James Pethokoukis

Politics and policy from inside Washington

Reagan and the year that changed everything

Aug 15, 2009 00:34 UTC

The great Jason Trennert of the Strategas Group recalls the beginning of the Reagan bull market (in the WSJ) in August 1982 and points out some key differences between then and now:

The only good news at the time was that America’s economic leadership, in the form of President Ronald Reagan and Fed Chairman Paul Volcker, were deeply committed to fiscal, monetary and regulatory reform. Put simply: business regulation, the tax code, inflation and interest rates were all at such dizzyingly high levels that they had room to improve in 1982. Today, interest rates and inflation are so low that they are unlikely to do anything but go higher.

Current headline inflation is near zero. Ten-year Treasurys are at a historically low level of 3.7%. Taxes on income and capital are low and are poised to go higher, while common valuation metrics for the market are hardly cheap. No investor should blame the current administration for what are likely to be lackluster market returns in the next few years. But it does seem fair to worry about the future of equities in an environment where government spending is poised to comprise a greater portion of the economic pie.

The global economy and the day after tomorrow

Aug 15, 2009 00:24 UTC

A really great article in the FT that serves to dispel some of the doom and gloom that pervades much of current thinking:

In spite of the economic implications of a more restrained credit environment and of rapid ageing, it would be as myopic to presume that our destiny is secular economic decline as it would be to believe that, in time, we will revert to the status quo ante. … The pressure on labour supply can be alleviated by strategies to raise the participation in the labour force of the two groups that are under-represented, namely, the over-55s and women. This is likely to involve extended working lives, changes in the organisation of work, more affordable childcare and family-friendly policies at work.  … The quality and productivity of the labour supply can be improved greatly by strengthening the education system, including universities, and by developing and expanding learning programmes throughout working lives.

Technological change may redefine the boundaries of future economic growth much as information technology has in the last 20 years. New IT applications are likely to augment production, design and the dissemination of information. Advances in materials will improve electronics, transport, energy systems and medicine. Genetic engineering is expected to lead to new products and processes in medicine, food production, plastics, chemicals and fuels. Nanotechnologies that build products more cheaply and precisely from individual atoms and molecules, could potentially revolutionise automation and robotics; and the fusion of nano, IT and genetic sciences could be as significant as any innovation so far.

Is Obama a bad economic cheerleader?

Aug 15, 2009 00:10 UTC

Dude, you’re bringing me down! Or so says economist Robert Brusca:

Obama has been saying bad things about the economy ever since he got in office. As economic data improved he focused on how bad things were, not on the improvement or the trend. When the Q2 GDP figure fell by only 1% in the quarter he said there would be many more months of recession to come. … His administration was talking about deficits and about raising taxes before the recession was even over; that was reckless.  Japan got into its lost decade of growth by fearing the size of its own fiscal debt and hiking taxes on consumers before the economy was strong enough to take it. Is that the model Obama is pursuing?

The drop in sentiment in current conditions and in expectations is a depressing end to a week of mixed numbers. The consumer sentiment and consumer spending figures are on the same page. But job market improvement usually boosts these two series.. … If June was the end of the recession we are not seeing some very bad economic sentiment for early in the recovery period. It is the first ‘in recovery’ or ‘end recession’ variable that looks uncharacteristically weak.

How could sentiment be so bad with the impact of nearly $1trillion in spending on the horizon? I think it comes back to the president’s constant smashing of sentiment every time an economic statistic improved. If the President won’t cheer for this economy who will? I think that is the lesson of this report. Confidence should be leading the improvement in the cycle not trialing it. With all the positive news someone must take ownership of the failure in confidence.