Obama Plays Bad News Tune for the Stock Market: Amity Shlaes

Commentary by Amity Shlaes

Jan. 22 (Bloomberg) -- “’Tis the gift to come down where you ought to be.” That’s a phrase from the Shaker tune played by the quartet at Tuesday’s presidential inauguration.

The song, “Simple Gifts” -- “And when we find ourselves in the place just right, we’ll be in the valley of love and delight” -- was updated and prettified by Aaron Copland in his day and, for the medley on Tuesday, by John Williams.

Still, the market took the old line literally. By late Tuesday afternoon, the Dow Jones Industrial Average had indeed come down to where it ought to be -- or thought it ought to be. Which is to say, hundreds of points lower than when President Barack Obama approached the microphone.

OK, abysmal bank news played a big part in the inauguration- day drop. And presidential inaugurals don’t always cheer bulls.

Ronald Reagan’s first inaugural address, on Jan. 20, 1981, offered a “hopeful prologue, a pledge of action,” as the New York Times phrased it, a theme almost identical to Obama’s. Plunging profits at Citicorp (now part of Citigroup) and an enormous gap in California’s budget -- nothing really ever changes -- offset the hope that Reagan offered. Something about the mixture pushed the Dow down 20 points that day.

One can argue that the Obama inauguration-day drop was partly a reaction to his speech. Specifically, a reaction to what it didn’t contain, rather than what it did.

Evoked FDR

First, the good: Obama called for sharing in hard times. The rhetoric evoked Franklin Roosevelt, that other crisis president. The 44th president called for “hope over fear,” recalling the 32nd president’s famous 1933 declaration that “the only thing we have to fear is fear itself.”

And Obama wisely didn’t echo Roosevelt’s hostility to the market. Said Obama, “Its power to generate wealth and expand freedom is unmatched.” Roosevelt, in his second inaugural speech, in 1937, said of government that “we are fashioning an instrument of unimagined power.” The Dow flattened in response and, then, upon reflection, embarked on the long slide that ensured the Great Depression would last a full decade.

President Obama’s speech was a comfort speech, designed to rally citizens at home and make the foreign-policy point abroad that America would move with “humility and restraint.” It lacked a bold international economic component, and it lacked vigor.

The humble speech could have, but did not say, The U.S. will prove an awesome competitor in the contest for international capital. It did not say, The U.S. now has a sign around its neck reading, “open for business.” It could have used a bit more Super Bowl and a bit less comity.

Banks and Taxes

What might the components of an awesome “open for business” plan include? Obviously, more and different action on banks, with an emphasis on injecting capital into the system more quickly, as David Malpass of Encima Capital wrote in an e-mail to clients this week. Also, a commitment to lower corporate taxes over the longer run. A commitment to reduce taxes on interest income. A commitment to cut taxes on capital for higher earners, not merely for lower-earning spenders.

This plan comes from a philosophy that couldn’t be more different from that of the lovely “Simple gifts.” It’s not about sharing and making do. It’s about growing like crazy.

Why should this matter? It feels almost unseemly to raise the possibility of a president talking enthusiastically to financial markets in an inaugural speech. Still, that kind of direct talk is necessary as it never was before.

The 1930s, again, provide a reference point.

When FDR became president, his New Deal was radical for the U.S. But it was nothing next to what was going in Europe. The front page of the New York Times on March 6, 1933, contained, along with details of Roosevelt’s inauguration, a report that starved mobs had recently attacked Stalin’s home to protest mass famine in the Soviet Union.

A Different World

Also on the page was an item on about Chinese and Japanese going hand to hand at China’s Great Wall. Another story was headlined “Hitler Bloc Wins a Reich Majority.”

The fact that the rest of the world was in trouble gave the U.S. great license. The New Dealers might commit their peccadilloes, many of which FDR unfolded in his first 100 days. The whole 1930s in fact might be a sort of egalitarian fairytale along the lines of the Shaker tune. The faith in that decade was that the fine calibration of social equity, including income equity, was a project worth considerable amounts of the nation’s psychic energy.

But these self-indulgences did not stop European gold from crossing to the U.S., in ocean liner after ocean liner, when FDR returned to the gold standard in 1934. For the U.S. was safe, clean, unlikely to go communist. To remain the world’s premier destination, all the U.S. had to do in the 1930s was not have a revolution.

The situation is different now. The U.S. has to compete for capital -- with Europe, with the U.K., with China. The U.S. is currently an attractive destination, as the negative yields on Treasury bonds have shown. But everyone is looking to the future, to whether we can sustain that role.

It’s not enough to hope vaguely that the U.S. will simply land, after this economic turmoil, back in its accustomed place of supremacy. Obama will have other chances to charm world markets. But he also needs another song.