Don’t Think of a Stock Price

To many (if not most) Americans, the United States economy is an enigma. With the exception of gas prices, nary an economic story retains traction for more than a few days. A good example of this was the ironic release of poverty statistics immediately preceding Katrina’s arrival onto land. The hurricane destroyed the homes of those very people living below the poverty line, yet a week later it was forgotten.

A lot of this is the fault of consumers, who clearly exhibit a reluctance to choose a newspaper with an economic headline over the one next to it with he said she said all over the front page. The market is much more interested in stories about Christmas, crime and celebrities. Part of why this is happening has to do with politics, but mostly it has to do with a widespread falsehood that in order to understand the system, you have to study it in college or do a lot of reading. Not so.

The United States economy consists of three basic elements: government, commerce/investors and individuals. Each element is co-dependent on the other two, and a long-term goal of economic growth is only possible if all three improve over time. If one element is surging, while the other two are stagnant or moving in the other direction, short-term goals can be met, but only at the expense of long-term goals.

The President’s roll in domestic economic policy, whether they’re aware of it or not, is always about balancing the burden shared by government, commerce/investors, and individuals, to ensure that each carry their share of the load. It’s a natural, self-preserving aspect of our economy that relies on this critical balance to ensure future growth. Often it’s said that Congress holds the purse strings, but the executive retains the power of both a veto and the bully pulpit. Basically, Congress does their work and turns it in, but it’s up to the President whether or not what they turn in is acceptable.

Left unchecked, Congress will spend until disaster ensues, and then even more after that. This has been proven true throughout the years, whether it’s Republicans or Democrats in control of the House and Senate. Political necessity determines what becomes a hot-button issue and what gets ignored, and in terms of the republic’s future economic prosperity, White House policy plays the largest role in determining what happens.

A perfect example is the recent highway bill that initially passed with hundreds of riders, but following Katrina was reevaluated. Initially the Congressmen insisted their pork stay put, but when the White House got to work, one by one the riders suddenly disappeared (for now at least). This is the role that separates the President from what we’re calling the ‘government’ element.

While Congress is the most notorious aspect of government, as well as the image people have in their minds when the word is mentioned, for the purpose of understanding the economy it’s more about production and quality than anything else. Government is the streets, telephone poles, utilities, police, firefighters, public schools, entitlement programs, prison system, social workers, justice system, etc. How much ‘bang for our buck’ do taxpayers get out of the money we fork over every month? That’s the only question that matters, and the President is in charge of assuring the answer is ‘YES’.

The commerce/investor factor consists of every business that generates taxes paid to the government, and the individual factor is every American citizen who pays taxes and spends money in the marketplace. As all three are co-dependent, the policy signed into law by the executive pertaining to how much of a contribution each must make, determines whether or not the entire economy moves as one. Most decisions that are made, amount to changes that effect the system in minor ways. When an industry wins favorable legislation, it effects a small percentage of consumers relative to the entire market, and therefore exists to most Americans as only a fleeting headline out of thousands.

A change in policy can result in positive or negative results soon or after a long time, depending on what exactaly is done. The sheer enormity of our economy makes it resilient as a whole to the effects of misguided shifts in policy, but as far as the three basic elements are concerned (government, commerce/investors, individuals), the effect of policy shifts can often be seen early on. For the most part, whoever helped get the politicians elected will reap the benefits of policy shifts, and that’s why the President’s task of balancing it all is so vital. Because a member of Congress can be corrupted, but that betrayal often requires a President’s signature to bear fruit.

With each element, the only factors you need to you consider is how much money is coming in, how much is going out and whether debt owed is increasing or decreasing. Economic ‘strength’ is almost always politically tied to whatever batch of numbers someone wants to cherry pick to make their point. To understand whether or not each element is moving in the right direction you need only to check up on the three factors I listed above, which are money in, money out and amount of debt.

The trap Americans have slipped into over the past couple of years is in how we perceive economic events when they take place, and most importantly, how competent we are to sort out the events that are likely to effect the economy in minor ways from the events that have the potential to be catastrophic.

With that in mind, I have three scenarios listed below. The first two are of things that tend to get a lot of attention, yet carry with them minimal economic consequences. The third will be a matter of far greater risk for the economy (especially in terms of long-term prosperity), yet next to nothing along the lines of traction in the mainstream.

