When I hear people criticize President George W. Bush for the nation’s economic problems, I feel as if I’m part of the old joke about watching an overbearing in-law drive your new Porsche off a cliff.
I have mixed feelings.
I voted against Bush and believe that many policies he is pursuing are bad for our country. If someone credible runs against him in 2004, I would be very glad if he ended up a one-term president like his father.
But much of the criticism I hear is way off base and reflects widespread popular misunderstanding of what government in general — and a U.S. president in particular — can do about economic conditions. Until the public gets more realistic expectations, we are going to have lots of votes cast for the wrong reasons. That only perpetuates bad policy.
In the past week I have heard late-night comedians blame Bush for falling stock prices and a slow economy. One radio-program caller asserted that “Bush let the economy get way out of control and we are going into another Depression.”
This is all nonsense, but I realize it is unlikely that I would convince the people who made those assertions.
What I can do is set out some basic propositions about the relationship between government and the economy that most economists in the United States would affirm. You may not agree, but you are going against the tide of thousands of people who have made this their lifetime work.
Government actions greatly influence the economy, but government has little control.
In retrospect, it is easy to identify things governments did — such as opening land for settlement with the Homestead Act, subsidizing state universities with the Morrill Act, returning to “hard money” after the Civil War and sharply raising tariffs in 1930 — that profoundly affected how the U.S. economy grew or did not grow.
Excessive budget deficits and lax monetary policy during the Johnson and Nixon administrations caused the great inflation of the 1970s. But these outcomes were not foreseen at the time of the actions. Unintended consequences of government action, both good and bad, are often larger in the long run than the intended outcomes.
The effectiveness of counter-cyclical fiscal and monetary policy is limited.
John Maynard Keynes argued that governments could revive economies mired in recession by increasing spending, cutting taxes, and increasing the money supply, which would in turn lower interest rates. Inflation could be countered by doing the opposite.
But the historical record of trying to overtly manage the business cycle in this way is mixed with some successes and many failures. Economists are still divided about this issue, but even the most diehard Keynesians are much more cautious about what they promise than many economists were 40 years ago.
Congress makes crucial taxing and spending decisions with the approval or over the objection of the president, but not the other way around. We roughly quadrupled our national debt during the Reagan administration. That probably would not have happened if someone other than Ronald Reagan had been elected and re-elected. But the tax and appropriation bills that caused this were passed by successive Congresses largely controlled by Democrats. The credit or blame must be spread equally.
Decisions by Congress and presidents about what we tax, how high tax rates are and what we exempt from taxation have strong effects on the long-term evolution of the economy, but little influence on the business cycle.
Central banks, such as the Federal Reserve, control the money supply, which greatly affects interest rates, exchange rates and inflation, but they don’t have “control” either. Increasing or constricting the money supply can affect employment and output, but in an imprecise way with long and variable lags. Moreover, the Fed is highly insulated from political influence, and no president — from FDR to George W. Bush — has had any effective control over Fed actions.
The business cycle and stock market bubbles are largely caused by nongovernment forces. New technology, external shocks such as wars and irrational crowd mentality all have contributed to the ebb and flow of output and employment for most of recorded history.
Government actions, intended or not, can contribute to such fluctuations, but are not the primary cause. There is little that Coolidge, Hoover, Clinton or Bush had to do with the irrational bubbles in stock prices that grew in the 1920s and 1990s and even less to do with the bubbles collapsing as they inevitably must.
© 2002 Edward Lotterman
Chanarambie Consulting, Inc.