Presidential Economic Policy
Some of the greatest economic shifts in history are associated with big political swings, if not with politicians by name. Think of Hooverism, Roosevelt’s New Deal, Reaganism or British Thatcherism. But those are just labels. Things are not as simple as they imply.
They’re like plate tectonics in the field of geology. An earthquake can often be quite a serious event. But one earthquake is just an indication of the presence of a fault, if not a complex fault system. And that fault system may be part of a vastly larger structural zone at the edge of a shifting continent.
When it comes to major changes, you have to keep something clear. Earthquakes don’t move continents. In the big scheme of things, moving continents cause earthquakes. Something similar occurs with economic events.
The Great Depresion, Hooverism and the New Deal
For example, the Great Depression in the U.S. is associated with the administration of President Herbert Hoover. The term “Hooverism” is commonly used to describe government mismanagement of the economy while things slide from bad to worse.
But the truth is that the market excesses that led to the stock market crash in October 1929 (only seven months after Hoover took office) occurred in the mid- to late 1920s, with Calvin Coolidge in the White House. And many of the monetary excesses of the 1920s had their roots in excess U.S. spending by the Wilson administration during the “Great War,” as World War I was called before there was a second.
And looking back at the 1930s, the growth of big government in the U.S. is associated with the presidency of Franklin Rosevelt.
True enough, the New Deal was a Roosevelt campaign slogan.
But Roosevelt’s plan to close the banks after his inauguration was drawn up during the last six months of the Hoover administration. And many of the great public works projects of Roosevelt, such as the Tennessee Valley Authority or construction of dams on Western rivers like the Colorado or Columbia, were drawn up under the Hoover administration. (Why do you think that they eventually renamed Boulder Dam after Herbert Hoover?)
Reaganism and Thatcherism
Much later, the seeds of Reaganism were planted during the preceding administration of President Jimmy Carter, who appointed Paul Volker to run the Federal Reserve. Indeed, it was Volker’s sharp increases in interest rates that broke the backs of the Vietnam-era inflation and the stagflation of the 1970s.
Volker’s policies allowed the Reagan-era tax cuts and supply-side policies to gain traction. Without Carter’s appointment of Volker, we would probably never have heard the term “Reaganism” or “Reaganomics.” The economic boom of the 1980s might never have occurred.
And let’s take a look at Britain’s “Thatcherism.” This concept has become almost synonymous with strong growth monetarism in the U.K. Looking back, Margaret Thatcher is often credited with defeating British inflation and ending an era of heavy-handed government spending and control.
Of course, there is no denying the important and bold policies that Margaret Thatcher pursued. Or Thatcher’s good fortune to be prime minister during the early and successful exploitation of the oil resources of the North Sea.
But monetarism in the U.K. dates from 1976, three years before Thatcher came into office as prime minister. That was when a Labor government accepted a loan from the International Monetary Fund, paving the way for Britain to prosper under Thatcher.
Deep Roots, Visible in Hindsight
The point to keep in mind is that major economic trends do not just appear and disappear with the coming and going of politicians in office. (We should be so lucky!) The roots of things are usually quite deep, perhaps apparent only in hindsight.
Thus, you want to be careful of assuming that the upcoming U.S. presidential election will usher in some new era of economic policy. Epic changes in economic trends do not simply appear when voters dismiss one bunch of politicians and ask a new bunch to do things differently. In many respects, the dice are already loaded for whichever of the two candidates prevails on Election Day.
It is not overstating the case to say that large-scale change tends to happen abruptly — and not uncommonly — when the previous policies collapse under their own weight. As history shows, it is often the politicians on their way out (for example, Hoover or Carter) who are forced to change things once it becomes clear they have failed.
Monetary Excess, Tectonic Policy Shifts
The excess credit creation by the U.S. over the past 10 years has been a policy failure of historic proportions. We witnessed serial bubbles in technology, dot-coms, housing and now energy and commodities. These bubbles were related to horrible distortions within the larger financial system.
Thus, within the past year, the lame-duck Bush administration has presided over a huge expansion of the government’s role in finance. The Bear Stearns bailout brought about a sea of change in policy. Now investment banks, not just commercial banks, may borrow directly from the Federal Reserve.
More recently, the Fed announced that it would lend to Fannie Mae and Freddie Mac. These two nominally independent firms guarantee or own half the mortgages in the U.S. And not to be outdone, the U.S. Treasury also stated that it would intervene to buy the agencies’ stocks if they stayed under pressure from short sellers.
Perhaps this is not quite the scope of FDR’s New Deal. Then again, the New Deal was about building roads, bridges and dams, not bailing out failed banks.
But the new government intervention to bail out large financial players signals a remarkable change in national economic policy. And it has not come about at the behest of the voters.
This new set of government guarantees to investment banks and Fannie and Freddie will be difficult — perhaps impossible — to reverse. Thus, the new situation will simply be “the way things are” when either President McCain or President Obama takes office.
What will this mean to the future of the U.S. dollar? Among other things, it means that the federal government will be spending tens or hundreds of billions of dollars to bail out bad investments by investment banks and Fannie and Freddie. And in turn, the government will not be spending dollars to fix national infrastructure like roads, bridges or water or energy systems.
And long term, it is probably bad for the value of the dollar. Which is why you should be sure to preserve some of your savings and purchasing power in precious metals like gold and silver.
Until we meet again…
Byron W. King
August 12, 2008