Chapter Four. Economic Performance by President. It is better to be roughly right than precisely wrong. - John Maynard Keynes

Transcription

1 Chapter Four Economic Performance by President It is better to be roughly right than precisely wrong. - John Maynard Keynes Fair or not, a president and his party are judged by the economic fortunes of the nation. It is widely accepted that the president is the navigator and pilot in directing the nation through economic waters. This was codified in the Full Employment Act of As we saw in the last chapter, Richard Nixon realized the political primacy of the appearance of prosperity after his loss to John Kennedy in When Nixon assumed the presidency eight years later he brought with him into the Oval Office what has come to be known as the political business cycle. Candidates have made economic prescriptions the driving force of their campaigns ever since the 1920's and even before.. Are you better off today than you were four years ago? was Ronald Reagan s campaign mantra. It s the economy, stupid, was Bill Clinton s ubiquitous reminder for staff. Is there a difference between parties that can be quantified, an economic scorecard from which we can tabulate results and determine the winner? Or do the economic tides ebb and flow on an independent timetable, not influenced by policy any more than by banner and bluster? Yes, the

2 data do present a definite verdict. Beginning in 1947 when reliable economic data came on line via the National Income and Product Accounts (NIPA), economic outcomes track the political affiliation of the president. One party has done better by virtually all measures of economic health. It is not, to be clear, our contention that either s or s operate by a consistent game plan, nor that the economic results proceed directly from theories held by the presidents. The results are not accidents, but neither are they entirely planned. Results reflect, we believe, the constituencies served by policy more than they reflect theoretical intent. Constituency and theory meet in policy, and the policy of s is fairly described as more Demand Side, while the policy of s has been decidedly Supply Side. Primary among criticisms of this approach may be three: (a) The economy does not care who is in power. This opinion has been held by some influential professionals, including Nobel Prize winners, but is of little relevance politically or theoretically today. It is certainly not a belief promulgated in political campaigns. (b) The influence of the president lags his term in office, and the results of his policies are credited to later presidents. While this is more plausible, it is still not politically or economically relevant. It is certainly absurd to assert as have members of the radically conservative Heritage Foundation that the economic initiatives of one president (Reagan) skipped George H.W. Bush and benefitted Bill Clinton, only to dissolve immediately as the latter left office. (c) The president is only responsible for half the problem if Congress is in control of the opposition party. This makes some sense in the abstract, but less when confronted with the historical record, where the president s control of the executive apparatus of government and his leadership on policy have consistently outweighed contrarian Congresses. Instances where the nation has followed a strong economic policy distinct from that avowed by the president are nonexistent. At a minimum it is fair to say that our results do not derive from designer statistics manufactured for the purpose of demonstrating a foregone conclusion. Growth, employment and profitability are described here in terms of the most widely used metrics real GDP, the unemployment rate, and investment. We also offer some useful measures to give depth to the evidence: real GDP net of federal borrowing (which we term Net Real GDP), employment growth, and corporate profits as a percentage of total income.

3 In all categories the economy has performed better under ic presidents than under s. Nearly every has outperformed all s in all categories. Appendix B provides details of statistical sources and rankings, from which those in this chapter are drawn. A complete treatment can be found online at DemandSide.net. Growth The most commonly cited economic statistic is the growth of gross domestic product (GDP growth) or more often and more appropriately the inflation-adjusted measure real gross domestic product (Real GDP). GDP has some drawbacks. It is more a measure of activity than growth the buzzing around the hive, rather than the size or strength of the hive, or even the well-being of the bees. These drawbacks and the need for more effective accounting, are discussed more completely in Part II. Still, as the most common statistic in the economic game, it is where we need to begin. Real GDP has been stronger and steadier, and recessions (periods of negative growth) have been fewer, when a has occupied the White House. Even more stark is the difference using our secondary measure Net Real GDP. This is simply Real GDP subtracting the federal deficit, including borrowing from the federal social entitlement funds. If deficit spending is pump priming, it is not appropriate to count the water used to prime as a product of the well. Net GDP corrects for this. 1 s have been in the White House for 26 of the 60 years between 1946 and Real GDP growth has averaged 4.0 during that period. s have been in power the other 34 years, during which time Real GDP growth has averaged 2.8 percent per year. Net GDP, taking into account the federal borrowing, drops ic performance to 3.5 percent. The same adjustment for s drops their number to a meager 0.8 percent. More than two-thirds of growth has been borrowed. Since 1980 there has been zero Net Real GDP growth under s. The difference of a point or two in growth may seem insignificant. But consider that an 1. The average annual deficit under s has been 0.5 percent of GDP. Under s, it has been 2.0 percent (through 2004). Of the top borrowers, only Bill Clinton is a. He edges Richard Nixon for sixth place. It is only fair to note that Clinton inherited enormous annual deficits and stifling debt service costs from Bush I and bequeathed to his successor, the younger Bush, a budget surplus.

