A Note about the US Economy and the Recent Elections (Yes, We’re Nuts)

One core reality too-often ignored in post-election analysis:  the role of the economy.  Americans tend to vote their pocketbook in elections to Congress and the Presidency.

This is nuts, on many levels.

  1. Who sets economic policy?
  2. How long between policy changes and results?
  3. How do policy-makers navigate?
  4. But at least they have economic theory to guide them!
  5. And so the American people rationally votes…

(1)  Who sets economic policy?

The most important agency setting US economic is the Federal Reserve.  The Fed can act quickly to change one of the fastest-acting economic variables (monetary policy).  “Fast” means over 6 – 9 months.  The President and Congress have little influence over the Fed, except by the slow process of new appointments — and the atomic bomb of limiting its power.

(2)  How long between policy changes and results?

Congress and the President control fiscal, regulatory, and tax policy.  Major policy changes take time to pass through the Washington sausage machine — even when one party controls Congress and the White House.   And all of these policies take months or years to take effect. 

  • Tax cuts and direct payments are fast but expensive. 
  • Most spending programs take 6 – 18 months to have full effect.  
  • Tweaks to the tax code and regulatory changes take years to have effect.

Nor are these policy levers like putting pennies in a gumball machine.  Economic policy-making is an uncertain business — not even an art, let alone a science.

(3)  How do policy-makers navigate?

Our real-time economic data is almost nil.  We have a few hard-data points (e.g., payroll withholding data, new unemployment claims, port and railroad traffic).  And lots of unreliable data, almost useless (e.g., monthly employment data, quarterly gdp and income/spending data).

Hence we know where the economy was 12 months ago.  We have reasonable guesses about the previous quarter.  We have guesses about today.  We have forecasts about the future, with a proven record of almost uniform failure to predict inflection points.

Worse, the US economy is increasingly affected by the global economy, esp changes in the emerging nations.  Their economic data ranges from poor to imaginary.  {Update:  for an example of this see “Economists Seek to Fix a Defect in Data That Overstates the Nation’s Vigor“, New York Times, 8 November 2009}

Result:  the global economy is a large and rapidly changing animal.  Operating the US economy is like sailing through a  foggy night.  No stars, no moon, with only a broken compass and hourglass.

(4)  But at least they have economic theory to guide them!

Just like ancient Kings had astrologers.  Economic theory is where chemistry was a century after Newton’s experiments with alchemy, with Lord Keynes doing for economic what Antoine Lavoisier did for chemistry.  Fortunately for 18th century Kings, their success did not depend on the accuracy of chemical theory.

In fairness to economists, molecules don’t change their behavior on the basis of chemists’ publications.

(5)  And so the American people rationally votes

…just like primitive savages in old B-movies.  If the rains come and the crops thrive, the Chief relieves every reward and honor.  But if the rains do not come, then the voters demand sacrifice!

Our with the old party!  In with the new party!

But why don’t the officials of either party respect us in the morning?

Originally published at Fabius Maximus and reproduced here with the author’s permission.

2 Responses to "A Note about the US Economy and the Recent Elections (Yes, We’re Nuts)"

  1. Anonymous   November 10, 2009 at 7:59 am

    No arguments with your basic message – but politicians have a remarkably strong tendency to reinforce these misperceptions by (a) criticizing their opponents’ economic records and (b) touting their own. Voters can be blamed for believing the b***s*** – but if politicians were businessmen (or bankers, noting the current climate), they would be attacked fiercely by Congress for misleading the public about the products they are selling.

  2. Anonymous   November 13, 2009 at 10:20 am

    add to that the fact that the lower americans are on the socioeconomic scale, the more likely they are to consider themselves part of the upper classes and view the impact of changes in that light. “We definitely need to repeal the death tax, so taxes don’t eat up my $300 estate”.