To keep my mind sharp, I like to spend a certain amount of time reading bloggers
with whom I disagree, such as the estimable 2
Blowhards and the slightly less estimable Andrew
Sullivan. Sullivan’s not so hot on rhetoric, but he is good on links, and
a few days ago he managed to find what he called
"the best explanation I’ve yet read of the rationale behind the Bush economic
Since I’ve read a lot of very cogent attacks on the Bush plan, and no good
defenses of it, I followed the link (you might need to go through a tedious
registration process, I’m afraid) to a
piece by Ryan Lizza in The New Republic. All I can say is that if the Republicans
have to rely on friends like these, then they will have very little need for
"Conservatives inside and outside the White House fervently believe that
the key to economic health (and Bush’s reelection) is a booming stock market,"
says Lizza, explaining why the centerpiece of the Bush proposals is the abolition
of the income tax on dividends.
It’s as though the White House is the last place on earth where the 90s-bubble
Kool-Aid is still flowing freely. What Bush and his advisers want, it would
seem, is to recreate the Clinton years, where a booming stock market and its
attendant "wealth effects" drove up consumer spending and boosted
the economy. In the 1990s, GDP grew at an astonishing pace for a mature economy,
but stock prices grew much, much faster still. In the short term, that combination
does indeed create wealth effects and higher consumer spending, but it’s not
a combination which can either be legislated or sustained. Corporations, collectively,
can’t grow faster than the economy as a whole, and share prices can’t grow faster
than companies indefinitely.
But what happened in the 1990s is that a lot of very rich people became exceedingly
rich people with very little effort. And far from having learned their lesson
– that if something seems too good to be true, it probably is –
they just want to do everything they can to recreate those days.
The fact is, a booming stock market is by no means necessary for economic health.
If you look at the golden age of the 50s and 60s when countries like the US
and Germany were growing much faster than anyone dares to hope these days, their
respective stock markets might have been going steadily north, but they weren’t
booming. What Bush is attempting here, it seems, is a short-term goosing of
the stock market, which in turn will create enough of a wealth effect that the
economy will continue to grow into the 2004 election, and he will get re-elected.
But the cost of his re-election (which would probably happen anyway, given the
disarray in the Democratic party and the respect that Americans have for a Strong
Leader with Moral Clarity) will be soaring deficits stretching indefinitely
into the future.
Once upon a time, it was quite easy to find deficit hawks in the Republican
party. It’s easy enough to see that every extra $500 billion which the federal
government has to borrow is $500 billion which can’t be lent to and invested
in the private sector. It’s no coincidence that the 1990s stock market boom
coincided with the era of balanced budgets: if Bush really wanted to set the
stage for a sustained rebound in equities, he wouldn’t be spending $360 billion
he doesn’t have on this dividend-tax abolition scheme.
More profoundly, however, the Bush administration doesn’t seem to understand
that the stock-market-led economic growth of the 1990s had big problems, which
are clear with hindsight. The shenanigans at Enron, WorldCom and the like have
been blamed on a culture of stock options, in which managers are rewarded much
more greatly the higher-risk their strategy. But they were also the fault of
the equity culture generally, where the distinction between companies and shares
was almost completely erased. If company X reported that it had managed to double
its profits over the past year, the press would lead on what happened to the
stock price. If it went up, the news was good; if it went down, the news was
In the case of IPOs, things were even crazier still: a very strong case can
be made that the main reason for eBay’s success is that it got a huge market
share very early on, based on all the priceless publicity following its IPO.
Everything became turned upside down: any sensible method of valuing a stock
was thrown out the window, and any sensible means of going public was also discarded.
Before the bubble, any bank who lead-managed an IPO which went up two, three
or ten times on its opening day would never get another mandate again: look
at all that money they left on the table! But now, such jumps were signs of
success, not of failure.
Now that the bubble has burst, it’s easy to see the excesses of the recent
past, and to realise that sustainable economic growth should come from well-thought-out
investment decisions made in an economy where risks and returns can be quantified
and managed. But if you’re a multimillionaire, as most of the decision-makers
in the Bush cabinet seem to be, it seems that you’re more likely to be blinded
by the dazzle of the riches you made in the Clinton era. And so rather than
fixing America (in the good sense of the word), they are trying to fix the stock
market (in the bad sense).
Most of us realise now that the stock market should reflect the fortunes of
companies, not drive them. Any market where the key driver of a stock is not
the underlying company but rather that very stock’s own performance will always
find itself riddled with feedback loops and crazy valuations. Meaningless numbers
like the percentage by which a stock has fallen from its 52-week high should
play no part in investment decisions: either the stock is a good buy at its
current levels or it isn’t. Where it was in the past is irrelevant.
Yet the White House still chases after its hoped-for 10% rise in the equity
markets, just like a CEO trying one more gimmick to boost the value of his stock.
Never mind the underlying fundamentals: look at the frothiness of the asset
price! If this is what happens when CEOs take over the country, give me back
the politicians, please.