The current price of a share of publicly traded stock reflects the discounted net present value of that company's expected future earnings. That's how an economist explains the value of a publicly traded American company. The company's aggregate value -- its market capitalization -- is the total value of all those outstanding shares, which reflect the stock market's value of the company's future earnings. That amount is discounted, of course, because a dollar's worth of future earnings is worth less than a dollar in hand today.
Within recent weeks, the U.S. stock market, particularly the Dow Jones Industrial Average, has been behaving like a patient with a severe case of atrial fibrillation: down 300 points one day, up 250 points the next day, down the next by over 500 points only to close higher with a loss of, say, only 175 points. What's going on? What explains this remarkable and unprecedented period of extreme volatility? Surely the value of America's businesses and what they produce cannot be subject to that much day-to-day fluctuation.
There's a one-word answer: uncertainty. And that uncertainty has two sources: at home and abroad. The former we have more control over; the latter is subject to events beyond our control: economic turmoil (Greece, the Eurozone, and OPEC), political developments (Mideast tensions, terrorist threats, China). We have waning influence, of course, over some of these external variables. For instance, we can urge the Chinese to stop manipulating their currency and respect U.S. patents, and we can try to bring together the Israelis and the Palestinians. We can try to reduce and prevent terrorist attacks. There are also acts of God -- natural disasters like earthquakes, tsunamis, and cyclones -- that we cannot escape.
But when it comes to U.S. domestic economic policy, we are our own masters, and in the last three years -- under both administrations -- our record has been dismal. We may have averted a total financial meltdown by the emergency measures taken in the fall of 2008 and in early 2009, but we have yet to provide assurances that we have the know-how to calm jittery financial markets, reassure today's non-consuming consumers, and coax businesses into investing the reported $2 trillion in cash they are holding.
The problem is that for more than three years, we have had too much economic policy churning: first there was the Troubled Asset Relief Program that was chartered to purchase toxic assets on the balance sheets of troubled financial institutions. Because those assets were difficult to value, TARP then became a bank-liquidity provider with direct capital infusions into shaky banks. Through temporary government takeovers, the taxpayer rescued Chrysler, General Motors, and insurance giant AIG. Bank of America swallowed up both Merrill Lynch and Countrywide Financial -- much to its current detriment and ongoing corporate acid reflux. There were tax breaks for first-time home buyers and a "cash for clunkers" giveaway. The Federal Reserve pursued two rounds of quantitative easing (essentially purchasing Treasury notes and flooding the world with dollars) and is now doing a new "Twist" designed to bring down long-term interest rates. In short, our monetary policy has been ad hoc rather than rules-based.
Likewise, when it comes to fiscal policy, our leadership has consistently fallen short. A Republican administration expanded Medicare, continued farm subsidies, and began two wars without caring about how these commitments were funded. We went from a budget surplus in 2001 to today's massive deficits. President Obama pledged on March 5, 2009, that his approach to health care reform -- the single biggest driver of our budget deficits -- would first get costs under control and then expand coverage to the millions of uninsured Americans. He signed a bill that did the precise opposite and left in place a program structure that we can no longer afford. Health care costs for family plans rose 9 percent in 2011, and entitlement spending on Medicare and Medicaid is unsustainable.
President Obama appointed a deficit-reduction commission co-chaired by former Clinton White House Chief of Staff Erskine Bowles and former Republican Senator Alan Simpson. The Commission produced an excellent set of recommendations, and the president ignored their work.
Now President Obama is lecturing the new Super Committee on how to reduce the deficit but refuses to fix Social Security, which is the easiest structural problem to solve. The mantra now is that we have to put it aside until there can be a bipartisan approach. That's looney. Why not pick the low-hanging fruit first to restore a sense of accomplishment among Americans who have all but given up on the Congress's ability to do anything?
On the evening of September 19, 2011, President Obama was in New York City raising money for his re-election. His time would have been better spent attending another dinner at the Hilton New York where the Economic Club of New York presented its first Leadership Excellence Award to former Secretary of State George Shultz.
George Shultz is one of the few Americans whose government service includes four Cabinet-level positions: the Office of Management and Budget, Labor, and Treasury, as well as State. As moderator-questioner Glenn Hubbard from Columbia Business School quipped, Secretary Shultz has enough Cabinet chairs in his home to make up a small dinette set.
At 90 years of age, Shultz sat in a chair on the dais before several hundred guests and without notes or teleprompter -- his hands folded gently on his lap, his legs crossed, and his voice calm and firm -- proceeded to explain how we had gotten into our current economic mess and what we needed to do to end it. You may not agree with everything he said, but there is no questioning that he spoke with conviction plus considerable experience and authority.
Secretary Shultz began with tax reform, especially lowering the corporate tax rate, and reforming the Code's overall structure to achieve lower rates and, most likely, more revenue. This approach is not raising taxes, Grover, but eliminating all of the rent-seeking preferences that Democrats and Republicans have stuck in to reward their PAC contributors since the last wave of tax reform in 1986.
As for Social Security, Secretary Shultz suggested one simple change: from wage-indexing to price-indexing. Americans over 55 would not see any changes in their benefits, but he added that he would also like to see voluntary private accounts as part of the program.
As for spending, Shultz expressed skepticism about the ongoing effort to deal with the deficit over a 10-year period. He paraphrased a Democratic president when he said, "Ask not what a Congress 10 years from now will spend. Ask what you will spend this year and next year." For a Congress that cannot even pass annual appropriations bills, his skepticism is, perhaps, warranted. And he added, "These multitrillion dollar things leave me cold."
George Shultz's most important point was to end the policy churning, and he described in some detail the efforts in the early Reagan years to put in place a set of programs that he described as "steady as you go with policies consistent with prosperity without inflation." He also noted how Ronald Reagan provided political "cover" for Fed Chairman Paul Volcker to wring out inflation from the American economy.
Schultz's remarks struck me as a tour de force, and he received a standing ovation. Finally, an adult with wisdom, judgment, and experience. My heart was calm -- until I regained Sixth Avenue and headed back to my hotel.
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Charles Kolb is president of the nonpartisan, business-led Committee for Economic Development in Washington, D.C. He served in the George H.W. Bush White House as Deputy Assistant to the President for Domestic Policy. The above views are solely the author's.