The fundamentals are strong?

By Michael D.R. Long
0 Comment(s)Print E-mail, February 11, 2018
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Wall Street [Xinhua]

"There is no such thing as a right answer."  As an academic, I can say that this proverb has rung true for most of my career. In fact, with the recent tumult in the world markets, this adage remains true to form.  There are no right answers… just variations and degrees of wrong ones.  The U.S. government and influential players in the market do indeed seem to be choosing from a wide range of very wrong answers to regain market confidence.

Even with the ups and downs on Wall Street this week, the White House insists that the U.S. president is focused on long-term economic "fundamentals" that remain "exceptionally strong." By this the administration is referring to low inflation, low unemployment, and high consumer confidence, which in a normal time would indeed be considered "fundamental" for both economic growth and market confidence. But these are not normal times. In fact, these are exceptionally abnormal times in American history.

Indeed, the U.S. Congress has only seen two major accomplishments in a year – the appointment of the conservative Supreme Court Justice Neil Gorsuch and sweeping, yet decidedly flawed Tax Reform. Yet presently the American Republic Party currently controls all three branches of government. With the historic upset through the election of Donald Trump, the Republican Party retook the White House from democrats after eight years.  In those eight years, the Republicans not only regained control over the house and Senate, but also were successful gaining control of 33 out of 50 states’ governorships; and where in 2010 Republicans only controlled both chambers of state legislatures in just 14 states, by the end of Obama’s second term Republicans controlled 32. Furthermore, the U.S. supreme court holds not only a conservative majority on the bench, but the Trump administration has also set a record for the number of Federal Judge appointments in his first term. There should be no barriers in the way of a very successful year for Republicans, yet without only two accomplishments over this time, it is safe to say that the Republican government is definitively out of control.

Let me be perfectly clear: The fundamentals of the U.S. economy are not inflation, unemployment, or consumer confidence – the fundamentals of the U.S. economy are a functioning democracy, and confidence that this government can indeed support and bolster the economy through intelligent policy measures and reform.  Yet in a recent report released by the Economist Intelligence Unit, the United States has been demoted from a "Full Democracy" to a "Flawed Democracy."  That is to say, the American people no longer have confidence in their government or its institutions.

Indeed, even with the U.S. stock markets having experiencing one of the longest periods of growth to date, the Dow dropped another 1,000 points Thursday evincing further volatility in the market. Stocks are overvalued, and the correction is now officially here. But how are we going to deal with this?  

Historically, there have been three periods of such rapid, arguably irrational growth: The first appeared in the 1920s when the United States was experiencing some of its fastest growth, and began emerging as a leading global economy.  The second occurred during the early 2000s with the Dot Com Bubble.  And the last has been occurring over the last week.  If history can be a guide, there are essentially two trajectories for which the American, and indeed the world economy, may follow.

With the crash of 1929, the U.S. stock market was severely overvalued, and when the inevitable correction arrived the U.S. stock market went into a selling frenzy – sparking a global depression. The panic that ensued led to global GDP shrinking roughly 15 percent and a decade of economic turmoil.  Whether the crash could have been avoided is a question on which I dare not opine. However, the overall results could certainly have been mitigated through a functioning, active government with sufficient foresight. Due to the ideological failings of the then President Herbert Hoover’s laissez faire – or "hands off" – policies, coupled with trade protectionism and an inefficient legislature, the economy continued to worsen. It wasn’t until the vigorous New Deal policies enacted by his successor that faith in the government and the economy returned.

In contrast, dot-com bubble occurred due to excessive speculation of startup internet companies between around 1997 and 2001, ultimately bursting in 2000.  The Dot Com Bubble is a story of pain – but a managed pain.  After the collapse, Congress immediately took action and by 2003 had identified a significant factor in the Dot Com mess. With changes in taxation policy, stock prices that were once decoupled from their dividends per share were again closely-coupled, and volatility was reduced.

Of course, the current market situation is vastly different from either the crash of 1929 or the Dot Com Bubble.  But what these examples do illustrate is that a functioning government capable of acting and reacting to both internal and external economic stresses is a vital part of governing. At present, the United States government with undisputed Republican dominance has not only failed to forward its own political agenda, but not once, but twice lead the United States into government shut downs due to an inability to agree on and pass a "Republican" spending bill.

The fundamentals of the U.S. economy are strong?  The fundamentals of the U.S. economy begin and end with the strength and confidence in its democratic institutions. Faith in these institutions has understandably been diminished over the last year, and while it is true that there are never any "right" answers in life, why does the U.S. Republican Congress insist on choosing the worst wrong ones?

Michael D. R. Long is PhD candidate at the University of Cambridge Department of Social Anthropology with seven years of experience in China.

Opinion articles reflect the views of their authors, not necessarily those of

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