“The Sun Also Rises”

Sydney M. Williams

Thought of the Day

“The Sun Also Rises”

February 6, 2013

Following an election, which Mr. Obama took as a mandate, despite his receiving fewer votes than he did in 2008, consumer confidence fell in December, based on concerns about the “fiscal cliff.” In spite of the “fiscal cliff” being avoided, at least temporarily, confidence plummeted even further in January. Now the concern is the economy and individual financial expectations.

Nevertheless, the stock market has had its best start since 1989. The S&P 500 is now selling close to its peak in October 2007 and just below where it was in March 2000. Interest rates are set so low, that there is little cost to money, which helps asset prices, but which provide little upside for bond investors. On Monday Laszlo Birinyi, who was one of the first strategists to recognize the bull market almost four years ago, reaffirmed his expectation that the market has another one to two years to run. In Washington, amidst all the tumult over debt, deficits and guns, it would seem that at least immigration reform may be forthcoming. The debate, as L. Gordon Crovitz wrote in yesterday’s Wall Street Journal, “has turned to opportunities, not the burdens.” And immigration reform has significant consequences, almost all of which are positive for the economy. Roger Altman has an article in the current issue of Foreign Affairs, “The Fall and Rise of the West,” in which he identifies five reasons to be bullish on the United States. Does all this suggest calm seas and smooth sailing?

We tend to extrapolate our most recent experiences. It is the rare individual who can look through the haze and see the future with clarity. Most of us are mere mortals, but an understanding of human behavior is perhaps more important than a knowledge of economics when making forecasts. Like Pavlov’s dogs, we are biologically engineered to behave in certain ways, one of which is to consistently fight last year’s battles. For the past thirteen years we have battled terrorism. The housing market, the source of most people’s wealth, began to collapse seven years ago. Federal Reserve numbers show that household net worth fell 39% between 2007 and 2010. Median family income declined 8% over the same period. The S&P 500 is almost exactly where it was in 2000. The world’s financial system came close to collapsing in 2008 and, since then, Wall Street has fared better than Main Street. Is it any wonder that, in spite of 125% rise in stocks since their bottom four years ago, investors and consumers remain skittish?

Problems abound. The world is a dangerous place, but troubled seas can be deceptively calm and raging storms give little hint of placidity to come. The VIX is selling at multi-year lows, yet terrorism persists and political/economic instability is a common theme around the world. Our debt and deficits are real. Unfunded entitlements will force needed changes. Interest rate policy at the Federal Reserve may have saved a worse economic collapse four and a half years ago, but it has punished savers and the elderly. Crony capitalism persists between titans in the industrial and financial sectors and elected and appointed officials in government. Banks too big to fail have become even larger and, thus, more dangerous. The spread between the rich and the poor remains too high, even though it peaked in the waning days of the Clinton Administration. The middle class has been squeezed and there are fewer people working than five years ago. Poverty remains too high, especially among minorities. There has been a growing dependency on government, which only adds to the problem, both ours and theirs. Unfortunately for too many, dependency is seen as a permanent solution. Our students are failing. They compare poorly to their peers in several other countries. A study done by the National Center for Public Policy and Higher Education found that 50% of college students could not understand a typical newspaper’s editorials. We live in a society that celebrates relativism and abhors conventional moral standards, yet everyone agrees, for example, that children born to unmarried women start life at a disadvantage. And we know they represent 40% of all births in the U.S. today. Even candidate Barack Obama, in 2008, noted that such babies were five times more likely to live in poverty and nine times more likely to drop out of school. Yet the persistence of such births has increased over the past four years.

But acknowledging that such problems exist is a necessary first step toward finding a solution. Once identified, they can be addressed. And that process, I submit, has begun.

We know the world is dangerous, but that has always been the case. Nothing is static in foreign relations; not diplomacy, alliances, trade pacts, weapons, military strength or borders. Technology and real-politics are forcing change. Drones will not only be used as killing machines, they will change the way in which intelligence is gathered and monitored; and potentially will be used for surveillance on American citizens. In a front page article on Monday, the New York Times discussed a secret legal review which concluded that President Obama has the power to order a pre-emptive cyber strike “if the United States detects credible evidence of a major digital attack looming from abroad.” Whether one agrees with the decision or not, the announcement demonstrates the changing nature of international conflict and prompts ethical questions, as of yet unanswered.

Ultimately, the answer to the debt and deficit problems will be found in neither austerity nor tax increases; the answer will be found in an economy that expands closer to three percent than two percent. That will not prevent foolish legislators from acting foolishly, but it should provide a reprieve, perhaps temporary. The International Energy Agency estimates that the U.S. will surpass Saudi Arabia as the world’s largest oil producer by 2017. In 2012, the output of oil and other hydrocarbons rose by 7%, the largest single-year increase since 1951. It is certainly possible that government will do their utmost to retard development, by limiting access to federal lands, but, in any event, the process will persist. Cheaper sources of natural gas and petroleum will provide enormous benefits to America’s manufacturing base, which have already benefitted from improved efficiencies, a result of the recent recession and mediocre recovery. Exports should expand as a percent our national GDP. The housing glut and subsequent bust have provided an opportunity for the construction industry to renew growth, at least in line with family formations.

Pro-growth economic policies would accelerate the trend. A lowered and simplified tax code, expansion of free trade, the elimination of burdensome regulation, an immigration policy that favors the talented and well educated; an expanded guest worker program would also help fuel the recovery. While most of these changes seem unlikely under the current Administration, the foundation for increased growth exists.

Nothing in life, however, is assured. At some point the Federal Reserve will have to lift its foot from the accelerator and place it firmly on the brake. Will they be able to do so without going into a skid? Probably not. Technology has advanced at a pace faster than our ability to absorb the natural growth in our workforce, and it has strained our ability to understand the effect of technological advancement on our moral standards. Nevertheless, things are changing. The financial successes of states ranging from Wisconsin to Indiana to Texas are attracting wider attention. The number of charter schools is increasing, providing alternatives to the poor and oppressed, especially in our inner cities. The gasping, grasping sounds emanating from teacher’s unions indicate they are aware that their future is less secure. But it is our children and their teachers, not the unions, which should be our concern.

I am far from happy with current trends at the national level. The course the Administration has chosen, in my opinion, is distinctly the wrong one. Redistribution and collectivism will do nothing to revive the animal spirits necessary for robust economic growth. Congress has abused our trust for years and appears uninterested in addressing the serious financial concerns we all face. But many local and state governments are confronting the consequences of previous administrations’ profligate ways. They are taking on unions and improving their local economies. Susan Combs, the state comptroller of Texas, has recently proposed the radical step of returning to taxpayers the state’s surplus. A first step toward long term reform is the public acknowledgement that the funds with which any government operates belongs to the taxpayers, a position Mitch Daniels repeatedly emphasized during his eight years as Governor of Indiana. Government employees serve at our pleasure. Nationally, we have moved a long way from that understanding. It is refreshing when governors, mayors and comptrollers remind us that they are servants of the people, rather than us being subjects of the state.

Of course, if more Republican governors follow the sorry example of Ohio’s John Kasich, and a half dozen others, and succumb to the temptation of ephemeral federal Medicaid funds, then all bets will be off. Mr. Kasich may win this year’s budget battle, but he surely will lose the war.

Despite my concerns, it is the examples of Ms. Combs and Mr. Daniels that provides me hope that the sun will come out.