Good But Not Great

In his opinion today, Don Luskin takes a similar view of the economy to mine of yesterday. He raises the question of what this portends for the stock market. He is far from bearish.

Mr. Luskin is one of the few individuals who doesn't see a slow adjustment as necessarily bearish for asset prices. Indeed, one would think that a decline in demand for consuming stuff today in favor of consuming stuff tomorrow would increase the demand for assets that yield future fruits. Of course, the tolerance for risk assets has taken a real beating during this past crisis, and has not returned. If people take money and bury it in jars in the backyard, or almost as bad, buy 2-year treasury securities, there is not much benefit to the economy. Eventually, the appetite for return will outweigh the stomach wrench of risk. Whether this will happen before I am too old to enjoy it -- I'm 51 this year -- is another question.

Those who worry about the demand side of our economy are always asking, "Where is the new demand going to come from?" Over the past decade -- indeed, one might argue, since the end of WWII -- the American economy has "relied" on expanding demand through taking on of progressively greater levels of debt, both public and private. The double taxation of corporate income, with high rates of taxes on dividends and capital gains for much of the past 75 years, coupled with favorable treatment of housing above and beyond every (other?) asset by our laws, has made saving in general, and stock market investment seem a poor bet. Savers have gotten a very raw deal, indeed, particularly during the past crisis. They have been rewarded by bailing out the irresponsible, unredeemed, and reprehensible, and suffered the double indignation of having a decade's worth of stock market gains wiped out for the privilege.

Given an economy's resources and technology, the consumption of the resulting output might be divided in any number of ways, and for much of my life, it has been tilted towards borrowers. In the future, I suggest that the balance will shift towards savers. Whether prices of goods and services, factors, and assets can adjust sufficiently quickly is an important determinant of how fast our economy returns to the "new normal." The "new normal" need not correspond to a period of shrinking output growth and shrinking standards of living in America. It is distinctly possible, however, that policy missteps that do not take account of the natural adjustment of our economy away -- at least in part -- from a reliance on debt could generate just what one might hope to avoid.