4 economy growing at 4.0 percent doubles in size every 13 years, and one growing at 2.8 percent, every 25 years. Growth of 3.5 percent would double an economy s size in 20 years. One growing at 0.8 percent would need 90 years to double in size. For Real GDP, the chart seems perhaps not to make the point asserted here. The bars seem to be of similar height, and only a couple of gaps distinguish the red from the blue. These gaps are telling, however. ic years are consistent. Unemployment and Employment In the realm of employment the most cited statistic is the rate of unemployment. Here we will use both that and a measure of growth in the workforce actually employed. Rates of unemployment or employment only partly describe the health of working America, however, since they omit wages and salaries, so we add some notes on income and wages. Unemployment has been lower on average under s, 5.1 percent v. 6.2 percent. More striking than the actual rate is the progression of the measure over time. Under s unemployment has shown an unmistakable, persistent tendency to fall from year to year. After 1949 and the turbulence of transition from war to peace, only twice under s has unemployment failed to fall. It rose once, modestly, under Kennedy in 1963, and then more substantially under Carter in 1980 in the context of the Iran oil embargo and the Volcker Monetarist experiment. We have used 2.0 as the baseline, although the minimum practical rate of unemployment is likely closer to 3.0 percent. It is tempting to allow the charts to speak for themselves. Elaboration on the data may seem to be mere advocacy. The strength of the economy as measured by the employment of its members is described in the chart on employment growth. The stability of the blue bars as opposed to the volatility of those in red illustrates the success of millions of working people. Getting a job has often been characterized as a personal choice available to all the willing. If so, ic presidents have inspired many millions to be willing. Growth in employment has been strong and

5 stable under s. Not so under s. 2 Weakness in employment numbers has historically, and not surprisingly, been reflected in wages and salaries. High unemployment means it is a buyer s market for labor. The experience of the American workforce in the years since 1980 compared with the period prior to that has been the difference between stagnation and opportunity. In looking at the following statistics and relating them to our own observations, we should keep in mind that an individual worker may do better over his or her lifetime as he or she advances in experience, skill, or seniority, but each group will not. For example, wages have declined for the 20- to 30-year-old unskilled labor force, yet of course, an individual will grow out of this category. The numbers show only that, as a whole, our economy is not progressing from the point of the majority of its citizens and that it is no longer true that children will do better than their parents did. That happy circumstance is a relic of the past. Between 1947 and 1978, real hourly wages rose 72 percent. Weekly earnings, which factor in the number of hours worked per week, rose 53 percent. Between 1978 (the start of the Volcker Monetarist experiment) and 2006, real hourly wages fell 5 percent and weekly earnings fell 10 percent. 3 Median income of all Americans rose 107% between 1947 and 1978, a number greater than the earnings figure partly reflecting the increase in the proportion of Americans employed and partly reflecting investment and interest income. Between 1979 and 2005, median income rose only 9 percent. 4 Manufacturing employment peaked in 1979, with 19.4 million (one in five workers) engaged in the manufacture of durable or nondurable goods. In 2006, only 14.2 million were so employed (one in ten) Strong unemployment numbers under George W. Bush ( ) do not find correspondence in the employment growth chart. This displays the Bush administration s willingness to work with the numbers for public consumption. A discussion of the anomalies can also be found on the web site. 3. Data from 1984 Economic Report of the President, Table B-38 Average weekly hours and hourly earnings, , and 2007 Economic Report of the President, Hours and earnings in private nonagricultural industries, Data from 1999 Economic Report of the President, Table B-33 Median money income , and 2007 Economic Report of the President, Table B-33, Median money income Economic Report of the President, Table B-46 Employees on nonagricultural payrolls by major industry

