Sunday, May 2, 2010

2008: 1976 all over again?

This was previously posted on on or before 2007-09-04:

The analogy is far from perfect, but there are some similarities. Having come from a couple of Middle East wars (1967 and 1973 vs 1991 and 2003), major acts of terrorism (Munich 1972 vs 9/11) and dramatic spikes in the price of oil, the next major election looks to be won by people who have a fanatical desire to raise taxes and spend every penny.

In 1976, it was Jimmy Carter and his congressional cheer-leaders who did their best to punctuate US competitiveness and embolden our enemies. Inflation and interest rates both hit double digits, economic growth went negative, the stock market declined and people's savings evaporated. It was the only real economic crisis we have had since the 1930s.

32 years later, we are better off in one respect, and worse off in another.

We are better off now because so many countries around the world are making the strongest economic progress in almost a century, perhaps in all of recorded history. The former Soviet Union and its occupied territories such as the Baltic states all the way down to Albania have implemented flat taxes from 10% to 17%, leading to rapid economic growth of which we could not dream when the Iron Curtain came down in November 1989.

In India and China, privatization, liberalization, deregulation and spectacular tax cuts have caused an economic boom not seen since the US became the world's superpower in the 100 or so years before the 1930s. Countries who were trying to battle mass starvation under Indira Ghandi and Mao Tse Tung in the 1970s, are now major food exporters - not to speak of every iPod, iPhone and iMac. It is clear who, and when, world leaders learned from Ronald Reagan instead of Jimmy Carter.

Therefore, while the US may suffer from tax hikes and insane new regulations - including making the entire health care system into an arm of the same people who now dish out services from the windows of the US Postal Service - we are at least operating in an international environment where capitalism has never been as wide-spread as today. Our own domestic consumption may collapse, but at least our companies - largely operating out of Chinese and Indian facilities - can still generate the goods and services the rest of the world will buy in mushrooming quantities. Milton Friedman, Ronald Reagan and Margaret Thatcher may be banned from history classes for our young people because their achievements don't fit the socialist planning utopia of America's teaching class, but they are the heroes whose ideas and leadership have brought life and growing prosperity to literally billions of people around the world.

In another dimension, our position in 2008 could be dicier than in 1976. The cold war was of course filled with the ultimate danger, but at least the Russians loved their children too, as that song went whose name I don't remember right now. Unfortunately, today's enemy doesn't love its children at all. It strapps bombs around them, while thinking about the 72 virgins soon to be enjoyed as Allah's grand prize for killing an infidel. Or a few million of us. One of these days, one of these religious fanatics will walk across the Mexican border, get a driver's license in LA, and drive to NYC with something very lethal. At this pace, we are clearly living on borrowed time. On December 8, 1941, President Roosevelt joined with a united congress and country to destroy our enemy to the last millimeter. Today, many Presidential candidates generate the biggest applause lines when they promise to "bring our troops home" so that we can achieve a "political solution."

Oh boy. Every time I see John Edwards, Hillary Clinton or Barack Hussein Obama, I see the ghost of Jimmy Carter redux. Let's leave our fanatical enemies to therapy, while we tax the US economy into a state of socialist paralysis. Sadly, there is a significant probablility that this part of history will repeat itself 32 years later. I guess this is the political equivalent of every generation making its own mistake. As kids, we do something stupid and we learn from it. As adults, we vote for Jimmy Carter and then we sober up with a Ronald Reagan. Will it happen again in 2008 and beyond?

If it does, that spells a disaster for the stock market down the road. Taxes and regulations have been as certain to kill an economy as sustained rain storms have been certain to kill a forest fire. As Ludwig von Mises wrote in 1920, when he predicted most of this, "The Santa Claus Principle eventually liquidates itself." Now that's a lesson for Obama, Osama and Chelsea's mama.

So what about about George Bush Jr in all of this? The conventional wisdom, at least in the left-wing media, is that he is inarticulate and suffering from low intelligence. Interestingly, they also claim that he is basically taking his orders from Vice President Cheney, whom not even the leftists accuse of being inarticulate or unintelligent. So either it matters that President Bush is inarticulate and unintelligent, or it doesn't. You can't have it both ways.

Besides, if you leave someone in charge of something - such as your money with a fund manager - what matters isn't whether the fund manager is articulate or smart. What matters is if he is right. Being articulate and smart may get you through school and may make you popular in the finer circles of Uptown's cocktail parties, but it is all in vain if you are not right in your decision-making. I know plenty of fund managers who are inarticulate and perhaps not all that intellectually impressive, but who deliver spectacular results because they are right. Who would you rather have running your money - someone who is articulate, intelligent and wrong? Or someone who is inarticulate, unintelligent but right? That doesn't mean George Bush has been right on everything, but it should tell us to at least focus on the right metrics. A few decades from now, we may have a verdict.

It is always easy to criticize a manager, as there will inevitably be mistakes of all kinds, not the least in execution. Even the best fund managers are only right just over 50% of the time. But imagine if Al Gore and his fan club would have been in charge in 2001 and beyond - would we have been better off to dramatically raise our taxes, impose all sorts of new regulations, socialize major parts of the economy and patted the terrorists on their backs and offered them therapy? It sounds to me as if the alternative to what actually happened over the last 6 years would have been poverty followed by death. So with all of his many faults, perhaps George Bush was a lot better than the alternative after all...