The Politics of Economic Recovery

* Unfortunately, it’s all about politics – On Friday, I reflected on how the Obama administration’s efforts to re-flate the housing market, is the wrong approach to lead this country out of the current recession/depression. To summarize my thesis: the government is supporting the housing sector which should be in contraction, which in turn is diverting our countries resources and talent. Instead, these resources and talent should be focused on more productive endeavors. Meanwhile, the nation’s chronic unemployment situation continues.


What happens next, remains to be seen. Clearly the answers will be embedded in the actions of our politicians. While Obama is advancing his agenda of change, it seems as if it is more along the lines of his socialist plans, and not towards a self-sustaining evolution of our capitalistic system. To that end, it becomes increasingly clear that unless our politicians start thinking like capitalists, then they will snuff out any chances that the economy will magically turn itself around.


On Meet the Press yesterday, there was a debate amongst Republican and Democrat Congressional leaders for each party’s 2010 campaign committees. David Gregory was very good about challenging each party about what they will do so get the economy back on its feet, and solve the deficit problem. In short, the Democrats spent their time blaming the current situation on the Bush administration, and asking if the country wants a return to Bush policies, which they suggest the Republicans will gravitate towards. The Republicans were not much better, because all they did was accuse the Democrats of passing legislation the country does not want, (health care), and refused to offer any suggestions on how to cure the deficits, instead, saying they want to see what the deficit reduction committee comes back when that report is due, on December 1st.  The debate was sickening to me, and made me wonder who else can I vote for? I am not sure that the Tea Party is the answer either, although some of their precepts are appealing, I doubt they will have the vision to lead us out of the current predicament.


In other words, if I assume that the success or failure of the economy going forward is dependent on the politicians, which I believe is becoming evident, then this reinforces my bearish perspective, and I start thinking outside the traditional investing box, in favor of precious metals, and eventually resource stocks (once deflation brings these prices lower).


One of the interesting, but not so comforting aspects about the recent slowdown, has been the way corporations have been able to reduce their staff and down-size themselves, in order to preserve their profitability, and their prospects. The corporate survival instinct has also lead them to move their production and customer support functions to Asia, where labor is a fraction of the cost. I recently read a piece about artificial intelligence (AI) which promises to be the technology of the future. In this future, technology, embedded with the ability to think like a person, will take the place of people. Such technology is already part of the telephone answering systems which many companies employ, and is likely to proliferate whenever machines can replace people. How does this sort of future bode for the ability of our country to come to grips with what could be a chronically rising unemployment rate?


Despite concerns about a deepening recession (due to a drop in spending), if the government would stop running massive deficits, I believe that the economy would react in a positive way. While it might be politically unattractive for any candidate to espouse a cut in social security benefits and other entitlements, I believe that lifting the economic uncertainty which our budget deficits entails, will actually encourage corporations to invest in expansion. These budget cuts should be combined with a sequence of incentives to encourage companies to hire “new” workers, as well as creating greater certainty (or even a reduction) in a corporation’s share of newly implemented health care cost increases. While it might shock the economy over the short term, I believe that the long term effects of such bold actions would be well rewarded. Unfortunately, I did not see anything resembling such an outcome on the agenda of either party during the Meet the Press debate.


The most credible plan to alleviate the budget deficit which I saw was Representative Paul Ryan‘s “A Roadmap for America’s Future”, which can be found at this web-address:


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I will not get into the particulars of this plan, except to note that this plan involves necessary cutbacks in entitlements, in addition to other initiatives. This plan appears to be the most credible approach which I have seen so far. I encourage you to take a look at it. Interestingly enough, the Republicans who were on Meet the Press yesterday, seemed to have little interest in embracing this plan, because it means upsetting their entitlement class of constituents. In other words, our elected officials want to remain in power, but do not want to stick their necks out too far in favor of reducing entitlements, except for Representative Ryan. 


Unfortunately, the longer the politicians “kick the can down the road”, the closer we are to a crisis, at which time, our collective hand will be forced. Unfortunately, once a crisis is upon us, the options to get ourselves out of the crisis will be reduced. Let’s hope it does not get down to that.