6 Investment and Profitability To judge economic performance from the perspective of business and investors, we turn to some lesser known statistics: gross private domestic investment and corporate profits as a percentage of total national income. Investment Gross private domestic investment is the most notable and most often referenced measure of investment in the National Income and Product Accounts (NIPA). It is comprised of (1) business investment in plant and equipment, (2) residential construction and (3) investment. The most important exclusion is government investment, which is treated simply government expenditure. 6 It is very important to most treatments of the multiplier which treat investment as exogenous (coming from outside the system). 7 Here, however, we attempt to connect the lines between investment, profitability, employment and effective demand. So the only truly exogenous investment arises from government, whose concerns may exist outside the economic sphere. Volatility appears in both blue and red in gross private domestic investment. The Truman years were wildly up and down in this category, as the demand and supply of consumer goods, industrial capacity, and housing after the war sorted itself out. The disruption of the Korean War further roiled the water. The tremendous spike in Reagan s first term is due in large part to Supply Side tax policy details which actually made some investments cost less than nothing. The modest rise of investment in the 2000's can be attributed in part to the run-up in residential housing. It remains to be seen how passive housing investment translates into economy-wide strength or weakness. Total private domestic investment grew at an average annual rate of 6.6 percent through the years of ic chief executives. Under s, the figure was less than half that, 3.2 percent (through 2004). 6. GDP = C + I + G + (X - IM) is the algebra, where C is Consumption, I is Gross Private Domestic Investment, G is government expenditures, and (X - IM) is net exports. 7. A very common usage of the multiplier is to gauge the impact of private investment projects on a local economy, often to see what a local jurisdiction should be willing to do to accommodate the new investment.

7 Profitability Our statistic for corporate profitability is not the gross dollars of profit, and not even dollars adjusted for inflation, but profits as a percentage of total national income. This might raise some antennae sensitive to designer statistics. Our measure is not created to hide the gross profits or growth in profits, however, which becomes obvious when we realize the percentage figure implies a larger piece of what is revealed in the previous GDP statistics as a larger pie. The percentage thus cannot hide a gross figure if it favors s because the product of the two must favor s. The point of our piece of the pie statistic is to show that investment is sensitive to profitability. The proportion of total income that found its way into corporate profits was 11.4 percent under s and 9.9 percent under s. Corporate profits are not as unambiguous as might be at first imagined. Profits are revenues in excess of costs, and a company which perceive the potential for greater profits in the future might be willing to forego present gains to invest. The reverse might also be true. If long-term prospects did not seem promising, a company might reduce investment in the short term, cutting costs and increasing the gap between revenues and costs, which is profit. Countering these, as discussed in Chapter 5, is the tremendous incentive for corporate managers to magnify current profits, since they often translate to stock prices, and stock prices directly influence managers compensation. All of which cautions us that present year profits are not necessarily related to the health or prospects of a company. Still, however ambiguous, the relationship is there. 8 As we pointed out in Chapter 3's look at the Reagan years, the Supply Side construction that investment relates to costs of inputs, taxes, or savings rates does not find verification in experience. By contrast, Demand Side strengths employment and income (as described by GDP) do follow with investment and profitability. A last note. The deficits and their costs are connected to these factors in several ways, among them through the price of money interest. This affects both the cost of investment and the strength of demand. The high deficits illustrated in the Chapter 3 discussion of the Reagan years 8. The observation by the great Polish economist Michal Kalecki (KAH-less-key) that profits must mirror investment is apt here. Kalecki s simplifying assumption is very reasonable, that workers spend all of their income on consumption goods. Then the conclusion follows from simple arithmetic. Since consumption goods equal labor income, investment must equal profit.

