COMMENTS:The Elections & the Economy
Weisskopf, Thomas E.
As every lay analyst of U.S. national elections knows, the first law of electoral economics is that good economic news favors the party in power and bad economic news hurts its chances. This is...
...recession since World War II...
...For all their differences on other matters of concern, the Democrats do not seem to be offering an economic strategy that is fundamentally distinct from that of the Republicans in its approach to the underlying problems of the U.S...
...The main difference is that in the '80s we started out with a much heavier dose of "stop," giving "go" a new luster...
...Underlying Problems and Some Solutions SOME PROGRESSIVE CRITICS of the Reagan administration's economic strategy have argued that its fundamental Achilles' heel is its inequitable impact on the distribution of income in the United States...
...This is not to say that economic conditions are necessarily determining...
...Since the trough of the last recession in late 1982, nonfarm business productivity has been growing at only half the rate typical for this phase of a cyclical recovery...
...The rate of inflation has been cut in half...
...Political memories are too short...
...Rising capital expenditures on new plant and equipment normally fuel the second phase of a cyclical expansion (after consumer and/or military purchases launch the initial upturn...
...unemployment will not easily fall much further...
...an escalation of the Persian Gulf war could cause great trouble for the world capitalist economy, once the available shortrun cushion of excess oil supplies and stockpiled reserves is exhausted...
...And the slow pace and unfavorable pattern of capital accumulation that characterize the Reagan recovery presage continuing productivity problems in the coming years...
...It is a sad commentary on the state of our political system that talk of basic economic change now appears wildly utopian...
...Still more significant is that capital spending and productivity have performed quite poorly by historical standards...
...Unlike demand-side problems, which have been alleviated by the Reagan administration's militarycumluxury Keynesianism, the supply-side problems are much more deep-rooted...
...The problem is a familiar one to economists: how do we determine how good or how bad economic conditions really are, when there are so many different indicators to choose from...
...Members of the economic press (and the Democratic candidates, when they venture to talk about the economy at all) have pointed to several troubling issues...
...economy, there will be no way out of alternating bouts of stagnation and inflation through the 1980s and beyond...
...Reaganomics has brought us a palliative, in the form of a short-run GNP boom—but not a cure, in the form of a long-run productivity revival...
...economy are on the supply rather than the demand side of the system...
...This essentially Keynesian fear of the long-run economic consequences of Reaganomics, while humanely motivated, is probably misplaced...
...capital stock is only increasing very slowly...
...not only is this worrying the real estate and automobile businesses, it is raising fears of widespread default among Third World debtor nations...
...The rapid growth of GNP, of capital spending and productivity is very deceptive...
...Such measures may well give rise to a shift in the productive structure of the economy away from old-fashioned consumer durables toward military hardware and new consumer luxuries...
...It turns out that there is one economic indicator, at least, that provides a consistently accurate forecast of presidential election outcomes since 1948...
...productivity growth, which the administration's own supply-side and monetarist ministrations have so conspicuously failed to alter...
...Whenever the index has grown more slowly, the incumbent party has been turned out of office...
...The one time the index grew at exactly its average rate in the year prior to the election was 1968, when Richard Nixon barely edged Hubert Humphrey to take office from the Democrats...
...Low unemployment and low inflation are both clearly desirable, but they rarely go together...
...The federal budget deficit continues to elicit new Synonyms for "astronomical...
...Democrats cannot expect to benefit much from anger at the huge cost that was imposed on the electorate from 1979 through 1982 (without which the current cyclical recovery would hardly have been so timely, nor would it have appeared to be so strong...
...As I write (in mid-June), it is no contest...
...control...
...Surely, it is harder to sustain the demand for automobiles when the average auto worker now needs 38 weeks' wages to buy an average car rather than the 28 weeks' wages needed ten years ago...
...This is a reason for great concern...
...When and if the U.S...
...The long-term decline in U.S...
...only that they are influential and not easily offset by other factors in an election...
...There is enormous room for improvement here, but meaningful change will challenge many vested interests and thus cannot be accomplished without strong politi399 cal organization and effective leadership...
...Longer-Term Prospects WHAT ARE THE SIGNS of underlying ill health...
...But it can succeed in avoiding a long-run economy-wide crisis of inadequate demand...
...Interest rates are beginning to rise again...
...Its contribution to the recovery, however, has been diminished by the fact that a considerably larger proportion of the spending than in the past is directed to imported rather than domestically produced goods...
...In reality, however, it is the weakness rather than the strength of the economic recovery that is its most disquieting feature...
...In short, "stop-go" policy and "stop-go" performance are likely to remain characteristic of the U.S...
...Although the dark economic clouds on the horizon are unlikely to cast much of a shadow on Ronald Reagan's smiling visage before the election, they will surely prove to be a source of great discomfort for whoever takes office in January...
