Election 101 — Economic Issues

Introduction

 

In 1992, Bill Clinton’s campaign strategist James Carville uttered perhaps the four most important words in modern political history: “It’s the economy, stupid.”  It’s become a part of received wisdom that a candidate’s prospects rise and fall with the electorate’s sense of how well they will manage the economy.  In 1992, the economy was recovering from a sharp, but not unprecedented, downturn and many people point to George H. W. Bush’s unsteady handling of the economy as a key factor in his loss to Bill Clinton that year.  Today, four years into the most severe economic crisis since the Great Depression, Carville’s dicta seems truer than ever, and the contest for the presidency seems likely to hinge on who voters see as the better steward for a still weakened US economy on an uncertain global stage.

 

It’s worth wondering how we got into this mess in the first place.  There are plenty of theories floating around, though no smoking gun as of yet; given that economists are still debating the causes of the Great Depression, it’s unlikely that we’ll get a definitive answer any time soon.  In the second edition of Irrational Exuberance, published in 2005 (when the real estate market was still white hot), Robert Shiller pointed to the explosion of house prices as unsustainable; three years later, in The Subprime Solution, Shiller explained the role played by subprime mortgages in bursting the now rapidly deflating housing bubble.  In Fault Lines(2010) Raghuram Rajan, former chief economist of the IMF, found the culprit in expanding inequality, both domestically and internationally, which encouraged politicians to paper over stagnant wages with easy credit, happily provided by emerging economies eager to invest their money in relatively secure Treasury Bonds.   And a team of economists at NYU’s Stern School of Business identified the lending practices of the two semi-public mortgage giants, Fannie Mae and Freddie Mac, as contributors to the overall financial crisis in Guaranteed to Fail (2011).

 

Regardless of who was to blame, it fell to the Federal Reserve to help staunch the bleeding on Wall Street.  At the helm of Fed sat Ben Bernanke, a former Princeton professor and one of the world’s foremost experts on the Great Depression (his essays on the subject were collected in the volume Essays on the Great Depression).  Bernanke—identified in a recent profile in the Atlantic Monthly as “the most activist Fed chief in history”—took his cue, in part, from the work of Milton Friedman and Anna Schwartz, who explained, in the pages of their magisterial book A Monetary History of the United States(1963) how a do-nothing Federal Reserve allowed a severe recession in the 1930s to turn into a full-on depression.  In a transcript reprinted in The Great Contraction (2008), Bernanke, speaking to Milton Friedman of the Fed’s role in the Great Depression, said, “You’re right, we did it…but thanks to you, we won’t do it again.”  Determined not to repeat the mistakes from the past, Bernanke opened the floodgates, serving as the lender of last resort to help keep banks going and staving off a full-fledged bank panic in the process.  For his troubles, he has been pilloried by Republicans (despite being one himself, and being appointed by George Bush), with one would-be candidate calling him “treasonous” and another vowing to “End the Fed.”

 

Of course, it’s questionable how much governments can do to quickly recover from economic crises.  In This Time is Different(2009) by Carmen Reinhart and Kenneth Rogoff, a study of the past eight hundred years of financial folly, it becomes clear that, historically at least, big economic booms are followed by equally big economic busts.  In 2009, the authors were warning people to expect persistently high unemployment and a recovery measured in years, not months.  Their predications, based on the historical data in their book, have largely been borne out, contribution to an uncertain picture facing President Obama as he runs for relection.

 

In the end, though, it may be that, as Pogo said, “We have met the enemy and he is us.”  In The Myth of the Rational Voter(2006), Bryan Caplan suggests that we only have ourselves to blame for our bad policies.  Democracies fail to make the right economic choices precisely because it does what we tell it to do—and as it turns out, most of us are pretty bad economists.  In Caplan’s telling, it is not special interests, powerful lobbyists, or Washington fat cats that are to blame for consistently poor economic decisions; we base our votes on faulty beliefs about the economy, and have a system that requires politicians to promise to put those beliefs into action in order to get elected.  In other words, when you ask your government to keep their hands off your Medicare, don’t be surprised when they try to do just that.

 

Whatever happens this election season, you can be sure that economists will have lots to say; thankfully, some of them can actually explain what they think to us!

–Seth Ditchik, executive editor in finance and economics

 

Exclusive Excerpt

Click here to download an article on the End of Prosperity and the Rise of the Bubble Economy

Excerpted from The Concise Princeton Encyclopedia of American Political History.

 

Featured Book

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Finance and the Good Society
Robert J. Shiller

 

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reading list


 

The Reading List

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The Darwin Economy

Liberty, Competition, and the Common Good
Robert H. Frank
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The Economics of Enough

How to Run the Economy as If the Future Matters
Diane Coyle
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The Case for Big Government

Jeff Madrick
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Fault Lines

How Hidden Fractures Still Threaten the World Economy (New in Paper)
Raghuram G. Rajan
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The New Financial Order

Risk in the 21st Century
Robert J. Shiller
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Animal Spirits:

How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism
George A. Akerlof and Robert J. Shiller
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Beyond the Invisible Hand:

Groundwork for a New Economics
Kaushik Basu
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The Venturesome Economy:

How Innovation Sustains Prosperity in a More Connected World
Amar Bhidé
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The Soulful Science:

What Economists Really Do and Why It Matters (Revised Edition)
Diane Coyle
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The Invisible Safety Net:

Protecting the Nation’s Poor Children and Families
Janet M. Currie
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Boulevard of Broken Dreams:

Why Public Efforts to Boost Entrepreneurship and Venture Capital Have Failed–and What to Do About It
Josh Lerner
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Collaborative Governance:

Private Roles for Public Goals in Turbulent Times
John D. Donahue & Richard J. Zeckhauser
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Luxury Fever:

Weighing the Cost of Excess
Robert H. Frank
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A Monetary History of the United States, 1867-1960

Milton Friedman & Anna Jacobson Schwartz
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When I’m Sixty-Four:

The Plot against Pensions and the Plan to Save Them
Teresa Ghilarducci
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Death by a Thousand Cuts:

The Fight over Taxing Inherited Wealth
Michael J. Graetz & Ian Shapiro
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Debtor Nation:

The History of America in Red Ink
Louis Hyman
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Zombie Economics:

How Dead Ideas Still Walk among Us (New in Paper)
John Quiggin
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This Time Is Different:

Eight Centuries of Financial Folly
Carmen M. Reinhart & Kenneth S. Rogoff
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The Company of Strangers

A Natural History of Economic Life (Revised Edition)
Paul Seabright
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Irrational Exuberance

(Second Edition)
Robert J. Shiller
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The Subprime Solution

How Today’s Global Financial Crisis Happened, and What to Do about It
Robert J. Shiller
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The Message Matters

The Economy and Presidential Campaigns
Lynn Vavreck
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Philanthropy in America

A History
Olivier Zunz

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