Beltway Shift: It’s the Investors, Stupid
John W. Snow underscored a major shift Monday in his brief remarks after being nominated as the next Treasury secretary. He mouthed the usual platitudes about “small businesses,” “medium-sized businesses” and “large businesses.” And then he hastened to add, “and investors.” That’s the reality of postindustrial America today: It’s the investor class, stupid.
Which is why Paul H. O’Neill, the ousted Treasury secretary, and White House economic advisor Lawrence B. Lindsey had to go. By most measures, they had done a good job. Yes, unemployment ticked up as the economy came under new strains; one study estimates that the new “terror tax” on the U.S. economy is more than $250 billion a year. Even so, real gross domestic product -- that is, GDP adjusted for what little inflation there is -- clocked in at a healthy 3.1% growth rate in the third quarter of 2002.
But there’s one statistic that’s gone seriously awry: that of the financial markets. Total capital losses over the last three years are $8 trillion, a sum dwarfing President Bush’s 2001 tax cut, which was a mere $1.35 trillion spaced over 10 years. And so the investor class -- the 100 million people who have money invested in those markets -- is drowning in its own red ink, and investors want blood, or at least scalps.
Grover Norquist, president of Americans for Tax Reform, explains the new political-economic dynamic: “Thirty years ago, politicians used basically just one measurement to judge the economy: the unemployment rate. Then came the inflation of the 1970s and another variable was added: the consumer price index. Today, there’s a third variable: the stock market.”
To Norquist and other free-marketeers, that’s a positive development, because this triad of concerns forces politicians to think comprehensively about the economy. That is, pols can’t simply enact “quick fixes,” such as public works projects to hire people, or wage-and-price controls to squelch inflation. Instead, they have to think long-term, about all the tax and regulatory factors that affect economic growth -- and thus stock prices as well.
O’Neill was intellectually in tune with this worldview, but he lacked the right personal touch. If the Treasury secretary’s job is to baby-sit the markets, he had a bad crib-side manner. He once dismissed Wall Streeters as folks who “sit in front of a flickering green screen ... not the sort of people you would want to help you think about complex questions.”
O’Neill was right, of course; the “masters of the universe” aren’t so masterful. Leaving aside the corporate scandals -- Enron, WorldCom, Global Crossing, each of which had a Wall Street component -- one might question the savvy, or even the sanity, of investors who blew into the stock bubble.
What was going through the minds of those who bid up, for example, the price of Yahoo from $7 a share in January 1998 to $237 in January 2000? Yahoo is now under $16. But to paraphrase Winston Churchill, market capitalism, including its casino-esque excesses, is the worst of all possible economic systems -- save for the alternatives.
So what about Snow? Will he be a good horse whisperer, befriending the wild markets? As business maven Neil Cavuto said on Fox News, “There’s some concern that this man is not coming from Wall Street; he’s coming from smokestack America.”
To be sure, Snow has market-friendly credentials; he was a member of Jack Kemp’s flat-tax commission in the mid-’90s, saying at the time that the tax system “must be replaced by a new system for the 21st century.” Americans, he added, must “capitalize on opportunities -- not stifle economic growth and entrepreneurial activity.”
And besides, railroad executive Snow is likely to be joined by a real Streeter, Stephen Friedman, former chairman of Goldman Sachs, in Lindsey’s economic advisor job. He can be relied upon to whisper sweet somethings into investors’ ears.
So what’s not to like? The only possible concern is that a high stock market will become a kind of entitlement, benefiting the huge new investor class. That is, presidents will be judged on their ability to comfort the comfortable and enrich the rich. That could make for the mother of all bubble-bursts someday. But today, the political imperative is much simpler for Snow & Co.: Get the Dow back up again.
