The July 21, 2011 issue of the Wall Street Journal carried an article about Canada titled “How Spending Cuts – Not Higher Taxes – Saved Canada.” The discussion focused on the problems Canada was confronting in the mid 1990’s and how those problems were solved by the Liberal Party taking a decidedly un-liberal tack – cutting expenditures. The correlation with the problems the US is facing today, and the subsequent persistent economic success of Canada, leads the reader to the obvious conclusion that policy makers – headed by President Obama – should be pursuing a similar solution.
However, President Obama is facing a conundrum that few presidents have faced. Consider two specific comments he has made during unguarded moments since emerging on the national stage. The first was during the presidential campaign when he responded to a question by “Joe the plumber” in Ohio that we have to “…spread the wealth around.” The other occurred during his press conference on July 11, 2011 regarding debt limit negotiations when he noted that instead of talking about the unpleasantness of expenditure cuts ‘I’d rather be talking about stuff that everybody welcomes — like new programs…” President Obama believes to his core that the US Government should be a major force in its citizen’s lives, a force for good. This is a noble and laudable position. To his credit, the President is true to his ideological heart and he is proceeding in a fashion that is consistent with how he described an Obama presidency to be when he was campaigning for the office.
Unfortunately, his ideology appears to be colliding with the economic reality of how one pays for the type of government that defines his vision (similar to what the Liberal Party in Canada faced). How can he remain true to his ideology while simultaneously embracing actions that betray that ideology? His vision of government reflects that which has been embraced by many in Europe. Some economists suggest that this more expansive form of government comes at the expense of lower economic growth and higher unemployment (the US unemployment rate seems stuck near 10%). So, the choice appears to be coming in to focus. The American people will get to decide in the presidential election of 2012 what vision of government they want.
That choice will likely determine relative economic growth rates by and between countries, and hence, will inform our judgment as to how investment portfolios should be positioned. Markets begin to discount the likely course of action well before the conclusion is in hand, and that is why we are pondering this, and related issues, now.
We welcome all comments and counter viewpoints.
Robert M. Bilkie Jr., CFA