"The Dog Days of August"

Sydney M. Williams

Thought of the Day

“The Dog Days of August”

August 17, 2010

It used to be that if one wanted to read of doom and gloom, one turned to the Russian novelists. Today, reading stock market commentators, one gets the same depressing sense. Of course, the economy has provided an excuse for these growing feelings of despair. Rising foreclosures and falling home prices present a bleak backdrop, as does the continued declining confidence among homebuilders. An unemployment rate of 9.5%, combined with the “under employed” suggest 16% of the population is having a tough time. On July 21st, Ben Bernanke described the economic situation as “unusually uncertain”.

Down markets and sharply reduced volume have had the effect of souring market strategists, turning thoughtful commentators into grumpy old men and women. Robert Shiller, the Yale economist, said yesterday that he believes the odds of incurring a double-dip recession are better than 50%. David Rosenberg of Gluskin Sheff places the odds of a double-dip at 70%. Bob Farrell of Farrell Advisory wrote on Sunday, “…we think sentiment will change to more bearishness rapidly given the news background.” Vince Farrell points out that “weekly initial unemployment claims are getting back to the recessionary level of 500,000.” Mortimer Zuckerman, writing in Monday’s Wall Street Journal, looked at the political environment: “But if the economic scene these days is daunting, the political scene is downright depressing. We have a paralyzed system. Neither the Democrats nor the Republicans seem able to find common ground to address what is clearly going to be an ongoing employment crisis.”

The news is certainly downbeat. Besides the economic news, the world seems more precarious. A nuclearized Iran looks increasingly to be a probability, destroying the wishes of those who dream of a nuclear-free world. While the Balkans provided the kindling that ignited the world wars of the past century, the epicenter of terror has moved East and South to the Middle East. China threatens the status quo in the Pacific. In what can be seen as a prelude to ObamaCare, universal healthcare in Massachusetts now consumes 35% of their state budget, up from 22% in 2000. The combined weight of consumer and government debt is taking its toll and will noticeably worsen if the prophets of deflation prove accurate.

However, the depressing news of sluggish economic growth should come as no surprise. We are a consumer driven economy and, as a society, have lived beyond our means for years, so that today the consumer represents close to 70% of GDP. Given the decline in home prices and ten years of flat-lined stock prices, it is unsurprising that consumers are reducing expenditures and increasing savings. This we all know. We also know that the Federal Reserve kept interest rates too low for too long; we know that regulators looked the other way, as lenders encouraged those without means to borrow beyond reason, and we know that the government’s affordable housing mandate played a role in running up home prices. We were on the ‘Titanic’; we saw the iceberg; we never cut speed.

We also know the “cure” involves a focus on savings, debt reduction and a curtailment in spending – all sound decisions, but ones, by their very nature, that are bound to negatively impact the economy.

What has been missing has been the leadership necessary to right the ship and alter the course. By way of tax policy we should encourage investment and savings and discourage consumption, acknowledging the impact on the economy. We need to focus more intently on exports. We must look at the rest of the world, especially emerging nations, not as a source of cheap imports, but as growing markets for our goods and services. We need to be salesmen, not policemen. Again, tax policy can help. In a globally competitive world, we should reduce corporate tax rates. Our immigration policies are in shambles. Not offering citizenship to foreign students graduating from college, for example, reflects a vacuum in leadership and a failure to understand the importance of today’s competitive environment. Our schools are underperforming. An emphasis on supporting the unions has done very little to help educate students.

None of this is rocket science. None of this is particularly perceptive. Solving today’s problems does, though, require a modicum of common sense, something that leadership across this land should consider during these slow, lazy dog days of August.