Isolationism has no place in economics or investment strategy.
Prior to WWII, American foreign policy could be succinctly summarized in one word: Isolationism. Following WWI, America shunned the potential entanglement of taking a global policy view, instead relying on the two big oceans off either coast as its primary security blanket. Those days of a geographically dictated foreign policy are seemingly well behind us today—the US routinely, for better or worse, is involved in matters the world over.
But isolationism seemingly still has believers in an economic or investment sense, promoting an outsized focus on the US economy—others be damned. Forget for a moment that two years ago many would have laughed at the suggestion our economy would be bigger than ever before as 2011 began. Still, it’s likely most would have gladly taken it, regardless of how fast or slow quarterly growth was along the way. But now, some bemoan what is supposedly the weakest post-recession economic expansion since the 1930s—and struggle to square that with big stock market returns and corporate profits over the past two years.
We have no bones to pick with parts of this argument per se—faster GDP growth than Q1 2011’s +1.9% would be desirable, and we feel for those struggling to find work. And there are steps our government can take to aid this, like actual deregulation, passage of free trade agreements, tax reduction and tax code simplification. But importantly, the interaction between government and economy isn’t as simple as saying cutting taxes will boost Q3 GDP growth X%, and jobs will boom because GDP growth is X% higher. The aforementioned government actions would likely promote an environment providing the private economy more latitude, freedom, capital and incentives to expand. But whether they do or not isn’t a government policy call.
Ultimately, there simply is no “correct” or “proper” growth rate for an expanding economy, and periods of gradual growth with fits and starts of faster or slower paces is just plain normal. But the general public can largely be forgiven for thinking that’s not the case since we’ve had a virtual three-year-long parade of politicians claiming a particular bill carries an immediate economic windfall. For example, consider unemployment (in our view, where many of these “anemic economic growth” arguments originate): First, we heard passing 2008’s TARP legislation was necessary or we’d get depression-like levels of unemployment. Then we were told the ARRAor “stimulus” would hold unemployment down. Then it was extending the 2001 and 2003 tax rates to “spur more jobs.” And so on (you can probably insert many additional examples here). When jobs don’t immediately result, we’re told the problem is uncertainty.
There’s no doubt uncertainty is present. But when is there certainty in economics? The claim falls prey to a fallacious assumption: That our economy exists in a vacuum and politicians exert a great influence over things like corporate hiring plans. Moreover, consider that the current pace of US job creation is slightly behind hiring trends following 1991’s recession and ahead of 2001’s job recovery. In the latter, non-farm payrolls had actually declined following two years of economic growth. And that lackluster job creation wasn’t a harbinger of what followed (full employment in later years). The inconvenient fact for politicians is corporate hiring decisions are made based on myriad inputs (productivity, capacity, order backlog and many more). And that’s where the rubber really meets the road: While unemployment is a symptom of past economic problems, it can pose problems for politicians’ future careers.
Instead of waiting for a political plan to boost US growth, what’s important for investors is to look beyond American borders. US corporations do, considering they derive a sizable portion of their profits from activities abroad. Which likely explains why US-centric investors might scratch their heads at fast-growing profits when US GDP growth isn’t equally quick. Across the two oceans at our east and west and our northern and southern borders are other companies and consumers in regions both faster and slower growing than the US. It’s a big, big world the US—and US investors—can’t afford to ignore.
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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.