I consider myself a fiscal conservative. I know many of you are thinking, "but wait, Matt, aren't you a Democrat?" Yes, and looking through history, as I am currently, I've found that the two aren't mutually exclusive. Some of you may know I am in the middle of a years-long goal of reading a biography of every president of the United States. I just finished Herbert Hoover and right now I'm in the middle of Franklin Delano Roosevelt (FDR). The contrast is stark. I can almost hear your brains turn off: blah blah blah, history. However, if you'll bear with me, a little history may help us understand what's going on right now and where we're heading.
Most people have at least a vague idea of what went on during the 1920's and 1930's. Herbert Hoover had been the Secretary of Commerce since 1921. During this time, he developed a theory of economics he called, "trickle-down economics." The basic idea is deregulation and lower taxes at the top which spurs growth by new hiring and reinvestment in the economy. Looking at this in the short term, one would think this worked spectacularly. We had the "roaring 20s" after all, right? Fast forward to 1929 when the whole thing came tumbling down, and we see what happened: the stock market crash and the resulting Great Depression; short term gain; long term decline.
The great depression brought a wave of Democrats into power along with FDR. These so-called “new deal Democrats” won with the idea that the economy is more sustainable with a bottom-up model. New Deal legislation increased confidence in the country, runs-on-banks became a thing of the past thanks to the FDIC. Social Security added nothing to government spending, but increased confidence in the system. Social work systems employed millions who were previously out of work. FDR started with a jobless rate of 24.9%. By the time World War II started, unemployment was down to 9.9%. Note: this decline in unemployment happened prior to our involvement in the war*. By the time Roosevelt passed away in office, unemployment was down to 1.9%.
Let's fast-forward slightly to a more recent president - Ronald Reagan. He came into power and immediately kicked into gear with "Reaganomics" which was a repackaging of Herbert Hoover's "trickle-down economics." Same idea, similar consequences. Short-term, it spurred tremendous growth. Long term, it created a balloon that popped in 1987.
Let’s continue with an examination of another recent president - George W. Bush. Republicans passed a slew of tax cuts meant to spur economic growth. We saw the boom in the early 2000's and we are still smarting from the Great Recession that followed.
During that recession, President Obama began his presidency. He and his team put in place policies that gave us the economy we are in right now. The economy wasn't flashy, nor incredible in its growth, but it was steady and had a solid base of support. Our economy is still enjoying the steadying influence of his policies.
I want to pause here to make a few observations from these flashpoints in history:
- An economic downturn is the ideal time to invest (e.g. buy low)
- An economic upturn is the ideal time to pull back and save (e.g. sell high)
- Short-term stimulus is good during times of need (e.g. cut taxes for the middle class/poor, increase investment in programs)
- Natural recessions are inevitable. Prepare for these situations by pulling back during times of abundance. This will yield long-term stability. (e.g. increase taxes on the wealthy, cut programs)
Now let's fast-forward slightly to 2017 when Republicans regained power in the senate, house, and presidency. The first thing** they did was decide to move forward with a huge tax cut that is meant to spur economic growth from the top-down, aka "trickle-down economics."
We know from history that this will spur economic growth short term (which we are experiencing). We know from history this is a great tool for getting us out of a recession. We also know that left unchecked, it will end in a huge crash.
I just checked my “economy calendar” and in 2017 we weren't in a recession. In fact we'd just come out of the longest stretch of increased economic growth in history.
This whole thing is analogous to food and a balanced diet. Before I run a race, I like to eat a bunch of carbs to give me a boost through the race. When I'm done with the race, I'll eat a cookie, bananas, and other foods that are high in sugar content to pick me up and get me moving again. Short-term, this is a good strategy. Long-term this is not a good strategy. Long-term I need a balanced diet of meat, vegetables, water, and a few carbs to keep me going. I can't eat Lucky Charms every meal and expect a healthy body long-term!
The economy has natural ups and downs. The trick is to use tools we have to kick it up when it comes down (like eating carbs and sugar after a race), and to store for the future when it comes up. One of those tools for kicking it up is lowering taxes for those who are less affluent (which has been shown to be more effective at juicing the economy). Another is lowering interest rates. One tool for harnessing the abundance are raising taxes on the more wealthy to cut our debts. Another is increasing interest rates so Americans are incentivized to save.
Even though we are in an economic upturn we just used the tools that are appropriate for an economic downturn. Right tools in the wrong situation (we're eating sugary cookies and drinking soda right now and we’re at the starting line – not the finish). When the inevitable crash comes, what will we have left to get us out?
*Many people think that WWII got us out of the Great Depression. This is simply not the case, though the war did help create an incredible economic engine, the Great Depression was over by 1939.
**This is hyperbole. The first thing they actually did was vote to gut the ethics committee