By Guest Columnist BOB WILLIS, CEO, Willis Investment Counsel
The last 20 years may not be the best representation of U.S. economic history. Likewise, it may or may not be a reliable predictor of the future. Whatever the case, recent trends of low interest rates and inflation appear to have entered the neural circuitry of decision-making and significantly impacted the passing of the economic policy torch in our country.
For decades, most leading economists believed government debt and deficit levels mattered – and were to be prudently managed. They also believed inflation was a very serious economic force that should not be taken lightly.
So, when those leading economists found themselves as advisors to a president and in senior positions in an administration, their counsel followed their beliefs – debt, deficits, and inflation mattered.
The same was essentially true with Congress. Because it was relatable to one’s family or business finances, and just plain common sense, a sufficient number of members of Congress generally embraced some notion of fiscal discipline. Although the extent of government policy discipline varied along the political spectrum, usually there were enough leaders in Congress who favored some level of fiscal discipline and who respected the risk of inflation.
The White House and Congress, along with their economic advisors, all had something in common: the actual history they had lived through. This was a very powerful influence on their thinking.
For the most part, inflation and high interest rates (or the threat thereof) were major issues from around 1970 to 2000. During this period, many economists believed government debt and deficit levels were connected to high interest rates and inflation. For example, if fiscal policy were perceived to be insufficiently concerned about the level of government debt and deficit (two different concepts), then higher interest rates and inflation would likely result. Similarly, if the Federal Reserve “over-stimulated” the economy with low interest rates, then that, too, would likely cause inflation.
It’s basic human nature that one’s actual experience or history naturally causes people to believe what they see and experience. For decades, economists and policy makers experienced troublesome inflation and high interest rates, conditioning their view that these were serious issues. History has changed.
For most of the last 40 years, interest rates and inflation have been falling (not in a straight line, but generally falling). Especially since around 2000, “high” inflation and “high” interest rates have not been a significant economic issue.
It is human nature, part of the hard-wiring of our brains and the network of our decision-making, to extrapolate and believe this current trend will likely continue. That powerful decision-making force, together with the fact that the old economic guard is no longer in control, represents a seismic shift in fiscal and economic thinking and policy making.
If those influential economists and members of Congress who believed in fiscal discipline are no longer in power, then maybe the smell of blood is on the trail. Maybe President Biden and his team sense an opportunity to change the economic policy rules of the game. Maybe they can point to the interest rate and inflation graphs for the last 20 years and say the old rules don’t apply anymore.
They can argue potentially beneficial policies should not be constrained by fears of inflation and high interest rates when neither has been problematic for 20 years. As is always the case, the White House and Congress can easily find economists, academicians, and research to support the new rules of the game they want instituted. And now they probably have the votes to do so.
Perhaps history really has changed. Perhaps the last 20 years is more representative of the next 20 years. Perhaps, but unknowable. The lessons of economic history, especially its inherent cyclicality, are no different than all history lessons. And we know what philosopher George Santayana said about those who can’t remember the past.
Bob Willis is the founder, CEO, and chief investment officer of Willis Investment Counsel in Gainesville. Willis oversees portfolio construction, participates in stock selection and fundamental analysis, and serves on the firm’s investment committee. Prior to founding Willis Investment Counsel in 1979, Willis was a tax accountant in the Atlanta office of Arthur Andersen & Co. Willis holds a bachelor of business administration degree, with high distinction, from Emory University’s Goizueta Business School. He is a former trustee and investment committee member of the State of Georgia Employee Pension Fund.
