What makes a good economy (How do you define a good economy)?
Now, more than ever, it seems this is a very pertinent question. Inflation appears poised to go over the top reminiscent of the Carter years. The Federal Government is pumping trillions of dollars into the economy and the value of the dollar is dropping yet there are nearly 9 m jobs open and unemployment is unchanged. We see every day the DOW seems stalled at the 34,700 level, for every day it rises 300-400 the next day it drops the same amount. The economic advisors are telling us everything is fine, the economy is strong and this is only a transitory increase in inflation due to supply chain interruptions. The Fed chairman tells us he’s watching the market but it won’t be time to act for several months, if at all. So conventional wisdom is leaning towards a strong economy, probably because we haven’t experienced circumstances like these in many decades. Sometimes it’s necessary to challenge conventional thinking, to explore what makes things work and why they work the way they do. Are appearances in fact reality or, like in 2007 are we headed for a significant drop? More importantly, why did it take 4 1/2 years to recover after this drop?
What’s behind the scenes for what we experience every day? The first question to deal with, are we in a strong economy now, or are we looking at another 2007 situation where it just looked like a strong economy? Is there substance to the market cruising at a DOW of 34,500 or as some economists preach it’s all unsustainable fluff and we should be back in the 20,000 range? This is a short article intended to provide you something to think about based on today’s news articles, (as opposed to just the headlines), not a detailed treatise breaking down all the minutiae. To begin with, today’s market needs to be put in a historical context. There isn’t much disagreement the economy was in poor shape during the Carter years. Tax rates had risen for corporations and individuals to the highest rates seen in a long time. Corporations were doing what they could to reduce the tax burden and keep prices as low as possible, the result was a high unemployment rate and inflation reached 14.75% with long-term interest rates approaching 21%, we actually began describing the economy in terms of a Misery Index. Reagan came along and, like Kennedy reduced the corporate and individual tax rates significantly. The DOW doubled from 900 to just over 2,200 in 8 years and the unemployment rate dropped below 6% for the first time while long-term interest rates dropped to roughly 10% and it felt like we were winning again. Bush I came along and kept things pretty much status quo so the DOW continued to rise at a slightly lower rate so that we were now in the 3,300 range by the end of his 4 years and then Clinton was elected.
What is significant about the Clinton era is technology exploded and the .com era was launched. This is a time of transition from a manufacturing/service economy to a sales/service economy. The manufacturers were moving all the manufacturing out of the US to avoid taxes and to reduce employment costs, but we were experimenting with a whole new industrial concept on a scale no one had worked with before. The beginning of the social information and technology industries occurred during Clinton’s time in office. With companies moving overseas many people lost their jobs and the unemployment spiked to 8% until the tech industry took off and unemployment dropped to new levels just under 4%. The labor participation rate saw modest gains with the drop in unemployment and the GDP maintained a healthy 6% rate. During this time the inflation rate kept a reasonable pace of 2-3% adding to the perception of a strong, well-grounded economy. As a proxy for a strong economy, the DOW began a quick rise from 3,300 to level off at 10,560 in April ’99 during the last year of Clinton’s term. Based on the metrics this was a strong economy and even the incidents of 9/11 would not cause more than a hiccup in the market as we put substance behind the new technology industry. As the saying goes, the devil’s in the details and part of the strength in the DOW, the GDP, and the low inflation rates were built on legislation instead of sound business practice. This legislation made a lot of cash easily available to marginally qualified investors. When the loans began coming due the market couldn’t handle it because sound business practices had been put aside for the purposes of popularity and more votes, not to mention our tax laws had incentivized manufacturing companies to move operations out of the US.
The legislation that came to fruition at the end of the Bush-era actually began during the first part of the Clinton Administration. The Clinton Administration launched the National Homeownership Strategy and it was intended to help roughly 8mm families buy their homes to boost homeownership over the next 6 years. Fine-sounding intentions but as in all things the road to perdition is paved with good intentions and shortcuts are never a good substitution to hard work. The bill came due 11 years later as stocks began to drop and the GDP fell eventually ending in negative territory during Obama’s 1st year. Property values dropped, loans were no longer covered with asset value and people began defaulting on loans right and left. People thought we had a strong economy and were speculating on what surly would come but instead we had empty promises from our legislators bolstered by glowing reports from our now-discredited journalists. There are even reports of people walking away from properties before taking possession of them after the purchase. The DOW eventually stopped falling at a low of 7,063.
