The Coronavirus Correction

BRANDON J. WEICHERT | THE WEICHERT REPORT

The stock market has undergone its steepest downturn in a 24-hour time period since shortly before the Great Recession of 2008. The response from the American Left has been understandably Pavlovian, as they believe that this correction will be Trump’s undoing.

Please understand that the Democratic Party only ever does well at the ballot box when ordinary Americans are suffering. They rarely come to power in “good times” and the Democratic leaders rarely resolve the problems they say that they are going to.

The myth that Franklin D. Roosevelt swooped into the Oval Office and “saved” the country from the tyrannies of Republican economic orthodoxy has been pretty solidly disproven by Burton Folsom, Jr. and Amity Shlaes long ago.

After nearly four terms in office, FDR’s “New Deal” actually did little to revive the economy. Here is FDR’s right-hand economic man, then-Secretary of Treasury Henry Morgenthau, Jr. testifying before Congress in 1939:

We have tried spending money. We are spending more than we have ever spent before and it does not work. I want to see this country prosperous. I want to see people get a job. I want to see people get enough to eat. We have never made good on our promises. I say after eight years of this Administration we have just as much unemployment as when we started. … And an enormous debt to boot!

Then, of course, there is the great example of Barack Obama. During the 2008 Presidential Election, the Republican ticket of Senator John McCain (R-Ariz.) and Governor Sarah Palin (R.-Alaska), managed to stay neck-and-neck with the Senator Barack Obama (D-Ill.) and Senator Joe Biden (D-Del.) ticket right until the 2008 market crash. Even after the market crash, the McCain-Palin ticket remained in a tight match against Obama-Biden.

By the time it was clear, however, that the Republican Party in Congress was going to side with the Democratic Party and vote for the very unpopular Wall Street bailouts, the American people had had enough. They decided to throw their lot in with the “different” Obama who promised to rehabilitate both the national economy and the country through FDR-style socio-economic programs and populism.

After eight years of the Obama Administration, though, the economy was judged as experiencing the most turgid recovery in postwar history. So, it’s safe to say that President Obama, like FDR, benefited electorally from the economic downturn and, after having failed to resolve the downturn through copious government intervention, he simply abandoned his endeavors and told us to accept the “new normal.”

Had it not been for the 2008 market crash having occurred smack-dab in the middle of the contentious election of that year, it is likely that the McCain-Palin ticket would have eeked out a large enough majority to win the election.

Here is an analysis from Pew Research Center‘s Jesse Holcomb writing on the subject in 2013:

Pew Research Center data analyzing the tone and focus of media coverage through the final stretch of that election showed how that coverage shifted dramatically in mid-September 2008 to focus on the financial crisis and the media narrative grew increasingly critical of Republican candidate John McCain. During this same period, our public opinion survey data indicate that what had essentially been a deadlocked contest between McCain and Obama before the Lehman meltdown turned into a solid lead for Obama in the weeks that followed.

The combination of the downturn plus the highly unpopular bailout being supported not only by Republican President George W. Bush, but also that the Republican candidate for that year, John McCain, did little to stop the bailout meant that most voters were tired of the Republican Party (especially in light of the enduring failure of the Iraq War).

Today, unable to defeat the Republicans in a fair fight in the 2020 presidential election, the Left is yet again banking all of their hopes on what could be another round of painful economic bloodletting for most Americans, regardless of political affiliation.

Here is an example of the mediocrities of social media, represented by the investor extraordinaire, Anthony Scaramucci (who went to Harvard Law, in case you didn’t know), celebrating an economic downturn that will hurt ordinary folks, like you:

To which, I replied:

It is the hallmark of sub-educated fools to blame a market crash on a single president. Of course, as I warned readers back in early 2018, the president needs to be careful to “own” the stock market highs lest he be willing to own inevitable downturns (which, understandably, he is not).

Still, from a technical and objective position, no president is individually responsible for an economic downturn. They can certainly exacerbate negative trends with bad policies (which, I would argue has occurred). Despite that, though, they are not as responsible for downturns as Intellectual-Yet-Idiot types insist on social media and the press.

The reasons for major corrections and crashes are usually born out of longer-term trends that have little to do with a given leader.

Just look at the Great Recession of 2008. Long-term decisions in the financial and housing sectors since the 1970s and 80s belied the economic downturn that ultimately occurred in 2008 far more than anything that George W. Bush ever did.

The same is true for the Great Depression: it is a galling argument that FDR’s predecessor, Republican President Herbert Hoover, was seriously to blame for the Depression. Although, if one does believe Hoover was responsible for the Great Depression, you could argue that Hoover did exacerbate the Great Depression because he, like his Democrat successor, engaged in widespread government interventionism. After all, Hoover was a Progressive Republican reviled by the previous Republican president he had served under, Calvin Coolidge.

If you look at the previous economic depression to the Great Depression, one that occurred under Republican President Warren G. Harding, the Harding Administration did not respond at the government-level, and the country prospered. In fact, the “Forgotten Depression” (from 1920-22) that occurred during the Harding’s presidency was more severe in magnitude (though it did not last as long) than the Great Depression which followed, according to economists Richard Vedder and Lowell Galloway.

Inevitably, Harding’s vice-president, Calvin Coolidge, succeeded him and, in the words of CATO Institute economist, Jim Powell, Coolidge’s economic policies allowed for the single-greatest expansion in American economic history:

Altogether, spending and taxes were cut 50 percent during the 1920s, and about 30 percent of the national debt was paid off. There were budget surpluses throughout the 1920s. Unemployment fell to 1.8 percent, the lowest U.S. peacetime level in more than 100 years.

