Why do we allow empty promises of economic gain and preposterous assignment of business cycle blame to cloud the issues that are truly important in the race for the White House?
Ronald Reagan asked people if they were better off than they were four years before. Bill Clinton famously stated ‘it's the economy, stupid.” George W. Bush asserted that it was his tax cuts that pulled the United States out of the 2001 recession. Barack Obama promised to get unemployment under 6% by the end of his first term. And as voters go to the polls to decide who will be the next President, they have to ponder Mitt Romney’s promise to add 12 million jobs to the economy in his first four years in office.
We all know politicians have every motivation to promise you that they can make your life better by raising your income, ridding your lawn of weeds, figuring out where that rattle in your car is coming from, and make you slimmer, smarter, and more loved by friends and family. At the same time, they are happy to point out that their opponent, if elected, is sure to do the exact opposite – and give the family dog a fatal case of warts. We rely on the discernment of the media and the electorate to keep the boasts and threats in line by ignoring the empty statements and focusing on the issues that really mean something.
Bad idea, it seems.
When it comes to short-run movements of the economy, neither the press nor the electorate seem to acknowledge that most of what the candidates have been saying is – to be charitable – pure fluff. Indeed, scarily enough, the business cycle seems to be playing an important role in determining who gets to be president for the next four years – given how it appears to be dominating voters’ decisions. How many times over the past few months have you heard that the economy is the most important issue in the election? The problem is that the candidates – both incumbent and challenger – have far less control over the immediate movements of the economy than their promises and pointed blame would suggest.
First, remember that economic growth is the default mode of the economy. If the economy is not being hit by some negative shock, or trying to recover from one, the efforts by individuals and businesses to do better for themselves adds up to an expansion of economic output. The Bush tax cuts did not cause the economy to grow, nor did the election of Clinton. In both cases the economic recession came to an end naturally and the economy began to move forward. For Bush to say his tax cuts did the trick has as much legitimacy as me claiming that my purchase of a townhouse in West Los Angeles fixed the economy—after all both have the same piece of evidence supporting them—they occurred in 2002.
The fact that Romney is promising to deliver 12 million jobs is humorous—largely because given current economic trends, the economy is likely to add 10 to 11 million jobs or more over the next four years regardless of who is elected president. But if Romney does win, this won’t stop him from claiming that he was personally responsible for every one of those jobs. Thanks Mitt!
Second, recessions, those periods of time when the economy is not growing, are caused by shocks to the system that are large, rapid, and sustained. These often come from imbalances that have been building up over a period of time. When the imbalance finally snaps back towards normalcy it creates economic dislocation as labor and capital must move elsewhere to find employment—a process that is time consuming, and has negative consequences for the rest of the economy.
Issues that lead to a recession often stem back years before a candidate is even thinking about running for office. And once the shock hits, there is little a president can do to ‘fix’ the economy—by that point it becomes fait accompli. The role of policymakers is really about trying to reduce the overall pain of the return to normalcy by minimizing the secondary impact.
When Obama took office the recession was already in full force, driven by years of excessive borrowing, spending, and building. There was no ‘fix’ for the economy, regardless of who was in the Oval Office—we simply had to deal with it, not unlike dealing with a bad hangover after an all night bender. Had John McCain taken over he would have been unlikely to have handled the situation any better—things were a mess.
The only complete fix would have been a time machine that would allow us to go back and reverse the bad decisions made under both the Clinton and Bush administrations in terms of deregulation and the complete lack of attention to the massive asset bubbles that were forming. We might argue that better policies may have made the recovery better—but only slightly. Anyway, this nuance is completely lost in the context of the campaign debates.
Third, the office of the president has the least control of any of the Federal agencies in dealing with economic cycles. Sure, the president is enormously powerful, but not in ways that would typically be considered helpful for short-run economic cycles. The two most important controls are the budget and the money supply – controlled by Congress and the Federal Reserve, respectively.
Does this mean that presidential elections are irrelevant to the economy? Of course not. The power of the veto, the ability to push important policy priorities to the forefront of debate, the executive powers the office wields, and being the one loudest voice in Washington DC means that the presidency is indeed critical to the national economy. But the impact of presidential policies is one that is felt over a decade or more, not over the course of a couple years. And this is what the electorate should be focusing on—what are a candidate’s long-term plans on key economic issues?
Sadly, the important long-run issues that should be central to a presidential campaign seem to get pushed aside as candidates spend their time making pointless promises and launching empty attacks about short-run movements of the economy. And the sheer luck of timing can end up determining who gets into office and makes the critical decisions that actually will impact us all in the long-run.