John McCain set off a firestorm yesterday when he said, "The fundamentals of our economy are strong," while also noting that these are tough times. McCain, for whom the economy is not comfortable terrain, was simply repeating a formulation he's used before. In August, he told radio host Laura Ingraham: "I still believe the fundamentals of our economy are strong. We've got terribly big challenges now, whether it be housing or employment or so many of the other—health care. It's very, very tough times."
Commenting on the seaworthiness of the nation's economic ship even as it is being swamped by gale-driven waves is a staple of the modern presidency. When there's upheaval in the markets, or a discouraging run of economic news, the president or the treasury secretary trudges out to tell us to remain calm. On Monday, as Lehman Brothers was filing for bankruptcy, Treasury Secretary Henry Paulson said, "Well, as you know, we're working through a difficult period in our financial markets right now as we work off some of the past excesses. But the American people can remain confident in the soundness and the resilience of our financial system." After 9/11, President Bush told a press conference: "I want to assure the American people that the fundamentals for growth are very strong." Treasury Undersecretary John Taylor told reporters on Oct. 4, 2001, that "our basic fundamentals are very sound." In December 1991, with the economy stubbornly refusing to get out of its funk, President Bush the Elder declared in a speech: "I remain convinced America's fundamentals are sound—not just the economic indicators that I mentioned a few moments ago, but the broad fundamentals that sustain American society." In October 1987, when the stock market crashed, Ronald Reagan reassured the public that "the economic fundamentals remain sound."
It's ironic that presidents (and would-be presidents) would continue to use such phrasing, because the president who seems to have minted the phrase is the one with the worst economic record of all time: Herbert Hoover. In the wake of a big stock-market downdraft, Hoover on Thursday, Oct. 24, 1929, proclaimed: "The fundamental business of the country, that is, production and distribution of commodities, is on a sound and prosperous basis." (The worst Depression-era attempt to calm Americans came from plutocratic Treasury Secretary Andrew Mellon, in early 1930: "I see nothing in the present situation that is either menacing or warrants pessimism.")
It's easy to see why leaders resort to such banal, swaddling language in times of stress. It's a way of changing the conversation, redirecting attention away from the debacle du jour and tapping into Americans' basic pride and faith in their system. Yes, some of the numbers are less than optimal, but this too shall pass. A few windows may have been blown out, but the foundation of the building is just fine. One rarely hears protestations of soundness when the economy is doing well–the numbers and the markets speak for themselves.
The question remains: Are the fundamentals sound? Was McCain right, or hopelessly rosy-eyed? It depends on which fundamentals you want to emphasize. There are times when all the fundamentals are unsound, as was the case in 1931. And there are times when all the fundamentals appear to be sound, as was the case in the mid- to late 1990s. The rest of the time, the fundamentals reside somewhere between the two poles (the left pole signifying we're totally screwed and the right pole signifying that happy days are here again). Today, we're closer to being totally screwed.
Consider this. The U.S. needs to create about 150,000 jobs per month just to keep pace with the growing population. When payroll jobs fall for eight straight months and the unemployment rate spikes, and when new weekly unemployment claims remain above 400,000, the economy may not be fundamentally sound.
When inflation in the past 12 months has run at 5.4 percent, well over the twice the level with which central bankers are comfortable, the economy may not be fundamentally sound.
When foreclosures are running at record rates and housing prices fall by nearly 16 percent year over year, the economy may not be fundamentally sound.
When the two largest financial institutions in the nation, which guarantee about half of the mortgages, fail and have to be taken over by the government, when the fourth-largest investment bank files for Chapter 11, and when the Federal Reserve effectively nationalizes a massive insurance firm that is a component of the Dow Jones Industrial Average, the economy may not be fundamentally sound.
In an economy where consumption constitutes 70 percent of activity, retail sales falling two months in a row may indicate that the economy may not be fundamentally sound.
When industrial production decreases, the economy may not be fundamentally sound.
When the nation's three major automakers, some of the largest remaining manufacturing entities, report sales declines of over 20 percent and beg the taxpayers for loans, the economy may not be fundamentally sound.
The litany of bad news has to be weighed against good news, of course.
When gross domestic product grows at a 3.3 percent annual rate despite weathering a series of shocks, the economy may be fundamentally sound.
When inflation shows signs of moderating and the prices of important commodities return to more reasonable levels, the economy may be fundamentally sound.
When exports rise 20 percent from year-ago levels, the economy may be fundamentally sound.
When $3.5 trillion is parked in money market mutual funds and corporations have vast piles of cash sitting on their balance sheets, it's an indication that money remains available for investment and consumption, and that the economy may be fundamentally sound.
On the whole, however, a reasonable observer would have to conclude that, on balance, the fundamentals of the U.S. economy are less than sound. And even John McCain has recognized his mistake. After a day of withering criticism, he abandoned his previous position. Now he's calling the situation "a total crisis."