Yesterday marked the signing of the stimulus package. It has been accompanied by a lot of commentary and criticism. One of our thoughtful readers recently asked if there was a book to read to understand government and economic policy. A good question, but not an easy one.
The problem is that our government consists of many different institutions. Each has a different mission with corresponding powers. Some are sensitive to the electorate, while others are more insulated. It is a system that has evolved over time. One of the first things to learn is that it was not all contemplated by the Founding Fathers. Their wisdom provided for change in process. It is the key to the endurance of our form of government.
The mistake that nearly every market pundit makes is to look askance at each individual move. The actions are incremental. They will not "solve" the problems. The government does not understand.
No one sees this as a whole, with each incremental step making a contribution. Will the pieces add up to a satisfactory solution? Maybe, and maybe not, but that is the right question.
It is a question that no one is asking.
Government is such an easy target.
The best marksman was Will Rogers who gave us (among many others) the following memorable quips:
Be thankful we're not getting all the government we're paying for.
Ancient Rome declined because it had a Senate, now what's going to happen to us with both a House and a Senate?
Another excellent quipster was Ronald Reagan. Who can forget this gem?
The government's view of the economy could be summed up in a few short phrases: If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.
The nine most terrifying words in the English language are, 'I'm from the government and I'm here to help.'
These humorists really understand the audience. It is the key to getting a laugh or making a successful speech.
Thinking about such humor and why it works leads us to an unusual and helpful investment principle. But let us start at the beginning.
What is it about our government?
Americans love to laugh at government. Maybe it is because we can. That was not true for many countries throughout history, and Americans love to exercise their First Amendment rights.
It makes us feel superior. For the same reason we can boo at a sporting event we can criticize politicians. We paid our money!
Why is this important?
Understanding this element of the American psyche is vital if you are a humorist. It is also helpful if you want to write a newspaper column or a popular blog. If you start criticizing everyone as stupid, you will have a lot of followers. You can do even better if you use a lot of "hip" language. Referring to the Fed Chair as "Helicopter Ben" or "Uncle Ben" or the like seems to show that you are an equal -- not intimidated by his credentials, experience, or academic background.
This is a good technique for the humorist, blogger, pundit, or columnist, since it establishes instant equality. It shows that you are qualified to criticize. Notice how well this describes much of the current content on financial media -- mainstream or Internet.
Talk radio stars like Rush Limbaugh have been attacking Sen. McCain. It might seem like McCain is the best choice for those of the Limbaugh persuasion, but he has many hours of time to fill and an audience of true believers. Some of his listeners recommend voting for Hillary to set up the next election!
Financial bloggers write for similar audiences, a readership with a lot of preconceived ideas. They already know the answers about what government is doing; what they seek is more confirming evidence. The financial media, hungry for content, has been pushed into doing the same. Twenty years ago, financial stories were more balanced and analytical.
Now, even the articles portrayed as straight news have a clear viewpoint. Pick a straight news story and read it carefully. Look at the headline, the lead, and the subheadings. Then look at the content from the last paragraph or two. The same story could have been written in a much more balanced fashion. We see it every day, and some examples are on our writing agenda.
The best way to make a good impression is to explain what happened yesterday and act like you are on top of everything. Beware of making any real forecasts, since those could prove to be wrong.
The sad consequence is a readership that begins with a number of misconceptions and then watches and reads things that reinforce these views.
An Opportunity with a Caveat: It Requires Work!
In our teaching days we had two types of students. Many just wanted to get some facts and repeat them on tests. They had the idea that this should be an “A”.
There were others that realized that the classes were about learning to think. This meant challenging a lot of the orthodoxy. It meant that before one could criticize, one needed to get some actual knowledge. This included both an understanding of facts and relevant theory.
Any investor willing to do this work will get beyond the conventional wisdom.
Wednesday's Example: The Stimulus Package
Much of the commentary on the stimulus package is personal and anecdotal. How would you spend $300? It is not enough. It will come too late. We are not going to cite these common statements, because they are so pervasive. It is not productive to pick on any specific source. Most of the commentators, fixated on their own prosperous lives, are completely out of touch with what a little cash actually means to the average family in America.
It is useful to consider the reality.
The Facts on Stimulus
There are several considerations.
Overall approach. Those recommending a stimulus package included Lawrence Summers, former Treasury Secretary and former President of Harvard. For those of us who are consumers of economic analysis, we might find his ideas more relevant than those of bloggers and journalists. The idea was that the stimulus package should be of an appropriate size. It should be targeted, timely, and temporary. How does the package measure up?
Phil Izzo, summarizing economic viewpoints uses the title, Economists Divided on Stimulus Effects. The "division" in his article is between those thinking that the effects will hit in quarter two versus quarter three. There is also a wide range of estimates, with the average suggesting a GDP boost of 0.3%.
Timing. We wonder whether many of the economists contemplated the business reaction to the package, cited by Council of Economic Advisors Chair Ed Lazear. He suggests that businesses may act in anticipation of additional spending.
Here are some thoughtful reactions from Brad De Long, after considering the arguments of Larry Summers.
The Best Sources. Some of the best commentary comes from the blogging economists. One of our favorites, James Hamilton, provided a summary of opinions and some of the considerations for testing whether a package might be useful. The article was written more than two weeks ago, so we will be interested in his thoughts on how the actual bill measures up. For a complete understanding, follow the links in the article. These are valuable sources not widely read by most investors.
We also note that many of the economic objections take the position that fiscal stimulus is unnecessary given the course of monetary policy. Investors should think carefully about this point. It does not suggest ineffectiveness of overall government policy.
The popular idea is that the Administration and Congress voted to provide some cash for people in an election year. This is described as if it is business as usual and, somehow, quite wrong. Pandering. Payola!
It makes one wonder. The people believe that we are already in a recession. They expect some government action. Our elected leaders, probably sharing this perception, respond both to the electorate and some pretty sharp economic advice. Congress held hearings and reacted in record time.
Is this not how a democratic government should work, reacting both to constituent concerns and expert advice? Would the critics prefer a system based upon some central planning methodology? If these critics were in the House or the Senate would they take no action on this perceived problem?
Government reacts to problems incrementally and through many different actions. No single step is a comprehensive solution. The astute investor looks to each move and considers how it affects the overall picture.
Readers who have not yet contemplated the Three Business Decisions are once again invited to consider these approaches.