Michael Hanson
Business in Review

It's Not as Bad as You Think

By, 04/13/2010

Brian Wesbury is an economist, has a column in Forbes (with Robert Stein), and is someone I've become a fan of over the last few years. His new book, It's Not as Bad as You Think: Why Capitalism Trumps Fear and the Economy Will Thrive (co-written with Amity Shlaes) is one of the finest, shortest, and easiest supply side economics books I've picked up in awhile.

 

On the heels of last week's review on Milton Friedman, this is an ideal next step. In parts, it's almost as if Wesbury channels Friedman via Ouija board, and in others, it's a near perfect supply side account of world events over the last three years or so (both Friedman's monetarism and supply side views are closely linked). Wesbury's views are razor sharp and accurate—citing the government's part in the panic, the insidious role of accounting rule FAS 157, and very importantly, that the actual panic part of the bear market and widespread global recession simply didn't have to be. Yes, most of the global economy was in pretty darn good shape entering the crisis, and that's a big reason it's emerging from the crisis so quickly. Hear, hear.

 

Wesbury makes a strange move relative to today's dour mood—one that's almost Reagan-esque in tone—citing optimism as the centerpiece of his views, and further, that capitalism is the mechanism supporting that hope. Which reminds me of an interview I saw on one of those Sunday morning political shows featuring prominent economist Robert B. Reich. Mr. Reich is, broadly speaking, a pessimist—he cannot see from whence demand will come once stimulus money subsides: Unemployment is high, many factories stand idle, the housing industry is anemic, and so on. Mr. Reich cannot see how the economy can thrive without strong demand to bolster things, and he does not believe today's consumers have it in them.

 

With this book, Mr. Wesbury excoriates such views, describing in very simple and clear terms why supply—that is, innovation, productivity, and wealth creation—is the true mechanism that will lift (already has lifted?) the economy from recession.

 

But who to believe? And why? In the end, they are both ideologies, both points of view about how the world should work in theory.

 

Instead of theory, look to the data. For the pessimistic demand-side narrative to be true, the economy should not be recovering in the way it is. The capital markets and subsequent economic revival—globally—cannot be fully (barely partially) attributed to stimulus spending, much of which has yet to be spent. Indeed, gains in productivity and operating leverage have formed a basis for new business spending and revived trade—those components of GDP gained the most as the US economy swung from recession back to growth. Indeed, the last 13 months or so of reality have bolstered the supply siders and confounded the demand siders. (And, to my mind, the last 200 years of history have done the same.)

 

Yet, as excellent an economic analysis as this is, Wesbury's investing advice misses the mark. As I said last week, overdependence on ideology often steers investors in strange directions. Mr. Wesbury sees the big stock rally continuing, but accompanied by very high inflation, and advises investors begin bracing for it in portfolios here and now.

 

This is the monetarist in Mr. Wesbury taking over, and I just can't go there with him. Is inflation a threat in the future? Yes. But inflation hawks have been cawing for well over a year now, and globally the needle has barely moved. Deflation is still a bigger threat in many regions. Indeed, to my view, Bernanke and his Fed cohorts are right to have a bias toward keeping rates accommodative for now (keeping the money supply loose) to give the recovery a continued tailwind. Bolstering a nascent recovery is more important than inflation at this moment—the Fed and other central banks will have plenty of time to rein in excess money down the road. Whether they do that right or not is questionable. But that is not an issue for right here and now—maybe they'll start tightening later in the year, but that will be a tough sell with what's sure to be a vicious midterm election come November. My guess is they can wait all the way into 2011 and possibly beyond before monetary belt-tightening becomes essential.

 

All of this rolls up into a great lesson about money management—that folks can share views of the world, have similar analyses, look at the same data, and yet come to wildly different investing conclusions. It's hard to go along with Mr. Wesbury's advice simply because there is no discipline provided to explain it. What of selecting an appropriate benchmark? What of positioning assets based on goals and time horizon? For instance, the book alludes to the wisdom of having a slug of bonds in investor portfolios. But what if an investor wants growth and has a time horizon of 15 or more years? Are bonds really a great option then? Particularly when Mr. Wesbury agrees a lot more bull market is ahead? If harmful inflation truly looms—that doesn't necessarily mean you shouldn't be in stocks. Without those parameters as context, giving investing advice to the broad public is treacherous.

Cogent economic analysis is only half the battle in investing. As I say in my own book, 20/20 Money, successful long-term investing is far more discipline than it is genius. Though it doesn't hurt to have a little of both.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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