When Economics Collide with Politics

I have posted before on how the political pendulum is swinging from Right to Left. Before anyone starts getting upset about the utter injustice of higher taxes, the government trampling on property rights, etc., we need to consider what happens when economics collide with politics.

The American Dream unravels?
In the United States, the social consensus of the American Dream, that anyone can succeed, has been the aspirations of millions and fueled many decades of economic growth.

What if American society experiences a severe enough dislocation that the mythic character of the American Dream is shaken? (See the discussion about the problem of low social mobility and high Gini coefficients in the US here and here.)

When the consensus moves too far to the Right and an economic shock occurs - the political pendulum swings Left. Edward Harrison of Credit Writedowns comments [emphasis mine]:

In 2008, the Democrats benefited greatly from Barack Obama’s election as President, taking large majorities in both houses of Congress. Their mandate was to work with the President to fix America’s economic problem. So, Obama’s and Congressional Democrats’ first priority is to end the recession as quickly as possible. I guarantee you there would be hell to pay if this is not done well before November 2010 when the next general election is held.

From Obama’s perspective, it is crucial that he fix the banks and fix the auto industry as these were the two economic issues front and centre in the election which he said he could tackle. With the banking industry stabilised, the Obama legacy rides crucially on how the Auto Bailout proceeds. Under no circumstances is the Obama Administration going to allow General Motors to do to the economy in 2009 what Lehman Brothers did to it in 2008. They are going to fix GM no matter what it takes. And if this includes heavy-handed tactics, so be it.

So, be very clear that the GM and Chrysler issue is an existential question for this administration. Handle it well and you get the Roosevelt treatment and ensure a good outcome for your party in 2010. Screw things up and the depression bears down on America and you’re out of office in due course. The key policy decision is how to ensure a favourable outcome. And when I say favourable, I mean one that ensures as many jobs as possible while minimizing any wider economic fallout. Other issues like treating bondholders well, not committing taxpayer monies to the effort, or keeping government out of the auto industry are going to be much less important.

Harrison's comments extended beyond America’s borders:

[I]f Obama is concerned about his political fortunes because of an election next year, you can bet that Germany’s Chancellor Angela Merkel is concerned given her election is later this year. In Germany, cars have a mythical status…

Today there are hundreds of thousands of jobs in Germany tied to the auto sector, which has huge importance in the Rhineland, Germany’s industrial heartland and part of the most populous German state North Rhine-Westphalia, as well as in Lower Saxony, Bavaria, and Baden-Württemberg. In short, destroying auto jobs is a sure-fire way to lose an election. The ruling coalition is keenly aware of this and that is why they too will be very involved in the GM bankruptcy as it affects Germany through GM subsidiary Opel…

And I haven’t even mentioned the politics in Sweden, the U.K., Austria, Canada or Italy where this expected bankruptcy is equally important.

In other words, politicians have no choice. In times of crisis, rights get ignored (think Japanese internment camps) and trampled on.

Marxism realized?
As individuals, we can argue about whether a policy is right or wrong. As investors, we have to understand political realities and orient ourselves accordingly. Pat Martin, a Canadian legislator from a left-wing party, recently stated:

When I announce that I am a socialist, I guess it is no surprise because we are all socialists now. We just bought General Motors … The fact is that we now have Marxism realized. We own the means of production and we did not have to fire a single shot. It is really quite phenomenal what went on today.

Paul Krugman, in recent a New York Times op-ed article, blamed Ronald Reagan for our ills because of deregulation. While it is true that the pendulum started to swing right with the election of Ronald Reagan, deregulation didn’t cause all our ills. Excessive deregulation did.

The pendulum is now swinging Left, like it or not. At some point in the future, it will swing back. In the meantime, investors need to be aware of the social, political and economic backdrop of this investment environment and deploy their capital accordingly.

Comments

[Tom Armistead:]

Unless you want to make a contribution to the common good you need to deploy your capital away from the path of government intervention.

Jun 15 06:04 AM

[Jasper M:]

Since I think the government is beyond its sustainable carrying capacity, I expect most of its interventions to fail, and soon.
Therefor, I will be deploying Some capital in Opposition to "the path of government intervention".

Jun 15 06:21 AM

[Jimbo:]

This article is realism to the tenth power. Welcome to the second term of James Earl Carter,Jr.(aka "Jimmy").

Jun 15 09:46 AM

[Old Trader:]

A good article that ties in nicely with a couple of articles by Jeff Miller that have appeared in SA about investors needing to be "agnostic" in their investing.

Jun 15 10:32 AM

[Ferdinand E...:]

Interesting, but just in case your readers have forgotten about Japanese internment camps during WW2, those Japanese were not interned because they were a danger to the US, but because their was some political (and maybe even economical) gain at stake. After all, the Japanese population in California were in no position to occupy Carmel or Beverly Hills, because most of their young men joined up to fight for Uncle Sam.

I'm sorry, but mention of that incident can be saved for another article. It has absolutely nothing to do with the present economic meltdown.

Jun 15 10:44 AM

[ain't no fo...:]

Thank you Mr. Hui, this was a good reminder that we must look at the big picture, in which politics plays an inordinately large role in our capital markets today.

In fact, going from macro to micro view, I happen to believe that policy makers have extended their influence right down to the day to day trading activities of some of the largest TARP recipients, as they act in concert to achieve a political agenda that is based on a very strict timeline... promoting green shoots and "helping" the major US markets convince a public desperate to believe that things really are improving is a major step in that initiative. November 2010 indeed.

Regrettably for the movers and the shakers, however, the markets and economies of the world do not always adhere to the machinations and timelines of mere mortals, not even the most inspirational of those politicians.

Jun 15 11:27 AM

[Northstar10000:]

First it was the stock market that put the first kink in the armor
Next up will be the big daddy bond market to kick it in †he groin
:Last it will be the currency boys who will put all end to all the nonsense.
Obambie has no idea of what markets can do.  

Jun 15 07:47 PM

[1RuleNoRules:]

You imply that after a far swing to the far economic right it now swings to the far left. True Reagan was on the economic right but he pushed the pendulum to the center and it has drifted back ever since, particularly after Gingrich left office. The swing to the left began in the 30's and we will now see it swing to the right over the next 60-80 years. What we are experiencing now is a rebellion against the caretaker administrations after Reagan. As anemic growth gives way to stagnation during the caretaker regimes Americans will again demand what Reagan was selling, American Greatness. This pendulum is swing has a much bigger amplitude than 15 years.

Jun 15 11:55 PM

[Paul in Texas:]

I am prepared to help it swing back to the right. I will vote against every politician I can who voted for the TARP and stimulus bills. I will try to find those who have a committment to the Constitution as written and as the Founding Fathers interpreted it and vote for them.

Jun 17 10:24 PM