No Single Person to Blame

As an economist, I am dismayed at the common impression that the president is at the helm of the economy guiding us through stormy economic times. Political cartoons showing President Bush handing over the reins of a broken economy to President Elect Obama illustrate this perspective. Even some very good economists like Alan Blinder seem to accept this portrait. Most economists believe that the President has little to do with the economic outcomes. Without empirical evidence, I would like to assert by opinion. It is easy for elected officials to harm an economy, nearly impossible to help in the short run, and difficult to help in the long run.

What can the government do in the long run to help the economy grow? It can allow the owners of productive resources to profit from utilizing these resources, keep taxes low and the government sector small, enforce, protect and respect private contracts, support education and public research.

Good and bad policy may not manifest its impact until the president and Congress that implemented it are gone. Suppose that the Obama Administration signs legislation passed by the Congress that drastically improves educational achievement and future worker productivity but must be implemented with first graders. It increases the cost of education by 2% but has a 50% return on investment when first graders graduate from college in 16 years. This policy change would be very productive, but will produce a negative return during the Obama Administration and give a future administration an unearned increase in economic growth.

Likewise, the Obama Administration might enact a bad energy policy. For arguments sake, let's say it mandates that power companies increase wind generated electricity by 20% per year beginning in 2016 and that this is an inefficient source of energy production. Power companies know the policy is bad, and do not increase current investment in wind power. Beginning in 2016, they start producing more wind power, it is more expensive than other energy sources and the growth rate in the economy slows.

Is it realistic to see policy from previous administration to affect current economic activity? The current housing crisis may well demonstrate that it does. Our friends on the political right blame the crisis in part on Democrats with the creation of Fannie Mae in 1938 (Roosevelt) which was taken public in 1968 (Johnson) creating a government sponsored entity with privatized profits and nationalized losses, a moral hazard. But Freddie Mac followed a similar path being created in 1970 by the Republican Nixon Administration, and taken public in 1989 by the G. H. W. Bush Administration again creating a GSE with a moral hazard. The Clinton Administration gave the GSE's the mandate to make more loans to underserved areas, but so did the Bush Administration. Fannie and Freddie complied by lowering underwriting standards: home prices collapsed, foreclosures skyrocketed, shaking the financial markets, and the rest is history.

Our friends on the political left often blame deregulation implemented by Republicans. The article from the Daily Kos linked above blames the Garn- St. Germain Depository Institutions Act for deregulating Savings and loans and passed during the Reagan Administration as the beginning of our current mess, ignoring similar legislation, the Depository Institutions Deregulation and Monetary Control Act of 1980, that was passed, signed and implement during Carter Administration. According to the blame deregulation and the Republican crowd, the next shoe dropped with the passage of the Gramm-Leach-Bliley Act in 1999, which repealed earlier banking law allowing banks to compete with insurance companies and investment banks. Note that the bill was signed by President Clinton. The third and final shoe (yes, we have created a strange beast) dropped in 2000 with the passage of the Commodity Futures Modernization Act. The act expanded futures trading and speculation, and was passed with Republicans again leading the charge, but again with President Clinton signing the legislation. Unrestrained markets lead to market excess creating the housing bubble and collapse, and the rest is history.

One party may be better than the other in encouraging growth. One party might be more "fair." One party may have contributed to the current crisis more than the other. I don't know, and I don't know of any article in a referred economics journal that attempts to answer these questions.

As a student of economics, when examining economic legislation, you should apply economic principles to attempt to predict the value of the policy, and if the policy is enacted, measure the outcomes of the policy.

Please comment. You are not required to agree, just to make reasoned, polite responses.