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Don’t anthropomorphize the economy

Summary:
Here’s a nice graph from the Financial Times: These graphs are very manipulative, as we think we are seeing the impact of various presidents on the economy.  But is that really so? I’ve argued that the performance of the US (economic, military, social, etc.) is about 3% the president and 97% other factors.  Three percent is not nothing; it’s way more influence than a blogger has.  But it’s not enough to be decisive. This tendency to think in terms of a “Bush economy”, or an “Obama economy” is especially pronounced in election years.  But which indicator is decisive?  Should we look at the graph and conclude that Trump inherited an economy that was already improving, or should we acknowledge that it gets harder to create jobs once we reach a low unemployment rate,

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Here’s a nice graph from the Financial Times:

Don’t anthropomorphize the economy

These graphs are very manipulative, as we think we are seeing the impact of various presidents on the economy.  But is that really so? I’ve argued that the performance of the US (economic, military, social, etc.) is about 3% the president and 97% other factors.  Three percent is not nothing; it’s way more influence than a blogger has.  But it’s not enough to be decisive.

This tendency to think in terms of a “Bush economy”, or an “Obama economy” is especially pronounced in election years.  But which indicator is decisive?  Should we look at the graph and conclude that Trump inherited an economy that was already improving, or should we acknowledge that it gets harder to create jobs once we reach a low unemployment rate, and hence Trump outperformed expectations?  There’s a bit of truth in both views.

I don’t believe that, deep down, people actually believe the economy is a test of a president’s performance.  They may make that claim when it’s convenient, but I don’t think they really believe it.  Here’s why:

1. Ask a Democrat about the current economy and they’ll often say that Trump just got lucky; the low unemployment is not related to anything he did.  He inherited an improving economy from President Obama.  Republicans will argue just the opposite.  So does that mean that Republicans believe that the economy is determined by the President, and the Democrats take my view?  Not really.

2. During most of the past 100 years the situation was reversed.  On average, the economy (and stock market) did better under Democratic presidents.  So if the president actually did determine the course of the economy, then this would be evidence that “proved” Democratic economic policies were superior.  FDR was an improvement over Hoover, The Kennedy/Johnson years were better than Nixon/Ford, or even Eisenhower (who presided over three recessions).  Clinton did better than either Bush, etc.  You might argue that Reagan did much better than Carter, but even that was mostly on inflation, not real economic growth (which was strong under Clinton).

Of course some Republicans will respond by pointing to initiatives during the Clinton years that were undertaken by the GOP Congress, but that just proves my point that presidents are less consequential than we assume.  And even that can’t explain why real GDP growth was twice as fast under Lyndon Johnson’s big government policies than under President Trump.  So I conclude that even Republicans don’t really believe that the economy is a measure of the validity of a president’s ideology.

Here’s how I look at things:

1. There are long swings in trend real growth (per capita) due to technology.  Growth was fastest when low hanging fruit from fundamental inventions like electricity and gasoline engines were being rolled out across the economy.  Once that was mostly accomplished (around 1973), growth slowed.

2. Presidential policies do affect the supply side of the economy, and this can have a modest impact on growth.  Some good reforms happened during the Reagan and Clinton years.  This partly explains why the US switched from under-performing other developed countries to outperforming them in the later 1900s.

3. At business cycle frequencies, it’s mostly monetary policy that determines the path of output.  Presidents do have the ability to pick Fed chairs, but they often re-nominate people originally picked by the other party.  Monetary policy is relatively non-partisan.

The first point explains why Trump could never hope to achieve LBJ’s 5% real GDP growth rate.  The second point explains about 10% of why Hoover did worse than Coolidge, and the third point explains about 90% of why Hoover did worse than Coolidge.  (Technological growth was strong during the 1930s; it doesn’t explain any of Hoover’s dismal performance.)

If people want to think in terms of the “Obama economy” or the “Trump economy” that’s fine.  But your vision is almost all in your head; it doesn’t really conform to what’s actually driving the economy.  At best, maybe 3% of the economy.

PS.  Here’s another example.  Both 9/11 and the 2008 banking crisis happened to occur when George Bush and Blair/Brown were leading the US and UK.  Tony Blair and Gordon Brown were basically the UK’s version of Bill Clinton.  There’s a lot of luck in involved in how a president (or PM) goes down in history.

PPS.  That graph really shows the weakness of job growth during the 2001-07 recovery.  Which is odd because RGDP growth was fairly decent.

Scott Sumner
Scott B. Sumner is Research Fellow at the Independent Institute, the Director of the Program on Monetary Policy at the Mercatus Center at George Mason University and an economist who teaches at Bentley University in Waltham, Massachusetts. His economics blog, The Money Illusion, popularized the idea of nominal GDP targeting, which says that the Fed should target nominal GDP—i.e., real GDP growth plus the rate of inflation—to better "induce the correct level of business investment". In May 2012, Chicago Fed President Charles L. Evans became the first sitting member of the Federal Open Market Committee (FOMC) to endorse the idea.

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