Both Parties Share the Blame For Our Election Inanity
Nineteen-seventy-six was the first year I began to care about things beyond the perimeter of my adolescent interests and desires. I was swept up in the pomp of the bicentennial and the pageantry of the Montreal Olympics and I followed closely that year’s presidential election, especially the Republican convention in which incumbent Gerald Ford struggled for the nomination with insurgent challenger Ronald Reagan. For a 12-year-old who until then paid little attention to politics this was high drama that simmered from the opening gavel until the final roll-call vote, when Ford was declared the winner.
It was Reagan of course, true to his Hollywood chops, who stole the show. Having accepted the nomination, Ford invited the Reagans to join him on stage. (“Ron, come on down and bring Nancy,” I remember him saying in his easy, cardigan manner, as if inviting them to a barbeque.) As the couple settled behind the dais the crowd went mute and the former California governor, one of the most successful communicators in presidential history, went to work.
Reagan graciously thanked Ford for the opportunity to address the delegation, appealed for unity after a hard-fought intramural battle and, without naming Ford’s opponent nor the opposition party by name, scorned those who had been eroding the nation’s “personal freedoms” through what he implied were decades of overregulation and taxation.
Viewed today, the speech is striking for its restraint, its complete absence of partisan rancor, and the spell Reagan wove over the crowd. Here was a maestro who understood the profundity of understatement and the power of intimation, an instinct that would serve him well as president four years later. His two terms would be defined largely by his support of deregulation and free trade, building on the tentative first steps made in that direction by Jimmy Carter, his at times hapless predecessor.
Last month, while catching glimpses of our two party’s nominating conventions from one departure lobby after another on both seaboards, it appeared to me that the spirit of Reagan-era reforms had exhausted their usefulness. As a college student I embraced the Reagan agenda as long overdue, a sentiment I still share. But what was judicious then has taken on a life of its own, thanks to the complicity of both parties over a period of decades. As neither side is willing to acknowledge its responsibility the best they can offer is expedient palaver instead of rigorous, bottom up reform. Consider:
- Candidates promise to restore jobs – the lynchpin of spending and growth – despite the fact that the labor participation rate topped out in 1998 and has been declining ever since. True, that is a function of demographics. But it is also the product of tax and labor laws that encouraged outsourcing, automation, and de-unionization. The share of gross national product spent on labor as opposed to capital fell from 69 percent in 1970 to 61 percent in 2013. At the same time the number of manufacturing jobs dropped by more than a third as the population increased by 43 percent.
- The bias in favor of capital over jobs is made painfully clear by the nation’s failing infrastructure. The American Society of Civil Engineers routinely assigns near-failing grades for our power-grids, air and seaports, levees and dams and rail networks, a state of affairs the Washington Post recently described as “a step from declining to the point where everyday things simply stop working the way people expect them to.” Reversing the damage would require an investment of $3.6 trillion by 2020, according to the ASCE, a target it estimates the government will undershoot by more than half. This despite the fact that interest rates have been languishing at all-time lows since 2008. Among the most badly neglected sectors of public works is public transportation despite an established link between transit systems and job growth. The creation of a national infrastructure bank, long supported by a plurality of economists, engineers, and city planners, has gained little support in Washington from either party.
- Despite attempts to curb Wall Street excess – higher capital requirements under the 2010 Dodd-Frank Act, for example, or the $284 billon in fines leveed by regulators over the last eight years – investment banks continue to bid up asset prices into bubbles that invariably burst with concussive effect. Despite hand-ringing among political elites on both side of the divide that banks are too large and powerful, four of the six biggest banks in the U.S. are larger than they were in 2008. Though the platforms of both parties call for the revival of the Glass-Steagall Act of 1933, which segregated commercial and investment banking, such an endeavor would require the balkanization of JP Morgan Chase, Bank of America, and Citigroup Inc., a highly unlikely prospect. Meanwhile, Daniel Thornton, a 33-year veteran of the St. Louis Fed last month warned that bubble-like proportions of share and home valuations was proof that “the financial cycle is way ahead of the economic cycle.” Ironically, while households’ mutual funds have doubled in value since 2009 due largely to asset appreciation, the number of new homeowners has plummeted because prices are too high for aspiring buyers.
Let me be clear: I come not to bury our free-enterprise system, only to reappraise it. Even before Reagan addressed the 1976 convention America was in dire need of liberalization. Taxes were too high, markets were illiquid, utilities were poorly run and unions were ham-fisted and corrupt. Indeed, things were so bad that it was Carter, a Democrat, who began the revolution that Reagan would complete.
Like most revolutions, however, this one ate its own. By the end of Reagan’s second term the labor participation force had peaked. The October 1987 stock market crash, a record-setter for value lost in a single session, was the first in what would become an ever-tightening sequence of ever-larger meltdowns. The money saved from tax cuts for high earners was invested more in risk assets than in human industry, innovation and infrastructure.
Rather than alter course, however, Reagan’s predecessors intensified his legacy with deeper tax cuts and sweeping new trade deals, the benefits of which never redeemed the hype that preceded them. Moreover, they encouraged the proliferation on Wall Street of what my former colleague, Mohamed El-Erian, calls “complex pieces of paper that involved risk-taking the banks themselves only partially understood but which seemed too lucrative to pass up.”
A course correction is as badly needed now as it was four decades ago. As a first step the party of Reagan must stop regarding supply-side economics as a religion instead of an economic theory as fallible as any other while its opposition should accept responsibility for hastening the schism between the financial and the real economies in the 1990s.
I support policies that put money in the pockets of people who will spend it on goods and services. As my former colleague and mentor Paul McCulley wrote in a recent article, deficiencies of aggregate spending begat deficiencies of aggregate jobs and income. “Spending drives jobs and income,” he argues, “not the other way around.” Paul opposes the race-to-the-bottom mania of zero-rate lending favors instead tax cuts and other targeted stimulants that encourage investors to employ people and create demand. Governments must flex their fiscal muscle and spend more in response to private-sector inertia, Paul writes, to foster among other things “a more just distribution of wealth and income growth in our country.”
In the meantime, we at Anfield remain in our most defensive posture since the company was launched over seven years ago. (Indeed, during our most recent Investment Committee meetings we discussed, but ultimately declined, a suggestion to increase the cash reserve we created last winter.) We continue to favor, for our fixed-income strategy, exposure to short-to-intermediate maturity and interest rate exposure as well as high-quality yield products. For our diversified portfolios we remain neutral on U.S. equity and are underweight on non-U.S shares, including among small-cap and emerging-markets.
In short, we’re keeping our powder dry in anticipation of the next siege.