Economists have long noted that changes in fiscal and monetary policy generally influence the real economy only after substantial time lags. Therefore, with 17 months to the 2004 election and seven to the Iowa caucuses, whatever President Bush can do to influence the U.S. economy in time is largely done.
The jury is still out on whether the economy and Bush’s economic policies will be a plus or minus factor in his reelection campaign.
In the interest of truth in punditry I need to state that I, like most other economists, think that any president really has much less influence over economic conditions than is popularly believed.
This doesn’t mean much. President Herbert Hoover was knowledgeable about economics and believed essentially what I have just stated. He was tossed out on his ear.
Political candidates learned the lesson well and no one running for office dares to argue that government doesn’t control the economy. Justly or unjustly, George W. Bush — who stops by the Twin Cities today to raise money and talk about the economy — will be judged by how well the economy is doing.
When evaluating economic performance, economists usually look at three things: output — which determines national income; employment — or its flip side, unemployment; and inflation. On these criteria, Bush campaign managers face a mixed scorecard.
• Output: We are not in a recession, defined as a prolonged period during which output is shrinking. Output grew at an estimated 1.9 percent annual rate in the first quarter of this year. Moreover, it has grown in all but three quarters of Bush’s presidency, and it has averaged about 1.5 percent per year from the first quarter of 2001, when Bush was inaugurated, through the first quarter of 2003. Compare this to the economy during Bush’s dad’s administration, when growth averaged about 1.7 percent a year from 1989 to 1991.
The political problem for the president is that output is growing less than half as fast as it did under former President Bill Clinton, when it averaged 3.5 percent growth a year, and also under the 3.3 percent average growth achieved during the Reagan years.
Some economists do expect the pace of growth of output to accelerate. One, Wall Street forecaster David Wyss, chief economist at Standard & Poor’s, recently predicted 4 to 4.5 percent output growth for 2004. If such strong growth materializes, any charges that the United States is in a recession under Bush’s leadership would be laid to rest.
The tantalizing issue for both Bush and his challengers is whether stronger growth will not only occur, but be recognized in time for it to help the president’s re-election. Only the numbers for the first two quarters of 2004 will be out before the election.
If they are highly positive, Bush campaigners will be able to beat the drum of economic recovery.
However, even if 2003-2004 turn out to be good years for output growth, it may come too late to help with the most visible problem: unemployment.
• Employment: National unemployment hit 6.1 percent in May, the highest level since July of 1994. Minnesota’s most recent number is 4.3 percent, down just slightly from the average over all of 2002.
President Bush could argue that current unemployment levels in Minnesota or the nation are not bad. In fact, we had higher levels than this 11 out of the 12 years that his political idol, Ronald Reagan, and his father, George H.W. Bush, were in office.
But Minnesota unemployment was lower in seven out of the eight years that Clinton was in the Oval Office.
Neither the U.S. nor the state unemployment levels are all that dire in comparison to the last 35 years. We are a particularly ahistoric nation, however. The general public, the media and Democratic challengers all have focused on unemployment as a problem and it will be hard for an incumbent to sidestep that issue.
As the economy grows, hiring will improve and unemployment numbers and rates will fall. This, however, is a lagging phenomenon and it may not happen in time for President Bush to claim success.
• Inflation: Rising prices were an important issue in every presidential race from 1968 through 1992. It won’t be an issue in 2004.
For the first time since 1936, fears of falling prices will be more important than fears of rising ones in a presidential election year. However, unless the economic situation in Europe and Asia worsens markedly, the Fed should have little difficulty in keeping deflation at bay.
While economists pay less attention to interest rates and stock prices than to the primary indicators discussed above, the general public does view them as important. Interest rates are as low as at any time in more than a half-century, and many U.S. households have secured very low mortgage financing.
I’m not sure if this will benefit the president much, but it certainly won’t hurt him.
The stock market is anyone’s guess. Positive news has brought the Dow into the high 8,000 range in recent weeks. It may stay in this range or even slightly higher.
But any return to the 10,000-plus levels experienced during the boom should be a cause for alarm rather than celebration. Don’t expect such gains in any case.
The upshot simply is this: The economy is better than many people apparently think. The political challenge for the president will be to convince voters that is the case.
© 2003 Edward Lotterman
Chanarambie Consulting, Inc.