Fact-Stretching in Presidential Debate

NEW YORK (TheStreet) -- Grab your pizza and popcorn, folks -- it's U.S. presidential debate season!

Every four years, we're treated to the spectacle of two men jockeying for power in the world's most powerful nation -- and predictably, this involves ample fact-stretching and twisting. At Fisher Investments, we're politically agnostic: We prefer neither party over the other, finding much to dislike (and occasionally something to cheer) in both parties' policies and proposals.

Either party is capable of implementing market-friendly reforms, and both have borne responsibility for some rather disruptive regulation throughout history. And during the first debate, both candidates proved adept at painting a rather fuzzy economic picture. Here, Fisher Investments reviews each candidate's portrayal of the U.S. economy.

We start with the challenger: former Massachusetts governor, Republican Mitt Romney.

Statement: Romney described this year's economic growth as "slower than last year, and last year slower than the year before."

Looking purely at percentage-based growth rates, this is true. Real U.S. GDP grew 2.4% in 2010 and 1.8% in 2011, and 2012's first half was slower than 2011's. But much of that slowness comes from higher imports -- a sign of healthy domestic demand -- and falling government investment.

Strip those components out, and the picture looks different. Total household spending and private investment rose $352.6 billion in 2011, higher than 2010's $330 billion increase (measured in 2005 dollars). The GDP components that better reflect the economy's health are more resilient than Romney's general statement would suggest.

Statement: "I'm not going to keep spending money on things to borrow money from China to pay for."

He won't necessarily have to -- China doesn't own a huge share of our debt. In fact, our biggest creditor is, well, ourselves: 66.6% of net public debt is owned either by the federal government or domestic investors. China owns a whopping 7.4%.

According to Fed and Treasury data, U.S. households have purchased significantly more Treasuries than foreigners in recent quarters, and China's purchases have lagged other nations'. One can't exactly say China is financing the U.S. government.

Statement: "Spain spends 42% of their total economy on government. We're now spending 42% of our economy on government. I don't want to be Spain."

Good, because we're not Spain. Not even close.

First, consider Spain's situation isn't all about debt. In fact, Spain's federal debt-to-GDP ratio wasn't high by global standards in 2010, when peripheral debt fears first took hold. Spain's situation is as much or more about economic competitiveness than about debt.

The U.S. private sector, by contrast, is considered extraordinarily competitive globally (as suggested by profits, World Economic Forum rankings and more).

Leaving competitiveness aside though, in 2011, our total federal, state and local government spending was 41.2% of GDP. Yes, this is on par with Spain today, but only because Spain has significantly cut spending in its eurozone crisis-driven austerity efforts -- efforts necessary because its borrowing costs rose to uncomfortable levels when markets got jittery about its very uncompetitive economy.

In 2009, Spain's government spending exceeded 46% of GDP, but the U.S.'s was still around 42% -- less than the OECD average, which was near 46%.

Moreover, U.S. borrowing costs are ultra-cheap -- real 10-Year Treasury yields are negative. Historically low borrowing costs on below-average government spending, especially in one of the world's most competitive economies, do not at all put the U.S. on the road to Spain.

Let's turn now to the incumbent: Democratic President Barack Obama, who fared no better.

Statement: "The approach that Governor Romney's talking about is the same sales pitch that was made in 2001 and 2003, and we ended up with the slowest job growth in 50 years, we ended up moving from surplus to deficits, and it all culminated in the worst financial crisis since the Great Depression."

Three fallacies in one statement!

We assume "slowest job growth in 50 years" refers to jobs added since 2003. Maybe 2001. And cumulative job growth since then has been rather frustrating.

However, context is key: The recent recession saw massive job losses, and U.S. labor markets are still in the recovery phase. Unemployment regularly remains elevated a few years after a recession's end -- job growth follows economic growth at a late lag.

As shown in Exhibit 1 though, the current and previous economic expansions saw perfectly fine job growth, outpacing growth during some other expansions during the past 50 years.

Exhibit 1: Total Nonfarm Employees

Source: U.S. Federal Reserve

It's true, of course, that the U.S. moved from surplus to deficit in 2002, the year after the first round of Bush-era tax cuts, and tax revenue did fall that year -- partly due to the lower marginal rate, perhaps, but there are other considerations as well.

Consider: Taxes operate at a lag to economic activity in many cases, and there was a little matter of a recession in 2001. Illustrating the point, corporate tax rates weren't changed by the 2001 or 2003 cuts, yet corporate tax receipts fell 36% from their 2000 high to 2003 trough. That's more than individual tax receipts' roughly 21% decline over the same period. (These data, by the way, are drawn from the White House Office of Management and Budget.)

And from 2003 through 2007, while the economy was expanding, tax revenue increased each year, and even at the 2008-to-2009 recession's nadir, our total federal tax take outstripped 2000's and 2001's -- with the lowered tax rates. Widening deficits are tied much more to spending increases than tax cuts.

And tax cuts and deregulation weren't responsible for the 2008 financial crisis. It's often assumed Glass-Steagall's repeal paved the way for the financials failures of 2008, and many assume separating retail and investment banking is necessary to prevent a repeat, but there's no evidence supporting this. None of the firms that failed in 2008 were retail/investment banking conglomerates.

Washington Mutual was essentially a thrift. Lehman Brothers and Bear Stearns were pure investment banks. AIG was an insurance company.

Deregulation wasn't the issue. Rather, bad regulation was the culprit: Specifically, the misapplication of FAS 157's "mark-to-market" accounting to illiquid assets on financials' balance sheets. Adding that to the government's bizarre, unpredictable actions taken in an effort to stanch the crisis begets the unintended result -- a financial panic.

If the debate proved one thing, it's this: Both men are politicians -- both will use rhetoric far different than economic reality as needed to win votes. Any time any politician starts talking about the economy, we suggest taking it with a healthy dose of skepticism.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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