It's Not the Economy, Stupid

It's the economy, stupid. Some time ago, this was the analysis offered by journalists and cocktail party intellectuals on the shortcomings of George Bush senior's candidacy. It came to be accepted wisdom. Irrefutable. Repeated often enough that it became fact.

The accepted wisdom went beyond the notion that what people cared about was the economy. It consisted of the notion that Bush the elder ignored the economy. He did not "do enough" to make the economy better.

We're getting the same thing now. A president should make the present economy better. Both candidates and their surrogates seem to believe this.

It's the weather, stupid. It's the sunspots, stupid. It's the path of moon in the night sky, stupid.

The only thing stupid is to believe the glib analysis that says "it's the economy, stupid." Let me specific. There is a subtext to the debate. It is this: Consumers ought to vote on the the state of the economy at the time of an election. Nothing is sillier. In extreme cases, in some basket-case country whose president has, say, nationalized farming and created mass famine, it makes sense to vote based on the present state of the economy. But in most cases in the U.S., it's just plain silly.

In the U.S., the ups and downs of the business cycle usually determine whether the economy is perceived to be "good" or "bad" at a given point in time. Presidents, by and large, neither create nor control business cycles. Blaming the president for a recession often resembles blaming your caterer for the rain. So, too, with praising him for booms. Elected officials should be judged on the likely long-run ramifications of their decisions not on the short-run. On microeconomic policy, as it were, rather than macroeconomics.

The president does not have much control over macroeconomic policy. More important, we don't want him to. The incentives are all wrong. A president facing reelection has every incentive to sacrifice the future to make the present look good. This is why we have an independent central bank. In basket-case nations, monetary policy is captive to the short-run political interests of government officials. Disasters (like hyperinflation) ensue. Economists tend to agree that independent central banks are good. But if this logic holds for monetary policy, it should also hold for fiscal policy. The great danger is not that a president will under-react to a downturn in the economy but that he will overreact. His reelection chances hinge on the short-run performance of the economy, not on its vigor or anemia 10 years later.

Demanding that a president "intervene more" to boost the economy in the short-run is like screaming at an obese person to eat more ice cream: His great temptation is to do just that--no matter the cost to future health.

Macroeconomics is the purview of the central bank. Stimulus packages, in my view, involve meaningless grandstanding. Hell, recessions tend to be over well before the effects of these packages (to the extent that the effects can be demonstrated to exist at all) are ever felt. Recessions happen. Some economists believe recessions perform an important function by weeding out weak firms. In any event, it appears we just have to live through them. We have in place an effective, independent mechanism for easing the impact and smoothing things out a bit. Going nuts and shoveling money at the economy every time we have a couple of quarters of negative economic growth is not sound policy. Here's an anaology:

It rains sometimes. You buy an umbrella and you use it. Eventually, the rain passes. End of story. What you should not do is spend millions of dollars (and bankrupt yourself) trying to produce some imaginary rain-stopping process that wouldn't even take effect until the bone-dry months of midsummer even if it did, by some bizzare chance, happen to work.

What is the relevance of this to the present campaign? Much of the current debate takes as axiomatic the idea that the present state of the economy is, or ought to be, the basis of an informed vote. Kerry said Bush should be "creating jobs." Jobs are the first priority. What does that even mean? Beats me. Bush's people pointed to modest improvements in the economy and tried to say his policies were "working." What policies? It's just nonsense. Then the New York Times, comic in its zeal, ran a number of loopy front-page articles spinning the good economc news as bad news, logic be damned. (See here and here.) The Times, nearly pathological in its partisanship these days, is doing everything possible to make the present economy look bad.

But the true failing of the Bush administration's economic policies has nothing to do with the present state of the economy--good or bad. Their failing is that they focus on the present at the expense of the future. The latest job figures are not the issue. The real issue is what may happen 5, 10, or 20 years from now. Analysis and criticism should be based on that. I am, myself, an undecided voter. The notion that July or August job figures tell me anything at all about whether Bush or Kerry should be president is nonsense.

Nine times out of ten, when politicians (and their proxies in the media) campaign on the present state of the economy, they engage in intellectual fraud. Economists--by failing to point this out and by instead siding, cynically and disingenuously, with the party of their choice--are complicit in this fraud. (Now there's a big surprise: economists deliberately spouting nonsense to promote their careers. Golly. Knock me over with a feather...)

"It's the economy, stupid," they said, a decade ago. The president should have "done something." Smug intellectuals at cocktail parties knew this. News analysts knew this. Enlightened intellectuals and news analysts know a lot of things.

But then, a lot of what they know is false.

P.S. Babcock

Comments

[Chris Silvey]

The statement "I created x number of jobs in the y years I was in office" has always pissed me off when it comes from a politicians mouth. About the only way they can say that is if they mean they created x 'government' jobs, because God knows we don't have enough government employees at the federal, state, local, and special district levels (insert sarcastic voice as you read that last line...sarcasm is hard to convey in written form).

Another excellent post. You have quickly become one of my favorite sources of reading. Keep up the good work.

[P.S.Babcock]

Thanks, Chris. And thanks for the link. Have received a noticable increase in traffic of late and I think its from your network of readers.

I agree that the "job creation" rhetoric is truly bizarre. Elected officials don't create jobs, other than by sinecure. Both Bush and Kerry are for job creation. Big surprise. Who, I wonder, would ever be against it? The question is, can a candidate make a credible argument that his policies will be in some respect growth-enhancing over the long run? (Blips in the number of jobs reported by the BLS from one year to the next could hardly be less relevant...)

Anyway, welcome to grad school! It's a wild ride...

[James R MacLean]

The only thing stupid is to believe the glib analysis that says "it's the economy, stupid." Let me specific. There is a subtext to the debate. It is this: Consumers ought to vote on the the state of the economy at the time of an election. Nothing is sillier.

Amen. Amen. Amen!

These words should be plastered on LED crawls everywhere.