Up until this time, the economy seemed strong but the underlying issues presented themselves as they always do. The government attempted to stimulate the economy with a fresh supply of money through Quantitative Easing and this arguably did help some, but the overall monetary policy did not change other than the basic differences between Democrat and Republican philosophy, tax and spend vs not as much taxing and spending. Thus began what economists around the country are calling the longest Bull Market ever experienced, born out of failed legislation.
It would take a long 4 years for the DOW to recover from this loss and reach the previous high of 13,930 because of the taxing, and increases in corporate regulations, imposed by the Obama administration. The value of the dollar dropped to a new low, the inflation rate as well as the GDP both entered negative territory for a brief period. And as usually accompanies a recession the unemployment reached a new high of 10% as more and more people were laid off. The government attempted to jump-start the economy with a couple more rounds of Quantitative Easing under the guise of “Cash for Clunkers” and “Shovel ready Jobs” but instead of stimulating the economy to new heights GDP continued along at the predictably anemic rate of 1-2%. This is predictable only in the fact legislation intended to move money around instead of incentivizing companies, big and small, to grow resources will always fail. Another, key aspect to the economic strength, which does not receive much attention is the Labor Force Participation Rate. During the period of time from the end of 2010 through 2016, the Obama administration reflected on how we had a strong economy as indicated by the falling unemployment rate, the rising DOW, and a constant 1-2% growth in the GDP. This was the “new normal” we were told, and unless someone had a “magic wand” it was unlikely to rise above this number.
As we have since learned something was seriously amiss and there was some “slight-of-hand” misdirection going on. In fact, a much more concerning issue was looming on the horizon. In a healthy economy a falling unemployment rate will be accompanied by, at the very least, a level Labor Force Participation Rate, and in the best case, an increasing Labor Force Participation Rate. This makes logical sense when you think about it. From 2010 until 2016 the Labor Force Participation Rate is falling almost as rapidly as the unemployment rate. People weren’t dying they just were no longer counted so the unemployment rate could look good. In fact, the economy was so bad there were no jobs to be had and if you don’t have enough jobs to go around the standard of living is going to drop ultimately for everyone except the government and the 1%ers.
If an economy is not expanding its resources then those limited resources must be redistributed so everyone receives enough to live on. Who defines what “enough to live on” is up for debate, but it will happen. We are predictable creatures in that we will always take care of ourselves first, family second, and everyone else third, as AOC has demonstrated lately. The lucky people working for the government with resources and control will do everything they can to keep those resources for themselves first, their family (nepotism) next, and the rest of us last.
This doomsday scenario was avoided because someone was willing to set aside their seemingly best interests so they could build something better. In the US we see this expression of audacity and giving every time there is a natural disaster or anytime people are in dire need, so it really isn’t a surprise that someone stepped up to the plate. In the past, most administrations attempted to work around the edges of the economy, working on one part or another, but they always put forth some type of legislation so the government does the work, “guiding” us along the correct path. Except for some of what Reagan did or Kennedy did, no one truly called on the US citizens to do what our Founding Fathers set us up to do, be self-sustaining pioneers. We have the capacity to grow resources and create new wealth so there is more “Pie” for everyone to share and no one has to “redistribute” the smaller pie. What we needed is for the restrictions and regulations to be removed. We needed protections from foreign governments who would steal our ideas and subsidize companies loyal to them. We needed protections from our own government who manipulates our judicial system against us. These things make the basis of a strong economy.
Over the previous 4 years beginning in 2017 you’ve seen a significant rise in the DOW but along with this, the labor force participation rate has been increasing as the unemployment rate drops, and the GDP has also seen a significant improvement. Instead of issuing legislation forcing companies to bring back manufacturing, incentives were put in place for companies to bring it back voluntarily and for a profit. When our trading partners didn’t follow the rules and put our companies in jeopardy the administration stepped in to protect them. All of this combined building real wealth into our economy.
We have a strong economy now although, a new wave of legislation is threatening to undercut the strength and wash it all away. We are a stubborn and stiff-necked people who love our independence, and we will overcome this latest onslaught by those who believe they are our betters. We guard against this by critically thinking through what the discredited press and our government are trying to tell us. Thanks so much for taking the time to read through this longer than normal article, as always I hope you walk away with a new understanding. Please pass it on if you enjoyed it and sign up for the automatic updates as new articles are published.