8 and in the Net GDP discussion earlier here in Chapter 4 follow right along with lower profits, lower GDP and lower employment. The contrary Supply Side notion that investment can be coaxed by favorable regulations or tax treatment leads to policies which are dangerous disruptions to the market. And that notion is in any event belied by the evidence.

9 Unemployment Rate by Year Source: Economic Report of the President.

10 Unemployment Rate by Presidential Term Data Source: Economic Report of the President.

11 Unemployment Rate by Presidential Term Data Source: Economic Report of the President.

12 Corporate Profits as a Percentage of Total National Income by Year Source: U.S. Bureau of Economic Analysis. Note: After tax profits with inventory valuation adjustment and capital consumption adjustment.

13 Corporate Profits as a Percentage of Total National Income by Presidential Term Data Source: Bureau of Economic Analysis. Note: After tax profits with inventory valuation adjustment and capital consumption adjustment.

14 Corporate Profits as a Percentage of Total National Income by Presidential Term Data Source: Bureau of Economic Analysis. Note: After tax profits with inventory valuation adjustment and capital consumption adjustment.

15 Percentage Increase Net Real GDP Average Annual Increase by Year Source: U.S. Bureau of Economic Analysis. Chart depicts GDP less federal borrowing, including borrowing from social program trust funds.

16 Net Real GDP Average Annual Increase by Presidential Term Data Source: Bureau of Economic Analysis. Chart depicts GDP less federal borrowing, including borrowing from social program trust funds.

17 Truman Eisenhower Kennedy Johnson Nixon Ford Carter Reagan Bush I Clinton Bush II Percentage Increase 6 5 Net Real GDP Average Annual Increase by President Data Source: Bureau of Economic Analysis. Note: Chart depicts real GDP net of federal borrowing, including borrowing from social program trust funds.

18 Average Annual Increase in Real Gross Private Domestic Investment by Year Data Source: U.S. Bureau of Economic Analysis, NIPA

19 Average Annual Increase in Real Gross Private Domestic Investment by Presidential Term Data Source: Bureau of Economic Analysis

20 10 9 Real Gross Private Domestic Investment Average Annual Increase by President Data Source: Bureau of Economic Analysis, NIPA 5.2.3

21 Percentage Increase 10 8 Real GDP Change by Year Source: U.S. Bureau of Economic Analysis.

22 Average Annual Increase in Real GDP by Presidential Term Data Source: Bureau of Economic Analysis

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24 Truman Eisenhower Kennedy Johnson Nixon Ford Carter Reagan Bush I Clinton Bush II Percentage Increase 6 Real GDP Average Annual Increase by President Data Source: Bureau of Economic Analysis

25 Percentage Increase 4 Average Annual Increase in Employment by President Data Source: Economic Report of the President. Employees on nonagricultural payrolls.

26 Percentage Increase in Employment by Year Republica n Source: Economic Report of the President. Employees on nonagricultural payrolls. -4

27 Percentage Increase 4.5 Average Annual Increase in Employment by Presidential Term Source: Economic Report of the President. Employees on nonagricultural payrolls.

28 3 2 1 Federal Saving (Borrowing) as a Percentage of GDP by Presidential Party Republica n -4-5 Source: U.S. Bureau of Economic Analysis. Includes borrowing from Entitlement Trust Funds. -6

29 Average Annual Federal Saving (Borrowing) as a Percentage of GDP by Presidential Term Data Source: Bureau of Economic Analysis. Represents borrowing from all sources, including social program trust funds.

30 Truman Eisenhower Kennedy Johnson Nixon Ford Carter Reagan Bush I Clinton Bush II 1 Average Annual Federal Saving (Borrowing) as a Percentage of GDP by President Data Source: Bureau of Economic Analysis. Represents borrowing from all sources, including social program trust funds.