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Politicians and the economy: Holding the reins, or along for the ride?
September 13, 2004
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| It's a common notion that the president and other politicians can create jobs and otherwise influence the movement of the economy. But how much control do they really have? Most economists say: Not much. (Photos by Getty Images/MPR Graphic) |
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St. Paul, Minn. — Maybe it's that it's an election year, and people have Bush and Kerry on the brain.
We asked 500 members of our audience by email about the economic recovery. We got dozens of stories of promotions, layoffs, business growth, household worries -- you've heard many of them through the rest of this series.
But we also got a good dose of politics, from people like Philip Dahlen, who is retired and living in Eden Prairie. He told us the economy, quote, "stinks, and it will remain that way until we get a new president."
In a follow-up phone interview, Dahlen said, "My retirement was not voluntary I was laid off on September 8th, just three days before the incident in New York. I feel that the Republicans are much to fault for what the economy is like. I am very anti-Bush."
On the other side, we heard from people like Dennis Fisher. Fisher is an engineer from Dayton, who works in the medical device industry. He told us "the obvious effect of tax cuts stimulating the economy has, once again... greatly improved the outlook for companies."
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|  Economist Ed Lotterman | | |
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We also followed up with Fisher. "I do believe that if you free up money, there will be more investment," he said. "To me, it's common sense. I don't know that there's a direct correlation, but I know a prerequisite for a good economy has to be that the people are not heavily taxed. I'll end up voting for Bush."
Small wonder we think politicians can change the direction of the economy -- they tell us so all the time. President Bush sounded the familiar themes in August at the Xcel Center in St. Paul: "Because we acted, our economy since last summer has grown at a rate as fast as any in nearly 20 years," Bush said. "Because we acted, America has added 1.5 million new jobs since last August and the unemployment rate is down to 5.5 percent. Because we acted Minnesota's unemployment rate is at 4.4 percent. When it comes to creating jobs, we're moving America forward and we're not going to turn back."
From Democrats, Bush gets the blame for being the first president since Herbert Hoover to leave an economy with fewer jobs than when he found it. John Kerry, speaking at the Democratic National Convention, promised his party can do better -- and has done better in the past.
"We're the can-do people, and let's not forget what we did in the 1990s," Kerry told delegates. "We balanced the budget. We paid down the debt. We created 23 million new jobs. We lifted millions out of poverty. And we lifted the standard of living for the middle class. We just need to believe in ourselves and we can do it again."
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There's sort of a joke among economists that you can tell a politician is lying when he uses the words, 'we,' 'create,' and 'jobs' in the same sentence.
- Economist Ed Lotterman | |
For some perspective on all this, we went to Ed Lotterman, a former economist for the Federal Reserve who now teaches at the University of Minnesota. Lotterman also writes the "Real World Economics" column for the St. Paul Pioneer Press.
"The president alone does not have that much power to change things, and the sorts of things that presidents can change tend to have a long lag before they really take effect" Lotterman said.
"There's sort of a joke among economists that you can tell a politician is lying when he uses the words, 'we,' 'create,' and 'jobs' in the same sentence. In the long run government does very little to create new jobs. New jobs spring up because of the private economy. Government can do things in the short run or long run in terms of monetary policy that may temporarily accelerate or slow that process, but the long-term growth of employment in the economy is largely due to factors outside the control of government or a specific administration."
Lotterman says theories about the "business cycle" -- the reasons the economy goes up and down -- are a subject of great debate among economists. But one cause they've largely ruled out is short-term action by Congress and the President.
Lotterman says it's not that politicians can't change anything. It's just that they can't change much -- at least, not nearly as much as they would like to have us think. Those tax cuts? Sure, they provide a boost. But it's easy to overstate the case.
"I think tax cuts with unchanged spending have the effect of stimulating the economy. I don't think that you can use that over the long-run to manage the economy very well," Lotterman said. "I would say in terms of an economic stimulus, the easing of monetary policy, the lowering of interest rates and easing of the money supply that the Federal Reserve started in January, 2001 have probably had more effect than the tax cuts."
And don't forget, Lotterman says: While tax cuts provide some thrust in one area of the economy, they create drag in another. "I think what you have now is a specter haunting the economy, and it's a specter of larger and larger federal budget deficits -- which lead to a larger and larger debt."
As economists like to say, "there's no such thing as a free lunch" -- even when electoral campaigns tend to resemble an all-you-can-eat buffet.
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| Morris: "Our economy works in spite of the president" | | |
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Lotterman says the same principle applies to the issue of health care, a more traditional staple of the Democrats. Government can address issues of fairness and distribution. But health care costs are going up mostly because of things no politician can control: Technology, the aging population, and a segment of American society willing to pay whatever it takes for the finest care. Rising health care costs might be crimping the economy, but the most government can do is shift them around.
Leave it to an economist to take all the fun out of politics. Surely the government, and even the president, can make some difference.
Lotterman says they can. But it's often through actions that don't pay off until someone new is warming the Oval Office chair.
"There are things that governments do or don't do that influence the long-run growth path of an economy," Lotterman said. "Things that favor investment, savings, education and training -- things like that have powerful effects. Things like the Homestead Act, the Moral Act that set up land-grant colleges and universities, the GI Bill that made education a near universal thing for a whole cohort after World War II. But people tend not to focus on those and focus much more on, 'The stock market is up or down, inflation is up, gas costs more or less.'"
So if Americans are focused on the short-term, where government can't make that much of a difference -- who's the cause of that misunderstanding? Politicians, certainly. Lotterman says his own economics profession after World War II oversold the ability of government action to create booms and busts. And the press deserves a share of the blame -- for pinning reasons on economic changes when the best answer might be, "we don't really know."
Despite all our worst efforts, sometimes the nuance gets through. Rick Morris owns a floral shop in Waseca, and also answered our survey about the economy. He cares about the presidential race -- but it's not going to make or break his business.
"I think it will be important for the economy, who gets in" to the White House, Morris said. "I don't know that it's going to be critical. I think our economy works in spite of the president much of the time."
And that's music to an economist's ears. Morris says he's still deciding which candidate will get his vote.
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