When reading and reflecting on the history of our economic and financial condition it appears that we get it wrong more often than we get it right. Just as our history is a history of wars with brief interim periods to rebuild and reload (often referred to as ‘peace’), our economic history is a story of moves to extremes with interim periods of relative stability.
Political hands on the machinery of the economy is just too tempting to resist. Monetary, financial, fiscal, and economic policy can become quite complex particularly in a world where exchange rates continuously adjust the relative economic power of nations. Global systems that work in a period of peace may work poorly in times of war; systems designed to assure balance among friendly nations may work poorly among nations at philosophical or political odds.
While few voters comprehend the complexities of administering economic policy, it would be a mistake to assume that our political leaders understand it much better. And while the average voter may not understand the nuances of economic philosophy they understand the results very clearly.
High unemployment and high inflation are not easily recognized until they change rapidly or drastically . Economic growth and new product innovation is appreciated by many even if it gets buried in the cynicism that masquerades as political analysis.
In the last 100 years only four presidents got it right. Coolidge, Kennedy, Reagan and Clinton practiced a combination of sound money and lower taxes. In each case the economy boomed afterwards. Their effective policies were undone by their successors; Hoover and FDR after Coolidge, Johnson and Nixon after Kennedy, George W Bush (who only got it half right) and Obama after Reagan and Clinton (with a brief lesson from ‘read my lips’ George H. Bush). It is worth noting that neither party has maintained a monopoly on economic competence or incompetence.
The tumultuous twentieth century demanded adjustments that our leaders were ill prepared to understand. Global monetary developments caused the rise of the economist as a central policy figure. Keynes’s deficits and stimulus became accepted more because of the rising popularity of central planning than because of any evidence that it actually worked. Milton Friedman’s monetary school focused more on monetary policy as a stimulus as opposed to active government intervention into the economy. While Friedman’s vantage focused more on individual liberty and freedom, Keynesian policies were favored more by those who wanted the government to force greater equality and social justice.
Better results were achieved by Robert Mundell (Nobel prize 1999) and his better known advocate, Arthur Laffer
Pushing businesses to extremes in efficiency is destabilizing. Tax codes that created incentives for debt over equity created leveraged companies that sought greater efficiencies to accommodate the structures. But as Nassim Taleb has pointed out, efficiency is a form of leverage. When you are running at maximum efficiency there is no magic hat to pull out further cost reductions when truly bad times hit. This causes recessions to be more severe.
Policies enacted when the economy is booming seem free of consequences. Raising the minimum wage 40% ( $5.15 to $5.85 in 2007, to $6.55 in 2008 and to $7.25 in 2009) seemed like a good idea at the time, but its impact on the unemployment rate of the young has proven disastrous. Yet reducing the minimum wage has become a risky battle in the class war.
More than the content of the tax codes and regulations themselves is the rate at which they change. We cannot have a stable economy when tax rates and regulations change every couple of years. Not only do the changes themselves inhibit growth, but the constant talk and debate leaves investors always wondering.
It is bad enough when this political volatility simply makes businesses and investors think in the shortest possible terms. We have reached a point where the regulations, both passed and pending, is squelching investment altogether.