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Why It's Not The Economy

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By Robert J. Samuelson
Wednesday, February 6, 2008

As the economy weakens and the campaign intensifies, we'll hear more of James Carville's familiar refrain: It's the economy, stupid. Well, it ain't or, at least, shouldn't be. I'm not claiming that Carville is wrong about voting. People vote their pocketbooks. In the latest Washington Post-ABC News poll, the economy overshadows Iraq as the most important issue by 39 percent to 19. What I'm saying is that this sort of voting is shortsighted. It rewards or punishes candidates for something beyond their power.

We have a $14 trillion economy. The idea that presidents can control it lies between an exaggeration and an illusion. Our presidential preferences ought to reflect judgments about candidates' character, values, competence and their views on issues where what they think counts: foreign policy; long-term economic and social policy -- how they would tax and spend; health care; immigration. Forget the business cycle.

True, presidents try to manipulate it. In 1971, President Richard Nixon imposed wage and price controls in part to prevent inflation from jeopardizing his reelection. The economy boomed in 1972. But the controls were a time-delayed disaster. When they were removed, inflation exploded to 12 percent in 1974. In 1980, the Carter administration adopted credit controls to squelch raging inflation. The result was a short recession -- a complete surprise -- that probably sealed Jimmy Carter's defeat in November.

History's long view teaches the same lesson. No president tried harder, with good reason, to influence the business cycle than Franklin Roosevelt. When he took office in 1933, unemployment was roughly 25 percent. By executive order and congressional legislation, FDR effectively abandoned the gold standard, adopted deposit insurance, tried to prop up falling farm and factory prices, rescued many defaulting homeowners, regulated the stock market, and embarked on massive public works.

With what result? Well, leaving the gold standard aided recovery. But some economic research suggests that other New Deal measures may have frustrated revival. In any case, all of them together didn't end the Great Depression. World War II did that. In 1939 unemployment was still 17 percent.

No matter. When the economy is good, presidents claim credit; when it's not, their opponents blame them. Political phrasemaking compounds the error by personalizing the process. Hence, "Reaganomics" and "Clintonomics." Among Republicans and Democrats alike, there is much mythmaking.

To his worshipers, Ronald Reagan's great economic achievements were tax cuts and spending restraint. Not so. Reagan's singular feat was supporting Paul Volcker's Federal Reserve in suppressing double-digit inflation, which had destabilized the economy (four recessions between 1969 and 1982). From 1980 to 1983, inflation dropped from 13 percent to 4 percent. This set the stage for the long expansions of both the 1980s and 1990s.

Reagan's cut in tax rates probably helped slightly, but the overall tax burden wasn't much reduced. In 1988, taxes were 18.2 percent of gross domestic product (GDP), slightly above the post-1950 average until then (17.8 percent of GDP). With a military buildup, spending restraint was negligible. In 1988, federal outlays were 21.3 percent of GDP, only slightly lower than in President Carter's last year (21.7 percent).

Bill Clinton had little to do with the causes of the 1990s' economic expansion: low inflation, low oil prices, a computer and Internet boom, a stock market boom. The claim made for Clintonomics is that paring the federal budget deficit in 1993 provided the essential catalyst by reducing interest rates. But long-term rates in 1994 were actually higher than in 1993. Many forces affect rates aside from the budget deficit: inflation and inflationary expectations, saving behavior, Federal Reserve policy, overall credit demand.

Clinton's contribution was self-restraint. Unlike Nixon and Carter, he didn't meddle with the Fed. He was a "conservative" in a pragmatic way. He knew when to leave well enough alone.

Of course, presidents do affect the economy. But their greatest influence often occurs after they've left office. FDR's enduring legacy was Social Security; Reagan's was low inflation. Some policies that are initially popular turn out to be calamitous. Under John Kennedy and Lyndon Johnson, the government followed highly expansionary policies to reduce unemployment. Initially popular, they ultimately spawned high inflation. The converse is also true. The anti-inflationary policies of the early 1980s sent unemployment to 10.8 percent. Reagan's popularity plummeted.

Sensible voters should look beyond the cheery or dreary economy of the moment. They should recognize that if presidents could control the business cycle, recessions would never occur, there would always be "full employment" and inflation would remain forever tame. Instead of judging prospective presidents on what they can't do, voters ought to concentrate on what they can do. There are plenty of real differences among the remaining candidates. But Carville is probably right. For many, it will be the economy, and it will be stupid.


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