Are You Better Off Than You Were Four Years Ago?
It is the summer before a presidential election. A former Republican governor is campaigning against a Democratic president. Unemployment is high, voters are anxious and there is trouble overseas. Is it August 2012 or August 1980?
The race between President Barack Obama and Mitt Romney, the Republican nominee, is showing some similarities to the 1980 contest between President Jimmy Carter and Ronald Reagan. Obama has his own economic malaise to wrestle with as voters ponder Reagan's famous question.
In the summer of 1980, in the midst of Carter’s re-election campaign, the US economy was in dire straits. Unemployment was above 7.5%, GDP (Learn more) growth turned negative and inflation hit 14%. There was, as Carter said, an “erosion of our confidence in the future”.
Similar to Carter, Obama faces significant headwinds the summer before Election Day. This is one of the slowest economic recoveries in the post World War II era. US unemployment remains higher today (8.3%) than it was at this point in 1980 (7.7%). When you look at the U6 rate, which includes the unemployed who have stopped looking as well as the underemployed, unemployment is closer to 15%.
Further, the GDP growth rate for the second quarter was only 1.7%, down from 1.9% in the first quarter and 3.0% in the fourth quarter of 2011, a worrisome downward trend. Consumers and businesses remain nervous about the future.
If the Federal Reserve (Learn more) worried about double digit inflation in the summer of 1980, today the problem is more related to deflation. With 10-year US Treasury yields below 1.7%, there is not much more the Fed can do to spur economic growth. The cost of capital for consumers and businesses is already close to historic lows.
Then there is the uncertainty surrounding the country’s national debt, which has reached $16 trillion, an amount greater than the total output of all goods and services in the US. Last year’s US credit rating downgrade and the upcoming fiscal cliff – automatic tax increases and reductions in government spending – have further eroded business confidence, which will keep CEOs nervous about hiring new employees between now and the end of the year.
Big trouble also lurks overseas.
Sovereign debt issues in the euro zone continue to rattle financial markets, the volatility of which keeps US consumers anxious about their jobs and 401(k) retirement accounts. Four years later and Americans are still worried about systemic dangers, such as the collapse of the Euro, a global banking crisis or some unforeseen financial disaster that could tip the US economy back into recession.
Against an uncertain economic backdrop, Romney has articulated a formidable story about why he should be president, emphasizing his combination of leadership skills in both government and private industry. Democrats have criticized him over his tenure as CEO of Bain Capital, a private equity firm. But at a critical point in the country’s economic history, his background in business is an asset, not a liability.
At Bain, Romney focused on venture capital opportunities, investing in startups such as Staples, Inc and Domino’s Pizza . But another big part of what he did was to invest in distressed companies, turn them around and try to make them profitable. This involved rebuilding management teams, improving company processes, identifying new products and markets, fixing balance sheets, and implementing other strategic changes to increase shareholder value.
Why is his turnaround experience important in this presidential race? Today, there is no greater turnaround situation than fixing the federal government. The to-do list is extensive: reduce debt, balance the budget, fix entitlement programs, reform cumbersome tax codes and regulations, lower the costs of doing business for American companies, and open up markets for our goods and services around the world.
The most difficult challenge, however, is getting companies to spend the record amounts of cash on their balance sheets to create new jobs. Unlike most politicians, Romney spent the bulk of his career in the private sector working with a variety of companies, large and small. Not every private equity investment was a success, but he understands as few other politicians do the real challenges that CEOs face in growing their business, meeting payroll and competing in a global economy.
On a higher level, similar to 1980, there needs to be a paradigmatic shift in Washington – a new mind-set that there is no such thing as government money, only taxpayer money. To have confidence in the future, CEOs must first have confidence in our federal government, that the president and Congress will balance budgets, pay future liabilities, make timely decisions, and be partners for economic growth rather than an obstruction.
As a former businessman, Romney conveys a seriousness and sense of urgency in the debate over the economy and the fiscal direction of our country. In picking Wisconsin Congressman Paul Ryan, who heads the House Budget Committee, to be his running mate, he has assembled a turnaround team that has the credibility and vision to bring fiscal discipline to Washington, realign Washington’s interests with those of taxpayers and otherwise restore confidence that the federal government will be part of the solution, not part of the problem.
There are fewer than 100 days until the election. Voters will soon answer the proverbial question that Reagan posed to voters in his 1980 debate against Carter: "Are you better off than you were four years ago?"
With unemployment above 8%, Washington at a standstill and a lot of economic uncertainty about the future, for too many Americans, the answer is no, making Romney’s narrative all the more compelling.
William F. Weld was governor of Massachusetts from 1991 until 1997. John B. Stimpson served as his aide.