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Is it the economy, stupid?

/ Source: National Journal

Spending time last week on both Capitol Hill and Wall Street provided me with a stark and fascinating contrast.

Among elected officials in Washington, there seems to be little talk about the economy and hardly any mention that the housing sector is in a free-fall.

In New York, everyone is white-knuckled as fears over the economy and a mounting credit crunch are pervasive. What started as a subprime mortgage crisis has since spread far beyond the housing sector. That, combined with oil prices exceeding $90 a barrel, constitutes a two-pronged attack on economic expansion.

However, among elected officials and staffs in Washington, there seems to be little talk about the economy and hardly any mention that the housing sector is in a free-fall. Most of the conversation steers away from economic problems, other than possibly the deficit and federal spending. Furthermore, the recent Democratic and Republican presidential debates have devoted hardly any time to the direction of the economy or the housing crisis.

To be sure, there are contradictory economic data on the issue. Some support the contention that a recession is quite possible, and other data suggest the economy is remarkably strong given everything that has taken place.

Former Federal Reserve Chairman Alan Greenspan, who has more credibility on the economy than just about anyone else, recently revised his odds of a recession from greater than one in three last spring to a not-so-comforting level of less than 50-50.

Additionally, Harvard economics professor and former Treasury Secretary Larry Summers has recently said that there is a "nearly even chance" of a recession.

Given these possibilities, one would think elected officials would stand up and take notice.

All but D.C. focused on U.S. economy
Tom Gallagher, who heads the Washington office of International Strategy & Investment, a firm that watches both the economy and what happens in Washington that affects the investment world, says "Markets are supposed to be forward-looking, and professional investors spend 60-plus hours a week trying to figure out the economy, so they tend to be more worried about what lies ahead than most voters."

Only halfway kidding, Gallagher says, "One good sign a recession is over is when Congress passes an anti-recession stimulus package. That's because politicians are slow to react to economic trends, and then slow to pass legislation."

Whether we are about to go into a recession or, more likely, a period of low growth, the fact that the rest of the world seems focused on the economy is really interesting. Bloomberg News reported this past weekend that Brazilian supermodel "Gisele Bundchen wants to remain the world's richest model and is insisting that she be paid in almost any currency but the U.S. dollar."

The Bloomberg article goes on to point out that the U.S. dollar has lost 34 percent of its value since 2001 and plummeted to a low against the euro, Canadian dollar, Chinese yuan and British pound. Bloomberg quotes Bill Gross, the chief investment officer of Pacific Investment Management Co., as saying, "We've told all of our clients that if you only had one idea, one investment, it would be to buy an investment in a non-dollar currency."

The Newport Beach, Calif., money manager runs the world's biggest bond fund.

I recently overheard one of the smartest investors around bemoaning that there really wasn't a way to directly invest in Chinese currency, though it might be the soundest investment these days. Whether a cheap dollar is a good or bad thing is beside the point, but wouldn't it seem to be more of a topic of conversation around Congress than it currently is?

Narrow focus squeezes out other topics?
It could be that American politics has such a narrow focus that a war in Iraq, a presidential election, the prospect of a nuclear-armed Iran and the normal flow of legislation doesn't leave much room for other topics of conversation. Or it could be that candidates and elected officials fear that if they raise a problem, they will be expected to suggest a solution, which they are not prepared to provide yet.

Perhaps yanking on the economic string leads to all kinds of other issues that are best not brought up.

For instance, exactly how would you address the problems of deficits, runaway spending and entitlements? You would have to raise taxes, cut programs that are near and dear to somebody's heart, and cut entitlements or make them based on need. Is there a fear among candidates of opening Pandora's box?

It's hard to say exactly why this disconnect exists, but there is little doubt that it does. When voters tell pollsters they are worried about the economy, jobs and where the country is headed, they are usually not addressing specific concerns as much as a broader unease about America's place in the worldwide economy. They worry about long-term prospects for quality jobs rather than a fear of what might happen in the next six months.

It might also be that elected officials tend to look at just two pieces of economic data: unemployment figures and the change in gross domestic product. Until those plummet, it's not time to hit the panic button.