I’m out at Notre Dame University to talk economic policy and the election tonight, so light posting. But while sitting on a runway, I read this really interesting piece from the National Journal entitled Defying Gravity. It’s a great read with a lot of thinking into why the President’s poll numbers are as high as they are given the still weak economy.
OTEers know my recent views on elections and economics, which have a lot to do with the direction of variables versus their levels, and there’s a lot of that in here, including reference to this study which I didn’t know about:
University of Michigan economist Justin Wolfers studied more than 600 gubernatorial elections across recent American history—a much more robust sample size than presidential elections—and found that voters were much more likely to retain an incumbent when unemployment was falling, regardless of how high the rate was. It’s all about trajectory, no matter how slow or slight.
But there’s much more to the NJ’s analysis than this (very important) momentum point. To me, the most interesting part was the author’s thinking about why the President might not “own the economy” the way incumbents usually do for a number of reasons.
–A lot less policy amnesia than usually prevails: People still associate the trickle-down, deregulatory agenda of the GW Bush administration (and the Greenspan Fed) with the Great Recession which the President inherited.
–It was broken when I got here: At least among the folks they choose to cite in the piece, and I’ve heard this a lot on the road myself, people cut the President some slack because he took office right as the economy was really tanking.
–Congressional dysfunction: The fact that people are getting so used to DC not helping them—which is really profoundly sad—may actually be a factor in the view that the incumbent doesn’t “own the economy” as per usual. As the NJ authors put it:
In ways never before seen, voters exasperated by the debt-ceiling fiasco and fearful of the looming fiscal cliff now just want Washington to hurt them less than usual.
As members of Congress create dysfunctional government by refusing to negotiate in good faith, stonewalling on tax revenues, threatening default, not compromising on the cliff, you’d think it would hurt those who believe that you really need a strong, efficient public sector to deal with market failures and limitations.
But this piece suggest these tactics may be helping the President by leading independents, like the ones quoted, to cut him more of a break on the economy. Though true, it can sound weak for an incumbent to say “things could be better right now if the obstructionists hadn’t blocked me”— e.g., the American Jobs Act. But the current dynamics may make this truth more believable right now.
Finally, the article suggests that people are just a lot more resigned to the economic slog in which we’ve been stuck and have lowered their expectations re future growth.
To an economist, this raises the question of what, realistically, should people expect? Is there a new normal re growth and unemployment that’s worse than the old one? This is a question worthy of more work that I’ll get to soon, but for now, I’ve plotted what I’d say are mainstream economic estimates of potential real GDP growth (i.e., with resources fully employed, so no recessions) and the unemployment rate associated with full employment. The figure shows both historical and projected values.
You’ll note that potential growth slowed quite a bit in the 2000s, a function, according to CBO, of both slower potential productivity and labor force growth. You’ll also note how far away we are from the full employment unemployment rate (it’s about 5%; we’re around 8%). Add gridlocked policy to the mix and perhaps people have legitimately lowered their expectations about growth and jobs in the near term.
But going forward, CBO expects growth in the 2% range and unemployment to eventually settle into a level a bit above 5%, though neither CBO nor any other forecaster expects us to see that rate any time soon. And who knows how accurate these guesses are (see Robert Gordon for a considerably darker view)?
But as I see it, the problem is less that the economy’s speed limits have changed in meaningful ways and more that we’re still stuck in a slog with high unemployment and public policy, outside of the Federal Reserve, not helping (and, as the NJ stresses, threatening to hurt). And that’s not from lack of trying by the White House to do more—were their American Jobs Act in place right now, we’d be doing better.
Interestingly, and perhaps even hopefully, it may be the case that more people get that point than I thought.