceptable that the typical male worker made $783 less last year than he did 42 years ago.’ His huge crowds enthusiastically embrace that populism, which is a direct contradiction to the dominant, complacent rhetoric about the economy parroted out from the FOMC and that which is being similarly claimed by the current administration of his own party.”

Like Trump’s statements about the unemployment rate, “Sanders' recent appeal seems enhanced by attacking Obama's economy rather than serving tribute to it as is generally expected of these things.” Bernie’s socialism would be a disaster, of course, so what’s positive about where he finds his second serious Presidential run right now right at the top of the Democratic heap? As I wrote four and a half years ago:

“Getting the election ‘right’ this time isn't so important so long as finally the attempt of not settling for the con.”

In my mind, there are so many parallels between this election and the one in 1972. The economy isn’t close to being fixed and yet many people appear willing to see it play out the way it is now. To give the guy more of a chance after he shook everything up. Trump, like Nixon, can win in a landslide even with a “boom” that deserves every bit the quotation markets around the word.

At least he asked the question, and he still does.

And the Democrats have a choice, too, but one they seem very, very reluctant to embrace. Even George McGovern wasn’t afraid to attack Nixon on the economy. The unemployment rate, however, has spoken for his party descendants, as well. They’ve all but conceded on the big picture when it should still be their top priority.

What was good about 2016 was that it had shown Americans did have a pulse, that we weren’t going to meekly accept the fate the “establishment” had served up for us to follow along down the Japanese road to national suicide. That America had demanded some real answers. Whether we got them, that’s still the debate should you realize it or not.

By every reasonable and honest standard, this is absolutely nothing like the 1984 election. Instead, 2020 bears too much resemblance to 1972 and therefore, sadly, it almost certainly will fall well short of finally writing the end to this chapter in our history. To paraphrase Friedman, sooner or later, the sooner the better, it will end as all previous attempts to fake a boom have ended. 


Jeffrey Snider is the Chief Investment Strategist of Alhambra Investment Partners, a registered investment advisor. 

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