The Ongoing Struggle of Perception Versus Reality

From the replay, we see the touchdown develop. Routes and blocking schemes are executed with near-seamless precision. And, the same goes for the 45-yard lofted pass that falls directly into the outstretched arms of the receiver. Across town, the center fielder glides under that ball for the out after a 35-yard sprint. Sitting in the stands or watching the game on TV – it almost looks easy. But, if you ever find yourself at field level or among the lower rows, you’ll see a different game entirely.

Running a government must also look easy when registering as a candidate. “I’m an outsider ready to change Washington, and I have the plan that will fix the economy and create jobs. We’re going to stop [insert whatever topic or issue you like here] right in its tracks.” It all sounds easy, I guess, until someone actually hands you the keys. Even as a trustee in an eight-home subdivision, I know first-hand how the most obvious of decisions can take months to negotiate.

So, why do we belabor even the most apparently insignificant of decisions? It’s because of the impacts or consequences that may trickle down, including both the intended and potentially unintended.

Let’s look at government policy and its effect on behavior. Businesses alter tactics to take advantage of programs or perhaps because some new regulation makes an activity too expensive. As individuals, we take the consequences of taxes into account when making investment decisions. Asset prices change due to Fed policy or preferential treatment in new legislation. Around here, we worry that even the most well intentioned policy will ultimately create so many unintended consequences that the problems will likely outweigh the original and intended good – think the widening of mortgage lending rules in 1992 and 2008.

Manchester Road: A Working Example
We love small business here at EverBank, and I often talk about Manchester Road in St. Louis. The road occupies a portion of Historic Route 66 and, as you wind through its 26 or so miles from city center to the outer suburban reaches, it reveals along its sides one local entrepreneur after another, typically wedged between much larger national chains and regional storefronts.

The public policy support and legislation on behalf of small business development comes as no surprise. It honestly all sounds great on the surface. And, on behalf of small-business owners everywhere, I appreciate the support. However, it’s essential that we also give due consideration to the fact that it’s often the larger enterprises driving the smaller ones, and not the other way around.1

In essence, small business feeds on the value chain created by a larger enterprise. In the areas surrounding Monsanto, Google, or U.S. Steel, employees of the big firms need dry cleaning, carryout food, houses to live in, and day care for their kids. Local entrepreneurs and chains fill those needs, while helping to redistribute paychecks throughout the regional economy. According to the numbers I jot down on the back of an envelope, Wal-Mart’s price discounts for a wide array of consumers far outweigh the lost revenue of the old Main Street store – much as I would like to retain the Norman Rockwell picture of the world.

So, add this all together and what might we get? I remain cautiously optimistic that the U.S. economy will muddle along with tepid growth over the next couple years. As for measured unemployment, I expect the announced monthly figure to show continued improvement. That figure alone, however, is incapable of painting the entire picture, as it doesn’t account for the underemployed and those no longer looking for jobs. For a better perspective on jobs health, keep your eyes on median income levels.

On the side of caution, there is a huge bill coming due one day soon, or perhaps later, for the ghost of fiscal and monetary policy past, present and future. As I discussed a couple weeks ago, total leverage – both governmental and personal – has continued to explode upward even after the lessons of the Great Recession. Public policy commentators beg for even more to be created. Legislatures can’t take their foot off the gas. Troubled borrowers suggest extinguishing their liabilities.

I hope we can stave off disaster, and maybe this time, it will all turn out gumdrops, rainbows, and puppy dogs. But, when looking at the volatility in the marketplace, I’m left feeling that the invisible hand isn’t so sure.

Until the next Daily Pfennig® edition…

Frank Trotter
EVP & Chairman
EverBank Global Markets Group