McCain has been roundly criticized over his belief that the fundamentals of our economy are strong. With a real threat of the Great Depression here, can anyone believe that? I can. The criticism is a bad one, McCain is more or less correct.
There are (at least) three levels of economics and finance to think about.
Financial: All the trouble we have right now is at the financial level. All the troubles are on paper. No houses have been destroyed, no buildings have been razed, etc. Financial issues are Wall Street issues. If an issue is mainly associated with Wall Street, it’s a financial issue. If you can’t understand it, it’s probably a financial issue. The current (phase of the) crisis is a Wall Street problem that has infected the economy as a whole.
Fiscal: Fiscal is just government spending. Our national debt is huge and getting bigger, we have enormous unfunded obligations coming due in Medicare/Medicaid (and Social Security to a lesser extent), and we aren’t addressing these issues. We’re making it worse with all these bailouts, nearly one trillion dollars added to the bad side of the ledger. But remember that this crisis is a long and ongoing. bailouts aside, which are a response to financial problems, nothing much has changed in the last couple years. (Except the fall of the dollar, which is directly connected to our debt level.)
Fundamentals: The GNP of the United States is enormous. Not only are we the biggest economy in the world, we are the biggest by a huge margin. We are over three times the size of the next country (Japan). We are far and away the most productive nation. We lead the world in just about every conceivable indicator of economic strength. Our political and cultural institutions are without peer. We are still the big dog.
These are roughly in reverse order of importance. It is most important to have strong fundamentals, which we do. It is next most important to be strong fiscally, where we are so-so. It is next most important to be strong financially, where we currently are awful. McCain should not be criticized for saying the fundamentals of our economy are strong, they are.
I think we’re arguing different points, we’re not disagreeing. Pre-crisis we had strong fundamentals and financial, but weak fiscal. Now we have strong fundamentals, but weak fiscal and financial. I’m not saying that having just fundamentals means the world is all rainbows and sunshine. I’m saying it’s possible for McCain to believe that the fundamentals of the US economy are sound, even while the financial markets melt down all around us. I don’t think you’re disputing that, you’re just arguing about how badly we’re in trouble due the effects of the other two.
“fundamental strength”…??? Productivity? Of course, people/workers are still the same, but the health of the economy has so many factors. why do you think our real estate values have been skyrocketing over the past 10 years? So using your categories…
– financial: driven by banks, easy money, securitizations, wall street risk taking. We no longer will have this for many years.
– fiscal: we just used tax payer dollars for huge bailout.
– fundamentals: yes, the US is a powerhouse and i’m so glad i’m an American. So agreed on “fundamentals” with the only caveat being that their are cheaper labor sources and just as educated in other part of the world which is why jobs being outsourced outside US which does affect the fundamentals argument a little bit.
with that being said, my point is that we don’t have strength in the “financial” and “fiscal” boxes you present, so even with good “fundamentals” this will lead to a protracted recession for many years regardless of whose president in 1st term.
Here’s TMQ, more or less agreeing with me. I don’t know if I like that.
I have to think that it is possible that just as the Financial woes have directly affected the Fiscal (bailouts, increased debt, further depression of the dollar), that it might even affect the Fundamentals. My theory is that though the productivity of the American worker and the US as a whole in terms of GDP is #2 and #1 respectively, I can’t imagine that the overall stress of the fiscal environment wouldn’t actually affect individual productivity (and thereby affecting GDP). In the simplest terms: when you are depressed, do you tend to work more or less? This is just a thought that I had, and it is distinctly possible that even if this were a real effect, that it would only marginally modify productivity. If you have any info on such a “mental” effect, it might be interesting to see….
I don’t want to take this too far, McCain is generally an idiot on economics, but the productivity of the American worker is pretty dang high. Second, just after Luxembourg. That’s certainly one of the reasons we’re the big dog.
My point is not that things are going great, or that they’re just about to get better. It’s that you can have bad times in an economy that has fundamental strengths. Even if we have a few bad years, this crisis is not going to sink the country. We just have too many things going for us. I think that’s what McCain is saying (it’s hard to tell between his vagueness and sound-bites what he really believes), and if it is, I agree with him.
In general, I agree with your argument. The US GNP is still very strong, which is a huge thing in our favor. However, if credit markets do not unfreeze relatively quickly, then problems will spread from financial institutions to non-financial institutions who rely on short term credit to run. For instance, I heard that AT+T cannot issue commercial paper whose maturity is longer than a few days– this is unbelievable. We’ll see if the government plan to recapitalize financial institutions will be sufficient– at this point, I have no idea what to expect.
About McCain, if he had responded in a manner similar to your initial post, that would have been fine. However, he came back with “I was speaking about the American worker, which is the fundamental driving force of our economy.” Completely absurd- I doubt the term fundamentals has been ever been used in that way.
I don’t disagree with any of that. I don’t think it answers my point one way or the other though.
Muttrox- usually, even when I disagree with something you say, I usually disagree at the margins and you make good supporting fact based statements. With this post, I completely disagree with you. Our economy is arguably going to be the worst since the Great Depression and certainly worse than the early 90’s when many of us first entered the working world in a recession and during the dot com bust. I can make a long post on all the factors that’s going to depress us for at least 4-5 years. Tight credit markets that will take years to turn around, stronger regulations of financial markets, rising (and will get much worse) unemployment, consumer and corporate confidence, etc. I can go on and on. I predict unemployment to reach 8-9% next year. Real estate prices will not start creeping up again for 4+ years and will probably take double that to reach our previous highs. I seriously hope I’m wrong, but most of my financial friends on Wall Street and others who track this closely all agree on a highly pessimistic viewpoint. Call me if you wish to talk about it.