The Outlook | May 2019

Where Have All the Statesmen Gone?

Inequality, Populist Politics and the U.S. Economy

In this issue:

  • Thoughts on inequality and populism
  • What is missing in the political debate?
  • What can be done to address inequality?

“As long as inequality and other social problems plague us, populists will try to exploit them.”

Kofi Annan, Statesman

At a time when the United States economy is experiencing the second longest expansion in history, our nation is facing a most politically-divisive period as the benefits of the post-crisis recovery have not been shared equally. America is not alone in this situation as concerns about inequality and other issues have led to increased frustration and anger with government leaders in many developed nations which makes this environment ripe for populist exploitation. The global economy is suffering from too much debt and too little growth, while the policies employed to combat the financial crisis have contributed to rising income inequality both in the U.S. and other developed nations. For too long, our government has placed too much responsibility for economic growth on the Federal Reserve, and productive fiscal policy initiatives have not been created to break out of the current slow-growth cycle. While the battle lines are being drawn for the 2020 presidential election, this is an appropriate time to provide some perspective with respect to what is missing in the political debate and what can be done to address our country’s most pressing issues.

Notwithstanding the political climate in our country, current economic conditions of slow growth, muted inflation, and low interest rates are fostering a positive environment for the continuation of this economic expansion and for equity investing. Investors should be aware that economic expansions have no set expiration date, and the current expansion can continue for some time as evidenced by Australia’s expansion which is heading into its 28th year. By the same logic, the stock market can continue its upward trajectory given current favorable conditions for corporate earnings. The more positive view of U.S. equities is further supported by the Federal Reserve’s current accommodative monetary policy, significant efforts by the Chinese government to stimulate its economy and the increasing likelihood that the U.S. and China will reach some resolution of their trade dispute. In this slow-growth and deflation-prone environment, investors should expect continued market volatility with possibly fewer companies benefiting than in recent years. Importantly, these conditions continue to create excellent buying opportunities for investors to be able to take advantage of the mispricing of leading companies benefiting from the secular trends.

What is Missing in the Political Debate?

“Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.”

Groucho Marx

Many observing the political dysfunction in Washington DC would agree with the spirit of Groucho’s statement. Politicians have been too busy running for office and blaming others to acknowledge their own responsibilities for the nation’s problems and their inabilities to implement appropriate policies. Compounding the problem is the fact that they are unable or unwilling to grasp the linkages between education, immigration, infrastructure spending, health care costs, debt and deficits on the prosperity of the nation. For example, changes to our education system would allow for more equality of opportunity for high school students and prepare our future labor force to adapt to rapid changes in their job requirements as automation replaces current work functions. Revamping our immigration policies would allow the U.S. to more immediately address the current skills deficiency as we would be able to retain foreign students who are educated here rather than have them return home to compete against us. Long overdue improvements in infrastructure would make the U.S. more productive and competitive. Additionally, increased spending would also support our digital and educational needs. The aging of our existing work force puts even greater strains on our ability to address these issues. Without an understanding of the immediacy of the need to fix these problems, the world’s leading economy will continue to produce subpar growth, fail to reduce inequality, and squander the opportunity to use this low-interest-rate environment to invest for the future. Not addressing these needs will promote even greater economic disparity.

The fundamental requirement rests with our elected officials to set aside partisan ideology and agree on policies to generate more equitable growth. Policies can be constructed to reduce income inequality, increase disposable income for lower and middle-income earners, and drive new business investment. The combination of these factors would result in a larger economy with greater tax receipts for federal, state and local governments. Before leaving office, President Obama said, “Without a faster-growing economy, we will not be able to generate the wage gains people want, regardless of how we divide up the pie.”   His assertion is that the solutions to income equality cannot be achieved by redistribution alone. The debate between growth and redistribution will be one that continues through the 2020 election.

What Can be Done to Address Inequality?

“‘Inequality’ has become the political theme/slogan of our time in both Europe and the U.S., yet political leaders do not even bother to consider that their own policies, which put the entire burden on central bankers to print money and drive up stock, bond and other asset prices, are actually exacerbating income and wealth disparity.”

Paul Singer, noted investor

The solution begins with politicians recognizing that they are the major part of the problem. Congress needs to end the “winner-take-all” politics that currently prevail, and once again, work together to make the country richer, both economically and socially. Given the unfortunate likelihood that the Federal Reserve will have fewer tools available to address the next recession, politicians will need to act together as the U.S. may require significant fiscal policy initiatives to forestall a prolonged recession. Politicians need to set aside their ideological differences and focus on bi-partisan solutions working closely with, not against, our best business leaders. At the same time, our business leaders need to act in a responsible manner as well, and some have failed in this respect. We need to develop policies that promote the best use of tax receipts and the right system to generate more receipts for all levels of government.   Education including skills training and apprenticeship programs, infrastructure, and immigration are all linked to economic growth, and effective policies are required to arrest the challenges of growing inequality and a declining middle class. Our federal government struggles to approve an annual budget, while China, our biggest competitor, has a written 5-year plan with specific programs and measurable goals. Congress must create and enact a bi-partisan, multi-year plan to address the critical and growing needs of the U.S. Such a plan must be designed to survive the bi-annual campaign cycle and deliver on our nation’s longer-term needs. The following are a few suggestions for politicians to consider that reflect some of the things they are missing today. It is neither exhaustive nor original, and that is what makes the current state of politics even more frustrating.

These are just a few of the things that should be on the to-do list of the President and Congress, and while we do not pretend to think that the solutions to our nation’s problems are easy, taking this type of approach would be far better than our current path. Our politicians must not squander the country’s unique opportunity presented by the historically low-interest-rate environment to address these pressing needs. Not acting now would represent a major failure by our elected officials. While some of the populist proposals being discussed may make for good campaign slogans, they do not address the causes or reflect the economic realities of the U.S. We are reminded of the words of economist Thomas Sowell who said, “the first lesson of economics is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.”


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