Polluting Economics With Politics
I'm hardly the first one to mention this, but in a politically charged environment that seems to want to reject empirical evidence at all costs, every professional discipline has been affected: medicine, science, and of course, economics.
Here is an example of what the country's politics have devolved into, and how it pollutes the "dismal science." We have before us the case of Mr. Brian Wesbury, currently the Chief Economist of a firm called First Trust Portfolios. Mr. Wesbury has some impressive credentials. Unfortunately, he lets ideology get the better of him.
On March 30, 2004, Mr. Wesbury wrote a piece called "Deficits Don't Matter" for a conservative magazine, “The American Spectator.” The article stated:
“I can’t believe that I am writing about budget deficits again. The Bush Administration’s $520 billion deficit forecast for this year doesn’t bother me, but the deficit phobia and media outcry is getting tiresome. I thought this had been resolved and agree with Vice President Cheney, who reportedly told Paul O’Neill, “Reagan proved that deficits don’t matter.” He was right.”
Dick Cheney is known for a great many things. Economic theory is not one of them.
But in March of 2009, it appears Mr. Wesbury had experienced a sudden change in philosophy, and wasted no time explaining it. President Obama had been in office for all of six weeks, and he came out with guns blazing on his company's blog:
Brian Wesbury shreds the lies behind Obama's budget and deficit predictions: "Rosy Scenario" Hides Irresponsible Spending Brian S. Wesbury - Chief Economist, FirstTrust Advisors Robert Stein, CFA - Senior Economist, First Trust Advisors Date: 3/9/2009
"In 2007, the federal budget deficit was $162 billion (or, 1.2% of GDP). For 2009, the budget deficit is projected to be eleven times larger: $1.752 trillion. This World War II-like deficit (12.3% of GDP), is not all on President Obama. Much of it is due to policies put in place by President Bush, Hank Paulson, and last year’s Congress. President Obama’s “stimulus” bill will certainly lift the deficit, but, to be fair, it is not the predominate force behind this year’s large fiscal hole. Nonetheless, contrary to the spin of big government-types, these deficits are not just temporary. In fact, the Obama Administration uses every trick in the book to convert an understandable and potentially temporary budget lapse this year into a structural lack of fiscal responsibility. Despite the rosiest economic projections we have possibly ever seen, and one of the largest tax hikes in history, (untrue) President Obama’s budget fails to achieve balance at anytime in the next decade. The smallest deficit (at least as far as the eye can see) will be $533 billion in 2013."
In Mr. Wesbury's eyes, the $520 billion deficit under President Bush in a stagnant, but stable economy was no cause for alarm. For President Obama, a deficit just $13 billion higher in the midst of a 1929 style crisis was an utter catastrophe. In March 2009, no less, when GDP was still negative, and the U-3 rate was still heading upwards to 10%. That is NOT the time a genuine economist worries about deficits. In fact, that's not a time when normal people even think about deficits. Most of the American population was running around with their hair on fire, and Mr. Wesbury chose to focus on THIS issue, instead of some of the larger ones being floated around, like the survival of market capitalism, or a substantial part of the population with their furniture stacked by the curb. In fact, Mr. Wesbury seemed to suffering from an attack of the "deficit phobia" that annoyed him so much in 2004. He "couldn't believe" he had to spank deficit scolds in 2004. In 2009, he became one.
He continues:
“But by 2013, according to the Obama forecast, the US will be in the fourth year of recovery, with an unemployment rate at 5.2%. In other words, it is the Obama team’s shift to an expanded government role in the economy and society that is boosting spending, not just spending to stimulate the economy. Deficits will remain extremely large because spending is so much above any historical ability of the economy to pay for it."
In fact, the deficit was cut by over 70% by 2015, and while the U-3 didn't get to 5.2% by 2013, (Mr. Wesbury doesn't mention a month) it did reach that level by June of 2015. That's not a great forecast, but it's not a bad one, considering how difficult it is to project four years out even in normal conditions.
Then there's this, from his Wiki page:
"Throughout his career as an economist, Wesbury held fast to his beliefs that the economy was not always doing as poorly as the critics believed. Through empirical studies on what moves the global marketplace, Wesbury held fast to his contrarian beliefs that if an economy were given the three key ingredients of economic freedom- low taxes, open markets and a supportive societal and governmental infrastructure, it would be primed for prosperity. Brian Wesbury's optimism has been recorded through countless interviews and publishings, as in February 2008, he stated in Human Events that the country is not in a recessionand people should be buying stocks because "the market basically today is priced for almost the end of the world." Obviously he was too early and after the article was published, the Dow dropped from 13,000 to the low of 6600 in March 2009."
Whoops. "Obviously too early," in fact, too clever by half, and as it turned out, the market wasn't "basically" priced that particular day for the end of the world. It happened to reach that level, irony of ironies, on the very day Mr. Wesbury published his hit piece on Obama's budget. The low for the DJIA, of 6547, occurred on March 9. 2009.
In the real world of investing, when most of us are that "early," we have trouble finding gainful employment later. Usually, the clients leave skid marks.
In the Human Events interview, he also said: "The biggest {problem} is this whole subprime lending issue. At its worst, and this is using the worst assumptions that I can make, it’ll be about a $250 billion problem. I don’t even think that we’ll get to that level; that’s the worst I can make it."
Oh, to hell with it. Let's stick it in further. From the 2004 article:
"Ronald Reagan experienced budget deficits every year he was in office and retired with some of the highest approval ratings of any President. (since superseded by Obama) Moreover, the economy underwent the worst recession in 50 years (since superseded in Obama's first months) during his tenure in office, and between November 1982 and July 1990 experienced what was at that time the second longest expansion in history. The ten years between March 1991 and March 2001 became the longest expansion in history, (since superseded by Obama) even though they included 7 years of deficits and just 3 years of surplus."
The infatuation with Reagan is both ordinary and preposterous: but what do deficits have to do with "high approval ratings?" Why even conflate the two?
Don't expect hearts and flowers from Mr. Wesbury for what he used to think was a stunning accomplishment. It simply isn't one after January 2009. I look forward to another paradigm shift from him in the New Year. Mark your calendars.
Then set your watches.
Lastly, in a message to clients on November 7th regarding the election, Mr. Wesbury solemnly advises: "don't let your personal politics cloud your long-term investment decisions."
Sage advice indeed.
2004: https://spectator.org/50349_deficits-dont-matter/
2009: http://www.ftportfolios.com/Commentary/EconomicResearch/2009/3/9/rosy_scenario_hides_irresponsible_spending
