Wednesday, June 14, 2006

Bush Don't Get No Respect On the Economy

When it comes to the economy, many conservatives have complained that the Bush Administration suffers from the Rodney Dangerfield syndrome. They argue that despite an incredibly robust economy (indicated by fantastic employment and GDP numbers) for the past several years, Bush “don’t get no respect.” They claim that the MSM is to blame for this.

Not so fast, says John Tamny, who is on the staff of the Cato Institute. Tamny contends here that the real story is that the economy really isn’t performing that wonderfully. Well it is, and it isn’t. That is, the broader numbers look stupendous, but certain other measures should temper the message of the broader numbers.

Tamny places the blame on our weak dollar, which has weakened substantially during Bush’s tenure. This kind of thing gets discussed in economic circles, by businesses impacted by it, and by Americans that travel abroad, but most Americans don’t pay much attention to the strength of our money on the international market. It’s just something that is. If it merits any attention at all, it is only fodder for cheap water cooler criticism of the government, despite the fact that dollar strength significantly impacts our daily lives.

Tamny argues that dollar weakness is a precursor of inflation, and that it indeed masks or at best delays inflation by “stimulat[ing] consumption and property booms.” Tamny notes that inflation is a lagging indicator, but he contends that the markets can see it coming from a long way off and that average Americans experience its effects long before it shows up in the numbers. Markets, economies, and voters “loathe inflation,” he claims.

If I grasp Tamny’s argument correctly, he is suggesting that Americans know how the economy is really performing, and that they will vote with their dollars and at the ballot box accordingly. Americans are hard to fool about the economy because their personal experiences trump egghead numbers.

Part of me is skeptical of some of Tamny’s claims, but they also seem to make sense. Tamny ties dollar weakness to Carter’s re-election failure and dollar strength to Reagan’s re-electability. This is an interesting contention, but monetary strength could certainly only be a portion of the whole story. Tamny cites the recent dollar strengthening trend, and suggests that if it continues Bush will get more respect on the economy.

If you consider Tamny’s argument that Americans grasp the real economic picture, perhaps it should be mentioned that the median real household income in the U.S. has been largely stagnant for three decades, and has been declining for the past five years (see here). In this respect, rosy economic pronouncements pale in comparison to stagnant or declining real household purchasing power for most Americans.

So what is the administration doing to strengthen the dollar? That opens an interesting can of worms. Experts disagree about what policies and elements actually strengthen or weaken the dollar. Cato Institute fellow Steve H. Hanke claims here that the government is largely impotent to affect the value of the dollar on the international market.
“Let's get one thing straight: No dollar policy, strong or weak, exists in the U.S. Nor can it. That's because the U.S. has for years embraced a floating exchange rate. In other words, the dollar is on autopilot and finds its own level among other currencies. When traders, investors and foreign central banks are net purchasers of U.S. currency and assets denominated in it, the dollar strengthens. When they're not, the dollar weakens.”
In other words, the market for money works on the supply-demand curve, just like other markets. Many elements of supply and demand are simply beyond the capability of our country’s government to influence in any substantive way. Dollar strength is largely dictated by demand for foreign investment in U.S. properties and securities.

But the government can impact foreign demand for U.S. securities by changing corporate law. In fact, this is what the government did when it enacted the Sarbanes-Oxley Act in the wake of Enron and other high profile corporate scandals.

The Wall Street Journal editors argue here, “Sarbox has added hundreds of billions of dollars in compliance costs, and for no clear public gain.” They argue that outside of the handful of serious corporate problems that were dealt with under previously existing laws, very little corporate malfeasance has been detected despite the SarbOx witch hunt. The WSJ editors note here that the heavy-handed SarbOx regulations have caused a “remarkable slowdown in U.S. initial public offerings,” and have caused a major shift in foreign investors avoiding U.S. securities.

To put this all together:
  • It seems that the government’s ability to influence the value of the dollar on the international market is limited.
  • But within that limited scope, the government helped further weaken the already-weak dollar by passing heavy-handed corporate governance laws and regulations in an overreaction to corruption in a handful of corporations.
  • The nation’s true economic picture is not as rosy as the broad numbers would suggest because a weak dollar means that average Americans are already suffering the effects of impending and/or hidden inflation.
  • One of the symptoms of this may be stagnant and declining real household purchasing power.
  • Consumers will act according to the real economic situation rather than to the picture painted by either the government or the MSM.
  • Despite government’s limited role in affecting dollar strength, voters will take their ire out on those they deem to be responsible for an economy that is less robust than they think it ought to be.
I’m not sure if I buy all of that. Some of the lines connecting some of the dots seem to be dotted or fuzzy rather than solid. But it gives me a few things to think about.

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