Leave it to Hollywood to come to the rescue of American politics. California Governor Arnold Schwarzenegger could well be the most dynamic personality on the US political scene today. Just as his finely honed skills as an actor served him well in forever imprinting the image of the Terminator on our national conscience, his rhetorical flourishes are now redefining the political arena. His recent speech at the Republican National Convention is a case in point. By depicting those of us who worry about the state of the US economy as “economic girlie-men,” the Governor offered new meaning to the debate that is currently raging in financial markets. Far be it for me to take this characterization personally. But in the interest of fair play, it deserves a response.
Forget about politics -- at least for the moment -- and consider the facts: This economic recovery, by most conventional measures, has been amazingly lousy. Annualized growth in real GDP has averaged 3.4% over the first ten quarters of this upturn, far below the 5% norm of the previous six business cycles. Nonfarm payroll employment is up only 0.1%, on average, over the past ten quarters -- hugely deficient when compared with the 2.7% record of the past six recoveries. Real wage and salary disbursements -- the essence of the economy’s organic, or internal, income-generating capacity -- is up at only a 0.8% average annual rate over the past ten quarters versus the 3.9% norm of the previous six upturns. The federal government budget is out of control, having swung from surplus to deficit by six percentage points of GDP from 2000 to 2003. This was key in pushing the net national saving rate down to its all time low of 0.4% of GNP in early 2003. Lacking in domestic saving, the US has had to import foreign saving in order to keep the economy growing; that has given rise to a record current account deficit of 5.1% of GDP. All this speaks of a vulnerable and exceedingly low-quality recovery in the US. If that makes me an economic girlie boy, so be it.
The “economic macho men” see it very differently. Subdued inflation, high productivity, and relatively low unemployment are all emblematic of what they would call great strength. Nor are twin deficits worth worrying about, especially if they don’t have the immediate consequences of pushing intermediate and longer-term interest rates higher. Little do the macho men know how grateful they are to the Japanese and the Chinese for this break on US interest rates. The dollar is strong because America is strong. And so on. Today’s US economy is also depicted by the macho man as being extraordinarily resilient -- especially in the aftermath of the bursting of the stock market bubble, the terrorist attacks of September 11, 2001, and widespread corporate governance scandals. But for many of this ilk, the basic character of today’s US economy is portrayed in a very different light: As Governor Schwarzenegger stressed at the Republican National Convention, ultimately, it’s all about faith -- “faith in free enterprise, faith in the resourcefulness of the American people … and faith in the US economy.” This borrows a page right out of the script of the general philosophy of the Bush Administration. Faith-based analytics have little tolerance for measuring economic progress through the traditional metrics of GDP growth, hiring, income generation, national saving, and deficits. This America is different.
It’s at this point where the debate gets highly political. The Republicans portray the state of the US economy as terrific. As incumbents, they have no other choice-- voters hold them accountable for the performance of the economy on their watch. The Democrats, of course, argue that the economy is in terrible shape. Each party builds its case on the evidence similar to that outlined above. If you side with either of those interpretations, you are quickly labeled a sympathizer of one party or another. Since stock market bulls need a good economy to justify their optimism, they are generally dismissed as Republicans. Conversely, since bond market bulls draw comfort from a weak economy, they must be Democrats. And now Governor Schwarzenegger inserts masculinity into the equation. It follows that bond bulls can now be labeled girlie men, while stock bulls can be called macho men. Such is the utter absurdity of the American political debate.
Fact and causality are two different things. Is President Bush entirely responsible for the poor quality of the current economic recovery? Does Senator Kerry have concrete proposals that will change the outcome? In my view, the answer on both counts is an unequivocal “no.” Blame for the fragile state of today’s US economy can hardly be pinned on one man. Nor is another politician likely to come up with an instant cure. Instead, the fabric of the US economy is more of a reflection of the broad sentiment of the “body politic.” It is conditioned by a broad cross-section of players -- consumers, businesspeople, investors, fiscal authorities (Congress and the White House), and the central bank. Each of these players, in my view, exerted an important role both in fostering the excesses of the late 1990s and in perpetuating the post-bubble funk that has since followed. To the extent that the Bush Administration compounded the problems of a saving-short US economy by locking in long-term structural budget deficits, it is certainly a part of the problem. To the extent that Senator Kerry has failed to offer a specific and credible set of proposals aimed at reducing the federal budget deficit, he hardly qualifies as part of the solution. Politicians are masters of the blame game -- simplifying complex issues and rushing to render judgment on accountability. I wish it were that easy.
Politics have always crept into the financial market debate. And that is obviously a good thing, as millions of investors attempt to price securities on the basis of ever-shifting political winds. But during the current presidential campaign season, the politics of the market debate have been taken to an entirely new level. That’s especially true in the media, where spin has long been a way of life. But I can hardly bear to watch business television anymore. A piece of data comes out and the “expert” interpretation is quickly set in political terms. As a result, economists, market strategists, and even analysts are all too often becoming identified with a political agenda. That is a disturbing development, in my view. It has the potential to compromise credibility and leave investors without the security of independent advice. Notwithstanding Governor Schwarzenegger’s terrific sense of humor, he is only compounding this problem. His politically inspired characterization of those embracing the relatively pessimistic case for a tough economy does a real disservice to the integrity of the debate.
Lest I get accused of taking all this too seriously, I will proudly stand up for the vast legions of economic girlie-men in America today. I have long maintained that the current recovery in the US economy has been largely a false one -- unduly influenced by the “steroids” of excess fiscal and monetary stimulus. Steroids have also played an unfortunate role in providing illegal stimulus to some athletes (and bodybuilders) in recent years. The problem comes in trying to break the habit without suffering serious side effects. For the economy, it’s all about sustainability. Without the organic fuel of job creation and wage income generation, diminished policy stimulus could result in an economic relapse. For athletes, the post-steroid syndrome can be equally painful. And they call us girlie-men!
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