#61 Great Economic Expectations

On January 10, 2012

Hello Everyone,

Almost precisely four years ago, I wrote Obamagram #11 when my wife, Penny Sebring, and I were literally “driving home from a productive and memorable three days in Grinnell, IA.” We had canvassed and observed a caucus there and enjoyed the jubilation of the huge victory celebration in Des Moines.

 Now that voting has begun, I want to start my comments about this election cycle by offering some thoughts about why the mood has changed from three years ago, when Barack Obama was inaugurated and expectations couldn’t have been greater.

Some of his supporters have told me that they are “disappointed” in the President. I have been wondering why that is when I don’t feel that way – quite to the contrary, I feel very good about his performance in office.

The conventional wisdom seems to be that the two primary causes for this feeling are continuing high unemployment rates and unrelenting partisan wrangling in Washington. I’ll wrestle with the first cause here, leaving the second for another time.

Human beings, perhaps particularly the American variety, seem to like simple answers to complicated problems, and, in the process, conflate correlation with causation. For example, when a president is in office, his policies must be responsible for economic conditions whether good or bad. We expect the president to be our “economist-in-chief.”

I’m not “disappointed” in Pres. Obama because I don’t expect a president – or anyone else – to be able to manage the economy. It’s just not possible. I do expect presidents and certain government institutions to intervene occasionally to avoid economic catastrophe. In 2008-9, presidents Bush and Obama and the Fed did just that. And, it worked. The stimulus plan passed by Congress probably helped, too. But that’s as far as it goes in my mind.

Ironically, we’ve never had an economist as a president and precious few have been businessmen: Andrew Johnson, a tailor; Herbert Hoover, a mining engineer; Harry Truman, famously a bankrupt haberdasher; and the presidents Bush, both oilmen. Several presidents were planters or farmers.

It’s the Economy, Stupid
James Carville, the over-the-top Democratic strategist/entertainer, is famously credited with telling Pres. Clinton, with respect to his reelection, “It’s the economy, stupid.”

I find it puzzling that in a reputedly free-market, capitalist system, that voters seem to expect, even demand, a single man to, “fix” the economy whenever it teeters.

I would submit that it is beyond the understanding, let alone the power, of any person or group of people to fix an economy. As I wrote in # 58, it appears to me that economies are prime examples of “emergent systems” – highly complex, dynamic phenomena that have no central controllers. Like ant colonies or stock markets.

As a result, we seem to know how to prevent the death of an economy, but no one can heal a sick economy. Not even “the most powerful man in the world.”

In an unguarded moment, apparently Gov. Romney admitted as much in Saturday night’s debate when, contrary to the premise of his entire campaign, it was reported that: “‘the president is trying to take responsibility for the economy,’ Mr. Romney said in response to a question about signs of improving job growth. ‘It’s like the rooster taking responsibility for the sunrise — he didn’t do it.’” Just my point. But the Governor can’t have it both ways. (By the way, I stick by the prediction in my last Obamagram that Gov. Romney will win the nomination, but if he doesn’t, Pres. Obama will have an even easier time winning reelection. I have also watched the trailer of the half-hour video attacking Gov. Romney for his leadership of Bain Capital. It is excessive, inaccurate, and unfair. There are issues to be discussed in this area, however, and I may address them after the entire video becomes available.)

Governments can directly create public sector jobs, but they have precious little to do with permanent private sector job creation. Even my liberal friends get confused when they claim that FDR “created jobs” – no he didn’t, not in the private sector. The pity in all of this is that most voters will not let any president admit that. They must all play along with the job creation charade.

Economies, like deities, act in mysterious ways. “It’s the economy, stupid” is not so much a strategy as an admission of powerlessness – that a politician’s fate as determined by the economy is largely a matter of fortune.

Presidential Approval Ratings
There does, however, seem to be a correlation between unemployment rates and “presidential approval ratings.”

Pres. Reagan has been the Republican icon for the past quarter century yet he, too, was bedeviled by economic turmoil. In #47, I quoted Tom Wicker of the New York Times who wrote in November 1981, “Ronald Reagan appears to be falling victim to dashed expectations…[he] came home from his August vacation to witness a September in which ‘economic activity fell off a cliff,’ in the phrase of Edward Yardeni, an economist for E.F. Hutton. ‘The magnitude of the drop,’ he added, ‘was larger than anyone anticipated.’ That could as well have been said of the unwarranted expectations the President had created…”

The unemployment rate peaked at nearly 11% in December 1982, exceeding the latest peak of slightly over 10% in 2009. It seems that the 1982 peak was intentionally caused by the Fed under Paul Volcker to break the back of hyper inflation. It seems not to have been caused by Pres. Reagan’s actions, although, to his lasting credit, he did nothing to interfere with the Fed’s actions. Nonetheless, he was apparently blamed for it as his presidential approval ratings plunged to 35% in January 1983 – lower than Pres. Obama’s nadir of 37% last September. Fortunately for Pres. Reagan, the unemployment rate dropped rapidly in the months that followed, and he was reelected in 1984. Cause and effect? Who knows.

Unfortunately, the myth of presidential responsibility for economic conditions has been perpetuated by many presidents who’ve had the good fortune to be in office during prosperous times and couldn’t resist taking credit for them. Carville’s client, Pres. Clinton, did just that during the 1990s when the economy benefited from the Soviet collapse, the tech bubble, and innumerable other factors equally beyond his control. Pres. Obama will not be able to resist taking credit, too, if the unemployment rate continues to fall. The myth will live on.

Interestingly, if Carville’s claim is true, and we’re simply seeking an economist-in-chief, why is the only Republican running on his “business” credentials, Gov. Romney, able to muster only 25% ratings in the national polls? Must be more complicated than simply economics.

Creating Jobs
Another myth all politicians seem required to embrace is that small businesses are the primary engines of job growth. Not so say economics professors Erik Hurst and Benjamin Pugsley of the University of Chicago Booth School of Business in a study released last year:

…the vast majority of small business owners do not expect to grow, report not wanting to grow, never expect to innovate…

When asked at the time of their business formation, most business owners report having no desire to grow big and no desire to innovate along observable dimensions…

In 2007, there were roughly 6 million firms with paid employment; 90 percent of these firms had fewer than 20 employees.

Think about your tailor, dry cleaner, or doctor.

By way of contrast, during decades as an investment banker, I worked with several innovative, fast-growing companies. But, I never heard any business owner or manager say that they were in business to “create jobs.” They were in business to do many other things, like getting a return on their investment or converting an idea into a viable product or service. And, they wanted to hire as few people as possible in the process.

In the end, it may be catchy to say “It’s the economy, stupid.” And, presidents may appear to hold onto their jobs or lose them because of the vicissitudes of the economy. I, for one, think it should be more complicated than that.

I will discuss the second apparent cause for disappointment with Pres. Obama – his inability to achieve bi-partisanship – in my next Obamagram.

Please, as always, pass it on. And, remember that previous Obamagrams are stored on www.obamagrams.com.

Chuck

 

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