Similarly, the coronavirus outbreak around the world–which is a pandemic–has triggered a major correction in the market. Understand that this correction has been anticipated since 2018. Sure, you can claim that President Donald Trump’s response until this week to the coronavirus outbreak has been lackluster (I certainly don’t understand why he hadn’t closed the borders and suspended all travel to and from China), but Trump’s slow response is not the cause of this downturn–not mainly, at least.

The Trump tax cuts and, more importantly, the regulatory reforms he enacted in 2018 helped to ameliorate what should have been a correction back then. These moves allowed for corporations to engage in stock buybacks and other reorganization measures that boosted the stock market and allowed for another round of expansion when all of the economic gurus told us a contraction was coming.

Today, however, there is no tax cut or greater round of de-regulation on the horizon. Plus, America’s corporations have engaged in all of the stock market hoo-doo voodoo that they can. There is nothing more to stimulate through tax cuts or de-regulation. And, another major problem today that Coolidge was able to ameliorate was the grotesque levels of debt the country had. Today, America’s debt-to-GDP ratio is 100 percent–with no end to the spending in sight.

We have to stop the spending, if we want to fix our underlying economic woes–which is something no one is willing to do from either party.

The president has spoken about the desire for tax cuts the sequel, but that would likely have diminishing returns or, at the very least, be akin to putting a band-aid on a deep wound.

The reason this correction has occurred so rapidly and unexpectedly is because the United States has allowed itself to become far too reliant on international trade and open borders to sustain its economy. These trends have occurred since the initial round of deindustrialization and globalization occurred beginning in the 1970s. For more on that, please read Salena Zito’s and Brad Todd’s incredible 2017 book, The Great Revolt: Inside the Populist Coalition Reshaping American Politics.

America’s industrial supply chain has increasingly been pushed through China. The more reliant on China that the United States and the West became, the greater geopolitical and economic advantages Beijing accrued. Further, the more that the West relied upon China as a major hub for the supply chain, the more likely that the West would be beholden to whatever crises occurred in China. Given China’s long history, the crises would come–and they would be severe.

Donald Trump campaigned in 2016 on the idea that the United States needed to be less reliant on international trade–particularly through China–and that we needed to diversify and bring our supply chain closer to home. This was the basis of his protectionist trade programs and it was necessarily coupled with his controversial immigration policies. The United States needed to become much more self-sufficient than it was when Trump made his presidential campaign announcement in 2015.

Despite the fact that we engaged in a necessary “trade war” with China over several long-standing issues, and given the fact that President Trump has fought consistently to build the wall and rollback illegal immigration, the United States has been slow to actually diversify its supply chain. Therefore, the explosion of the coronavirus in China has exacerbated negative trends throughout the world market–forcing a major correction, such as the one we are currently experiencing.

The president cannot attempt to maintain the status quo any longer. Whatever happens with the CoVID-19 disease outbreak, so long as the world remains linked to China as significantly as it presently is, the markets will be susceptible to major dislocations–particularly as longer-running trends within China (aging population, male-female imbalances from decades of the “One-Child Policy,” nationalist-imperialist foreign policy aggravating their neighbors, and Xi Jinping’s ongoing policy of transitioning China away from the manufacturing economy into a knowledge-based economy) take hold to fundamentally transform the economy there.

The coronavirus outbreak is a wake-up call to how vulnerable we are as a country. This is a strange and curious circumstance because, despite the fact that international trade and immigration have been the basis of our economic dynamism over the last 40 years, the World Bank estimates that only 28 percent of US GDP is generated through trade. That means that about 72 percent of US GDP is generated through other means (yes, I know, much of the trade undergirds other indigenous industries, but a diversification strategy in the supply chain would not harm the overall economy in the long-run).

In Washington, powerful elites have stunted and stymied what should have been a much bolder presidential program of reordering America’s trade and immigration policies. The coronavirus is now the perfect excuse to accomplish these herculean tasks. We’re already undergoing a powerful contraction.

The contraction will persist, regardless of whether the disease spread slows in the upcoming warmer months as many think it will. The contraction will continue even if a vaccine is developed in the next few weeks–if only because it will take upwards of 1,000 days to develop, test, and scale up the vaccine in large enough quantities to be of any help in mitigating the disease.

These trends will play against Trump in the election, yes. But, Trump’s greatest electoral asset are the blue-collar and working-class communities of America’s blighted industrial belt. They will be the hardest hit in any economic downturn. What’s more, the “trade war” has harmed the farming communities which proved instrumental to Trump’s reelection (in 2019 there was a historic level of farm bankruptcies from the “trade war” with China).

If Trump were actually to campaign on implementing his controversial–though necessary–trade and immigration policies, he would ensure that he has enough of their votes to overcome any threat from the Democratic Party.

Whatever happens, the coronavirus correction will not abate for some time (at least until this summer). This means that one can expect serious bounces for the Democrats in the 2020 election and that Trump will have to either fundamentally change the narrative or risk going into the election at a severe deficit in terms of popularity and votes.

If a cure cannot be mass distributed, though, until the end of the year, Trump will suffer at the polls. By totally embracing his original platform of trade and immigration policy reform; by diversifying the global supply chain away from China to spur a permanent and irrevocable decoupling, the United States will not be as susceptible to these economic shocks.

Trump must act boldly, decisively, and innovatively to overcome the threat that the coronavirus correction and potential recession poses.

A bright spot in this story is that Chinese demand for oil has slumped to such lows that the initial fears at the start of this year of a spike in oil prices have been abated. Next week, OPEC+ is set to meet where it is expected that they will vote to cut production. Still, prices are expected to remain low at least until this summer–meaning that the pile on that usually happens during a recession might be avoided in the near-term.

One of the things that harmed the economy going into the 2008 recession was the fact that oil prices had been at historic highs back then.

©2020, The Weichert Report. All Rights Reserved.

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