The Economy, Stupid
We all remember that famous line that James Carville posted in the Clinton campaign headquareters during the 1992 presidential campaign. Above all else, except perhaps war, the economy is largest single determinant of the political fortunes of presidential asperants. When it's good, the economy figures little in voter decison-making; when it's bad, the party in power usually pays dearly.
It looks like the economy will be a significant factor in this year's presidential election. As I rode into the office this morning, I heard reports of all the major stock indices around the world being in free fall. Most of this, in my view, is an over-reaction to the sub-prime mortgage mess and the demand of investors that the U.S. government "DO SOMETHING, NOW!"
What, if anything, should the U.S. government do? The president has proposed a series of tax breaks of roughly $150 billion to inject money into the economy. The foreign stock exchanges shouted, "Not enough!" by their performance yesterday and this morning.
One problem with recessions is that they are largely a phenomenon of economists. We often don't know we are in one until we are out of it. Recessions are defined by two consecutive quaters of negative GNP growth. Since economists don't get the data on GNP until well after a quarter closes, they are often calling a recession months after the economy is back on a growth track.
A second problem is that government reaction to a recession often takes so long to happen that any spending designed to inject growth into the economy ususually occurs as the economy starts growing on its own. Consequently, the real impact of increased governmental stimulus spending is often to stimulate inflation.
But politicians that ignore calls for so-called "stimulus packages" will pay dearly at the polls. I predict we will have a stimulus package, whether or not we are really in a recession now. We won't know until sometime toward the end of 2008 or early 2009, after the economists pore over their charts and numbers, do a few incantations and read the chicken bones. (I worked as an economist at one point in my career, so I can say these things.)
Third, recessions are as much a psychological phenomenon as an economic phenomenon. That is, we tend to talk ourselves into them and out of them. For example, the sub-prime mess is a very small proportion of all outstanding debt. Clearly, those affected feel the impact of a rapidly escalating mortagage interest rate. But the reaction of the markets to this is all out of proportion to it's real threat to the overall health of the U.S and the world economies.
In short, if everyone believes we are in economic trouble and everyone starts behaving like we are in economic trouble, we will talk ourselves into economic trouble. A recession becomes a self-fulfilling prophecy.
Can we wish ourselves to economic prosperity? No, but we can behave positively by continuing to act rationally and continuing to run our businesses in a prudent and forward-looking way.






