The pall of perceived gloom that continues to hang over the economy may have reached its nadir with the report this week that consumer confidence fell to a 16-year low, less than half its level of a year ago and the fifth-lowest level on record. The media trumpeted this report as another sign of the economy’s desperate straits, even though confidence data historically have been misleading.
For instance, over the past several months, the sharp decline in confidence actually has corresponded with an acceleration in consumer spending. Core retail sales are up at an annual rate of 10 percent for the last three months, about triple the rate of a year ago when confidence was near its cyclical peak. In fact, the drop in confidence to such a low level might be a positive contrarian indicator. The last time consumer sentiment was so bad was in early 1992, exactly when the long boom of the 1990s was beginning.
Be that as it may, starkly negative consumer sentiment can still lead to potentially toxic consequences. We get a glimpse of such potential when the media, after perpetuating the anxieties of their audience, seize on those anxieties by promoting an interventionist agenda. In an election year, this self-reinforcing cycle feeds directly into the policy choices of candidates eager to be seen as meeting the needs of voters.
A Time cover story last month, “The New President’s Economy Problem,” exemplifies this phenomenon. In it, writer Justin Fox discovers in the landscape of economic issues dominating discussion — income inequality, budget deficits, energy, housing, and health care — the potential “end to America’s 25-year love affair with tax cuts and deregulation.” This, Fox writes, would be the result of a “generalized sense of economic insecurity that has dimmed many Americans’ optimism about their future.”
It should be no surprise that Fox closely hews to the mainstream media’s economic perspective, with all its tendentiousness and unsupported generalizations.
On income inequality, Fox accepts as fact the findings of economists Thomas Piketty and Emanuel Saez that “75% of all income gains from 2002 to ’06 went to the top 1% — households making more than $382,600 a year.” But as Piketty and Saez have acknowledged, these results are significantly skewed by the fact that their data only includes income reported on individual tax returns.
Following cuts in individual tax rates in 1986 (under Ronald Reagan) and 2003 (under George W. Bush), many of the businesses that had been reporting income under the corporate tax switched to the lower individual rate. In 1986, business income accounted for only 11 percent of the income reported by the top 1 percent of earners. By 2005 that share jumped to more than 29 percent. Clearly, much of the reported gain of the top 1 percent is accounted for in this bookkeeping shift.
Fox also implicates the Reagan tax cuts in the recent growth of the federal budget deficit, even though it’s apparent to any objective observer that the current rise in red ink is attributable to the economic slowdown. Up until about a year ago, the deficit/GDP ratio was around 1 percent — near multi-decade lows. This fiscal year, the ratio is expected to be about 3.5 percent.
Of course, during Reagan’s second term the economy boomed with the deficit at 6 percent of GDP. But Fox warns that such an event “can’t go on forever,” trotting out the shopworn canard that “there comes a point at which government debts grow so large that they start to weigh on the economy, through higher interest rates . . . a weaker currency, etc.” Nowhere is the possibility mentioned that the deficit could be cut by restraining runaway spending. Instead, we’re told that taxes “haven’t quite been doing the job” of funding government.
On energy prices, the Time piece faults the “laissiez-faire policy of the past quarter century that has helped land us in our current sorry situation.” According to Fox, “doing the right thing” would mean “raising costs now, with higher taxes on oil, increased subsidies for other energy sources or higher energy-efficiency standards for vehicles and homes.” Nowhere does Fox note the contribution of easy-money Fed policy to the quadrupling of oil prices over the last four years. Nor is there room in his heavy-handed regulatory approach for opening the outer continental shelf and Alaska to increased oil and gas exploration.
As for the housing crisis, Fox sees it as an abject lesson in the perils of deregulation. He writes, “ever since Reagan took office, the approach has been to get out of the way and let financial markets work their magic.” Fox actually calls it “black magic,” leading to the conclusion that it is time for “much stricter oversight.”
Another complete miss. In truth, the housing crisis has its roots in excessively accommodative monetary policy from the Fed and a Community Reinvestment Act that forced banks to provide mortgages to marginal borrowers.
Finally, there’s health care. Here Fox finds “real hope” for instituting a European-welfare-state style of socialized medicine. He proclaims that “it is possible to conceive of a system that brings 47 million uninsured into the fold, improves medical outcomes and costs less than what we’ve got now. It’s possible to conceive of because many other wealthy countries already have such systems.”
Yes, they have such systems. And their economies are straining under the burdensome tax and regulatory structures necessary to support these costly schemes.
Fox is frank enough to acknowledge that this “new direction in economic policy” will stand its best chance if Barack Obama wins the presidency. John McCain, however, has shown that he’s certainly not averse to an interventionist approach, in particular when it comes to energy policy and mortgage regulation.
So the self-reinforcing cycle continues: The press fans the apprehensions of its audience and tailors its “reporting” to answer those fears. The presidential candidates, meanwhile, say what they have to say to get elected.
Perhaps the best hope of avoiding the restoration of pre-Reagan policies — in other words, dramatically higher taxes and regulations — would be for the economy to emerge from its recent doldrums. Economic growth cures a lot of ills, and often leaves the media with little room to advance a statist agenda.