I participated on a meeting last week about the state of the economy and the moves the Obama administration proposes to deal with slow growth.
One of the most experienced executives attending, a pretty impressive guy, spoke persuasively about the reasons he thought American economic performance had failed to meet our post-recession hopes. He argued that there hadn't been sufficient reassurance for the business community that the debt was going to be brought under control. He stressed that while we were in better shape than a few years ago and while he admired many things that the administration had done, he couldn't help feeling that it wasn't enough to reassure the financial community.
Until his remarks, I had been pretty relaxed and satisfied that the discussion made sense. After his comments, I felt that his assertion was so wrong-headed that, rather than bite my tongue, I would add my two cents to the conversation.
I asked how the financial community interpreted the fact that interest rates are practically zero and the stock market is at an all-time high. Given the optimism required to produce such extraordinary numbers, exactly who are the investors who still need reassurance? What could be better for folks in the world of finance than the situation we have now? Banks, for example, are able to borrow money at practically a zero interest rate. They can then often lend it out at five percent; a five hundred basis point spread is very reassuring indeed.
Elsewhere in capital markets we find confidence in the U.S. remains at an extremely high level. That confidence is reflected in the low interest rates for treasury securities. And the dollar is still the world's reserve currency. It takes a fair chunk of the world's financial community to sustain such favorable conditions. So, are all these investors crazy? Do they need more reassurance?
If you really believe in capitalism or just believe that markets work at all, you have to be impressed that the stamp of approval markets are giving to both the economic policy mix and the current economic situation. It won't be that way for ever and God knows stock and bond markets make "mistakes." But based on the objective evidence, the last thing we need to do right now is to worry about reassuring the business community. There is just very little evidence for alarm about either the overall economy or our national balance sheet. Sure, it would be great if the annual budget deficit, already on a sharply downward path, were declining even faster. It would wonderful if unemployment was substantially lower. But even under those circumstances, it's hard to see how things could be much better for the financial community.
In fact, one has to wonder what would be the impact of a little progressive policy reform. My guess is the business community would remain reassured if we had a more pro-growth strategy -- a strategy that included somewhat more spending, more balance in our tax system, and even a program to rehire the policeman and teachers who were laid off in during the doldrums of the recent deep recession. Those deep cuts in the public sector clearly have been a drag on the overall economy.
The good news is that we continue to be headed in the right direction. And for now that should be all the "reassurance" we need.