Out Of Touch With Reality

The world appears increasingly unfathomable. The number of political surprises and economic shocks is astonishing. It's hard to make sense of events, even harder to safely predict the future. How can we explain the enigma of these times?

The growing split between pols and people explains part of the confusion. The unexpected Democratic triumph in the recent elections was due, in part, to Washington's obsession with impeachment while the public was more interested in education, health care, and Social Security. Proposals for radical religious, social, and economic initiatives went unheeded by voters who preferred more moderate solutions. Polls showing the public's distaste for impeachment and a clear preference for safeguarding Social Security over radical tax cuts were available months before the election. They were ignored. No wonder subsequent events proved surprising to Beltway insiders.

The economy is providing similar surprises. Many in Washington opposed raising taxes on the top brackets in 1994 because they believed it would cause a recession. Instead, interest rates came down as the budget deficit fell. This triggered a middle-class spending spree and a capital investment boom that led to record corporate profits. No wonder many were astounded when the stock market took off for a three year run.

Many in Washington opposed a minimum-wage hike because economic theory suggested it would hurt the employment of low-wage workers. But when it was raised, the unemployment rate actually fell. Surprise. A 20-year era of labor surplus had been replaced by one of shortage in towns and cities across the country. Businesspeople had been talking about shortages for months, but few in Washington were listening.

Beltway insiders were totally shocked when a run-of-the-mill currency crisis in tiny Thailand turned into a near depression for Asia. What happened? Economists from the International Monetary Fund and the U.S. Treasury prescribed standard policies that turned out to be unsuited to local realities. Surprised by the devastation that followed, the economists blamed "rot" in Korea, Thailand, and Indonesia and pleaded ignorance of the local situations in the region.

The real world appears to be changing faster than leaders' comprehension of it. People who grew up in a cold war time of high defense spending, inflation, low growth, and high unemployment can easily misperceive a U.S. economy that is integrated globally, has no pricing power, and sustains high growth and low unemployment. Each quarter of 3% growth and little inflation surprises them. They dismiss real-world chief executives who say that high technology is raising productivity. So they are amazed when, even this late in the business cycle, productivity is up 2.3% for the third quarter.

Many leaders are simply out of touch. They are divorced from the people they lead and misunderstand the economic and political forces that will dominate the opening of the next century. For them, this should be a time for listening and learning. Otherwise, they're toast.

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