Ignore the Dollar at Your Peril
The state of the American economy is a contentious issue among economic commentators. Some argue we are and have been in a recession for some time. Others argue the economy never was contracting and won't in the future.
When we consider that a lot of the discussion hinges on gross domestic product data points, it could be argued more realistically that the discussion is pointless, given the misleading nature of GDP calculations.
Indeed, thanks to weak dollar driven price increases after the 1971 collapse of Bretton Woods, real GDP under Richard Nixon grew 8.8% in the first quarter of 1973. Not long after, Nixon was forced out of office. The weak dollar also led to impressive GDP growth during Jimmy Carter's presidential term, despite economic realities that suggested a very unhappy electorate when it came to the economy.
GDP growth was high under Presidents Reagan and Clinton, 32% and 31% respectively, and just the same it's been mostly strong under President Bush. Still, no one would mistake the booming Reagan and Clinton economies — where the S&P 500 grew 121% and 208% — for the one we've experienced during Mr. Bush's tenure, where the S&P 500 increased by 2%.
GDP measures the total market value of all goods and services produced, and with the dollar impressively weak this decade, it's unsurprising that this might show up in a positive way given the bogus nature of GDP calculations.
It should be said that some of the inputs used to calculate the GDP number misread economic strength. The alleged trade "deficit" is merely a signal that lots of capital is flowing our way from around the world. While that's an economic positive, a large deficit in that area subtracts from GDP growth.
Conversely, government spending is an economic retardant for capital being removed from the private sector for immediate government consumption, but when it comes to GDP, this adds to economic growth. The silly "stimulus" packages from 2001 and this past spring that "increased" GDP should be considered in this light.
A 19th century political economist, Alfred Marshall, defined labor as "any exertion of mind or body undergone partly or wholly with a view to some good other than the pleasure derived directly from the work." Mr. Marshall's definition of labor defines that which is economic growth, so recession or no recession, there seems to be a general consensus, confirmed by a very unhappy electorate, that Americans aren't putting forth work effort in ways they once did. So rather than debate unreliable data points, it should be asked why people are working less.
On the tax front, the 2003 tax cuts reduced the penalties on work and investment. The reductions were positive, but with the White House set to change hands in November, there's a great deal of uncertainty about what's ahead. On the one hand, Barack Obama would like to sunset those cuts, and on the other, John McCain supports the decreases he voted against five years ago. Those who like low tax rates have reason to be scared either way.
Removal of the above uncertainty one way or the other would be a big positive in that workers and investors would know what the future is for taxes. A fluid tax environment creates a fluid work environment. The Republican Party is correct in its push to make the 2003 tax legislation permanent.
As right as the Republican Party presently is on taxes, the dollar's collapse on its watch has in many ways discredited any gains made by tax-rate reductions. It is said that "politicians don't do currencies," and the Republican Party's unwillingness to "do currencies" has and will be a path to minority status in both houses of Congress alongside a President Obama.
With the November elections in mind, when we consider a Democratic platform that consists of increased tax rates, harsh measures against oil companies and more regulation, the Democratic Party ought to be careful what it wishes for when it comes to future economic performance on its watch.
On the other hand, Republican partisans ought to be careful defending admittedly bogus GDP numbers that they would eagerly tear into were President Bush a Democrat. Indeed, heading into the 1996 elections it was said by those partial to the Republican Party that the 2.6% GDP growth Mr. Clinton presided over was weak relative to that experienced under Reagan.
While positions taken more than 10 years ago were perhaps well founded, 2.6% would be a great number today. Today's economy is nothing to write home about.
The numbers used to calculate "recession" or "growth" only matter such that a positive number might save us from another economy-retarding "stimulus" package that would "increase" GDP, but while harming our real economic prospects.
Sadly, neither party is talking about the dollar, the most problematic economic variable by far. Whichever party wins in November, they can expect a short economic honeymoon so long as the greenback is ignored.
Mr. Tamny, editor of RealClearMarkets, is a senior economist with H.C. Wainwright Economics and a senior economic advisor to Toreador Research and Trading. He can be reached at jtamny@realclearmarkets.com.
