Political Instability and the Economy

In this New York Times article, David Leonhardt laments the death of the consumer as purely a function of the recession. In my opinion, this only tells half the story for it ignores the impact of demographics on our economy. People are buying less cars than they did 10 years ago? Of course they are, Boomers were professionals back then; now they're retiring. New home sales are at record lows? The same logic applies. We need to improve our understanding of all salient economic variables if we ever expect to get out of this downturn.

This recession is so severe and long-lasting because unavoidable problems like an aging population are being combined with government stupidity. It doesn't take a genius to figure out this is not a good mix. The current administration is making it so difficult for businesses to figure out how to allocate capital. When capital is scared into submission by schizophrenic administrations, economic growth grinds to a halt. No political stability, no confidence.

It is critical to understand what the political landscape is at any given time. If you don't understand politics, you don't understand economics- it's really that simple. I remember reading that the true movers and shakers always ask about the political environment when asking an insider about a country they are unfamiliar with. A lot of analysts can study things like GDP growth, current accounts, education levels, etc. But it is politics, and more specifically the rule of law, that is the pulse of an economy. Unfortunately, the U.S. is going in the wrong direction politically and the economy is going to suffer for it.

I can go on and on about the mistakes our government is making, but I'll stop here and leave you with this rant from Steve Wynn. I think he may know a thing or two about business and capital allocation.

“I believe in Las Vegas. I think its best days are ahead of it. But I'm afraid to do anything in the current political environment in the United States. You watch television and see what's going on on this debt ceiling issue. And what I consider to be a total lack of leadership from the President and nothing's going to get fixed until the President himself steps up and wrangles both parties in Congress. But everybody is so political, so focused on holding their job for the next year that the discussion in Washington is nauseating. And I'm saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime. And I can prove it and I could spend the next 3 hours giving you examples of all of us in this market place that are frightened to death about all the new regulations, our healthcare costs escalate, regulations coming from left and right. A President that seems, that keeps using that word redistribution. Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they are frightened of this administration. And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America. You bet and until we change the tempo and the conversation from Washington, it's not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the President. And a lot of people don't want to say that. They'll say, God, don't be attacking Obama. Well, this is Obama's deal and it's Obama that's responsible for this fear in America. The guy keeps making speeches about redistribution and maybe we ought to do something to businesses that don't invest, their holding too much money. We haven't heard that kind of talk except from pure socialists. Everybody's afraid of the government and there's no need soft peddling it, it's the truth. It is the truth. And that's true of Democratic businessman and Republican businessman, and I am a Democratic businessman and I support Harry Reid. I support Democrats and Republicans. And I'm telling you that the business community in this company is frightened to death of the weird political philosophy of the President of the United States. And until he's gone, everybody's going to be sitting on their thumbs.”

Political Instability and the Economy is a post from: Expected Returns