April 7, 2008

Economic Data Versus Economic Opinion

As the economy continues its slide into recession, some interesting data has popped up recently that's both edifying and food for thought.

On March 14th, President Bush spoke about the economy, but while he conceded that "times are tough," he also focused on the extension of his tax cuts for the wealthy - due to expire in 2010 - as the sole remedy for the country's doldrums. He reiterated his "optimism" and declared that the "foundation is strong," touting the trends in the metrics for employment, wages, productivity, exports and the federal deficit as proof. On March 16th, the New York Times debunked Mr. Bush's claims, point by point:
Mr. Bush boasted about 52 consecutive months of job growth during his presidency. What matters is the magnitude of growth, not ticks on a calendar. The economic expansion under Mr. Bush — which it is safe to assume is now over — produced job growth of 4.2 percent. That is the worst performance over a business cycle since the government started keeping track in 1945.

Mr. Bush also talked approvingly of the recent unemployment rate of 4.8 percent. A low rate is good news when it indicates a robust job market. The unemployment rate ticked down last month because hundreds of thousands of people dropped out of the work force altogether. Worse, long-term unemployment, of six months or more, hit 17.5 percent. We’d expect that in the depths of a recession. It is unprecedented at the onset of one.

Mr. Bush was wrong to say wages are rising. On Friday morning, the day he spoke, the government reported that wages failed to outpace inflation in February, for the fifth straight month. Productivity growth has also weakened markedly in the past two years, a harbinger of a lower overall standard of living for Americans.

Exports have surged of late, but largely on the back of a falling dollar. The weaker dollar makes American exports cheaper, but it also pushes up oil prices. Potentially far more serious, a weakening dollar also reduces the Federal Reserve’s flexibility to steady the economy.

Finally, Mr. Bush’s focus on the size of the federal budget deficit ignores that annual government borrowing comes on top of existing debt. Publicly held federal debt will be up by a stunning 76 percent by the end of his presidency. Paying back the money means less to spend on everything else for a very long time.
Which brings us to the food for thought.

Harvard University professor Dani Rodrik recently published on his blog a very interesting graph (at left - click for full size) from an upcoming book by Princeton economist Larry Bartels, and the data it describes is truly arresting. In summary, it shows that U.S. income growth - measured in dollars adjusted for inflation - is not only more progressive (i.e. more real purchasing power accrues to poorer segments of the population) but higher for everyone during Democratic presidencies than during Republican ones. This might be a common opinion for many who have lived through the Reagan or either of the Bush administrations, but this is no recent trend; it is true going all the way back to 1948.

It is important to point out that correlation does not equal causation - that just because two sets of data move together doesn't mean that one is the motivating factor for the other - but Professor Rodrik makes the following important point:
Bartels shows in his book that this difference is not a statistical artifact or a fluke. It is not the result of Democrats coming to power during better economic times, or of Republicans reining in the unsustainable excesses of Democratic administrations they replace. (It turns out that the same pattern prevails even when a Republican president is succeeded by another Republican.) These numbers are real and they are the outcome of partisan differences in policy. So if you are one of those who have bought the story that income distribution is the result of pure market forces and technological changes, with politics playing no role - think again.
There are, to be fair, literally millions of tiny acts of causation within the broad framework of political and economic policy that must combine to produce the results in Professor Bartel's graph. It is difficult, therefore, to make the case that any one person - the president for instance - has the power to directly create the outcomes depicted, but there is undoubtedly something going on here. It may be that underlying causation rests in the tone of the leadership, decisions and general character of each administration - which then ripple out to touch all aspects of the ecnomy - but there is no question that the output is clear, because while everyone is entitled to his own opinion, everyone is not entitled to his own data. And the data speaks for itself.

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