Politics Always Trumps Economics
"You can't blame our free market system for creating inequalities between and among people. It's just the nature of our system. Our system rewards people based upon their contribution to the system. The American people don't seem to understand that we can't ask our type of economic model to do something for which it was not designed; that is, deliver a fair social outcome."
Earlier this year, Goodman says, he attended a Washington dinner party early at the British Embassy. At the party, the Secretary of the Department of Homeland Security, Janet Napolitano, asked him whether he thought the country was ever going to get out of this mess, he says. "If you want to enjoy yourself tonight, don't have me answer that question," Goodman told her.
Napolitano persisted, he says, so he answered: "The American people are getting what they say they want. They want a more equal distribution of income and wealth; and our government will try to achieve that result by manipulating our tax system. In so doing, they may remove the very incentives for people to compete, to take risks, and create jobs. That strategy will inhibit long-term growth.
"The U.S. is facing a similar economic situation it faced during the Great Depression. To really put people back to work today, it may be necessary to recreate the WPA, TVA and CCC, and build dams, and roads, and bridges. While I know that means more government spending, in the near term that's what it's going to take to restart this economic engine. In the short run, we're going to have to run a large budget deficit. In the long run, however, we must eliminate the structural deficit that appears to be baked into the system. This can be done by a combination of slowing the growth of government spending combined with a major overhaul of our tax system, with the objective of making it more efficient.
"The challenge is there is an overwhelming majority of the American people that stand to benefit from government giving them something. They don't understand that government has only what it can get from other people. So these issues wind up being a transfer from those who are producing to those who are consuming. Only the arithmetic is now is running against us.
"It's going to take a lot more pain before we get any real change, and we haven't reached that threshold, not yet anyway," Goodman says.
"You could put me in the Oval Office with President Obama and shut the door and I would tell him the same thing that any economist would tell him. He's bright and he'd get it, he might even agree with everything I say. However given political reality, there would be vertically nothing he could do about it, because he would never get re-elected. In a democracy the people get what they ask for, not what they may ultimately need."
Once The King Of The Hill
As more and more countries adopt a free-market system, it will become increasingly difficult for the U.S. to compete as they become more efficient and we become less so. That means that over the longer run, Americans may have to adjust to slower growth and shrinking opportunities, meaning fewer jobs, which eventually leads to politicians getting thrown out.
"It's like a pendulum," says Goodman. "A pendulum swings from one extreme to the other, so eventually we will see a turn like in 1979 and 1980, which came about after the American people suffered enough that they threw everybody out and started brand new with Ronald Reagan. That will happen again, only we haven't experienced enough pain yet."
Goodman isn't trying to make a prediction; that's not an economist's job. You give them certain conditions that will most likely prevail and they will give you the economic consequence that are implied; change the assumptions and they'll give you a different assessment. With that in mind, the current economic outlook does not appear to be conducive to the kind of investment returns to which we've become a custom. Goodman's advice to the financial advisor: "Force yourself to step away from the day-to-day discussion of economic events and adopt a more macro view of the world and prepare your clients to approach this uncertain environment with a realistic investment plan."