Scenario #1 – Government swells, falls into debt and/or becomes increasingly inefficient from year to year, so a tax hike on individual and corporate earnings becomes necessary. Individuals suffer from having less money to spend, which causes investors to suffer from the reduction in consumer spending. Tax cuts of course work in the opposite way, and as long as the federal government can manage to continue providing value to individuals (safety, education, etc.), while maintaining or managing the national debt downwards, it’s good policy. A moderate increase or decrease in individual tax burden will not affect the economy as a whole in a severe way, but will cause more of a ripple effect noticed over time.

Scenario #2 – A foreign government manipulates their currency, making its exports more attractive to international buyers. The domestic manufacturers and their investors suffer from a reduction in sales due to the influx of cheap, low-end products. Individuals suffer from an increased amount of imports, as the revenue creates jobs in the country where the products are made, but not here. Because the consumption does not result directly in the creation of new jobs, the government sees no increase in tax revenue from wages. Corporate profits should increase in the stores that sell these imports, but as long as the imports are replacing domestic versions of the same product, the government’s take will not fluctuate dramatically. Similar to #1, the effect that cheap imports have on the economy as a whole is also a ripple that can be recognized over a period of time rather than all at once.

Scenario #3 – A corporation that is no longer able to turn a profit, cheats in its accounting to stay alive a few extra years by misrepresenting the value of its pension fund. Upon the corporation’s collapse, responsibility for employee pensions are shifted to the government. This forces it to raise taxes to cover the payments that it becomes responsible for until the individual dies. Because the government program only covers a portion of what the individual was expecting, each dollar must be stretched. This leaves less money for the government to spend on improving infrastructure, and less money for the individual to spend in the market (once credit cards start maxing out). This diminished spending power directly affects commerce/investors as less real estate, travel and high-end products are sold. The country from scenario #2 that’s exporting low-end products benefit from a rise in demand as individuals are forced to adjust their lifestyle downward rather than upward, and all three elements of the economy suffer.

Economic growth is either equitable to government, commerce/investors and individuals, or eventually the failure of one will bring down all three. GDP and the S&P 500 can grow at a steady clip, but if individual spending power doesn’t rise along with it and/or government efficiency declines as the deficit increases, the growth can only be temporary. Eventually the imbalance will force government into making decisions in order to fix what’s broken, and those types of decisions often result in a recession.

The Situation Today

We’re in the midst of a dangerous period right now in terms of the critical balance of government, commerce/investors and individuals. Despite government’s inability to fully fund the budget (even without including the cost of wars in Iraq and Afghanistan), tax cuts on dividends have already made it through the House. While investors will be given this break, programs like food stamps, Medicade and child support enforcement are being cut.

The value that each individual gets out of the tax dollars they contribute is declining, while at the same time, hurricanes added to the amount of individuals who will need additional government support. The rebuilding efforts in both Louisiana and Mississippi have become liabilities that Congress is not interested in dealing with. Government’s obligation to commerce/investors and individuals to provide infrastructure in exchange for taxes paid is ignored. With additional tax revenue, perhaps this wouldn’t be the case.

Consider for a moment the fact that our government is lacking the will and the means to reconstruct, while at the same time taking on thousands of new liability payments to retirees whose pensions were squandered. President Bush addressed this problem by saying, “corporate America needs to live up to its promises”, yet earlier in the year he approved an accounting practice known as ‘Cash-Balance Pensions’ that has made it easier for corporations to game the system.

You don’t have to be a political scholar to see that this President has a soft spot in his heart for the commerce/investor element. As the new year approaches, the basic system I’ve outlined here will help each of you to see clearly how the give and take works in our economy. You’ll see this theory at work and notice first hand what happens when the executive branch ignores its duty to represent all three elements, in lieu of support for only one.

The system is built to work a certain way, and a one-note strategy (cut taxes) is not enough to maintain our economy or ensure that government fulfills its obligation to the commerce/investors and individuals who fund its existence. Unless wages begin to increase along with inflation, tax revenue somehow increases and the corporate accounting trick involving pension plans are addressed early on in 2006, we could be in for some rough times!

When something bad happens there will be hundreds of ‘experts’ clamoring to explain ‘how’, and they’ll make it as confusing as they possibly can. Apply this essay to what transpires, and perhaps the next time around we’ll get it right. Because whether you despise government, corporations or individuals – all three are codependent and of equal importance. Anyone who tells you otherwise has an agenda.

The republic’s economy is too large and too vital at this point for politicians to squander. I don’t care whether it’s a Democrat or a Republican in charge, enoughs enough with the mentality that the economy is anyone’s chemistry set. And hopefully by the end of 2006 we can all wake up and realize that the stock market is only 1/3 of the system.

That, and money doesn’t grow on trees.