...Authoritarian structures of management control and bloated supervisory bureaucracies, so characteristic of U.S...
...And this in turn is widely expected to lead (either directly, or with an assist from an administration determined—like Gerald Ford a decade ago—to "Whip Inflation Now") to yet another recession...
...Whenever the growth rate of this "pocketbook index" has exceeded its postwar average (3.8 percent) in the year preceding the election, the incumbent party has remained in power...
...In the absence of such changes, inflationary pressures will plague each cyclical recovery and will continue to be fought with periodic economic downturns...
...But is there really nothing in the economic environment to mar this reelection scenario...
...They were 397 paid by millions of Americans in the currency of unemployment, business failure, and general loss of economic well-being during the longest and worst U.S...
...Overall economic growth is expected to slow down...
...productivity growth since the mid-1960s has been a major source of the economic stagflation of the last decade and a half...
...Now a much larger fraction of it is needed simply to replace worn-out or discarded old capital stock, and now an unusually high proportion of the capital goods acquired are items of equipment rather than physical plant...
...After falling for the first two years since the Reagan tax cut of 1981, 398 capital spending did rise significantly in the last year...
...The Outlook for 1984 WHAT ABOUT 1984...
...During the past year the media (and the Republicans) have celebrated the strength of the U.S...
...The gravity of the long-term economic situation—and the underlying reasons for it—are not well appreciated by most economic observers...
...Economic events will no doubt have a significant impact on the elections this year...
...After years of stagnation, it is to be expected that these variables pick up sharply...
...Summing the rates of unemployment and inflation to form a "misery index" may make for good campaign rhetoric, but such an index is not necessarily an accurate indicator of general economic well-being...
...To date, there is no evidence that this productivity slowdown has been reversed...
...but a strategy that drives people out of the "middle class" and polarizes society into a two-class structure of haves and have-nots is believed to undermine the prospects for sufficient aggregate demand to maintain economic prosperity...
...Not only is it grossly unfair to pamper the well-to-do and to pauperize everyone else...
...Indeed, many analysts seem to feel that the main problem with the recent economic recovery is precisely its apparent vigor...
...This law, however, is not quite so easy to apply...
...All these problems suggest that inflationary pressures are likely to increase sharply within the next year or so...
...All this adds up to a wonderfully managed reelection campaign, achieved without the expenditure of a penny from the Republicans' campaign chest...
...In the last few years, we have borne reluctant witness to the insatiable appetite of the Pentagon and the ingenuity with which the market can cater to the whims and caprices of the rich...
...many signs point to the growth of new inflationary pressures...
...corporations, have actually expanded in scope in recent years (despite some wellpublicized, different examples...
...economy...
...All this means that capital accumulation will not do much to increase productivity growth in the foreseeable future...
...There is some possibility that the main economic indicators will not be quite so buoyant by November...
...According to the Wharton Econometric Forecasting Association, the best indicator is the growth of real disposable personal income (that is, the inflation-corrected value of total after-tax income available to consumers...
...it has been pumped full of pain killers in order to maintain its form for the duration of the electoral campaign...
...Without an entirely new strategy designed to address the underlying productivity problems of the U.S...
...And—yes—the "pocketbook index" has been booming: it went up by roughly 7 percent from spring 1983 to spring 1984, buoyed not only by the cyclical recovery but also by the Reagan tax cut...
...The traditional indicators are (for a change) all pointing in the same direction, adding up to a great deal of good economic news...
...and the growth of the "pocketbook index" may well slip a percentage point or two...
...Real GNP growth has been rapid in the last year and a half, thanks to the cyclical recovery of the economy...
...The costs were, of course, paid earlier and— for the most part—not by Republicans...
...economy in the 1980s as they were in the 1970s...
...economy is rather like an ailing head of state paraded gingerly before an anxious public...
...Regrettably, it seems unlikely that the outcome of the elections will have much impact on our economy...
...Economic policy-makers will face some difficult choices next year...
...economy rather than its immediate future...
...Many other figures are regularly trotted out to describe the state of the economy: growth rates, interest rates, business-failure rates, budget deficits, balance-of-payments deficits, stock-market prices—to name only a few...
...Moreover, this new capital stock is contributing much less than in the past to long-term productivity growth...
...And a substantial part of the increase consists of shortlived equipment (such as new computers) rather than long-lasting plant (such as new factories...
...And this capital spending normally provides a firm basis for long-term productivity growth (beyond the shortterm gains associated with the initial revival of production after a recession...
...It has been amply demonstrated in recent years that this cannot be achieved by relying on the natural profit-making instincts of private corporations competing (after a fashion) in an increasingly tax-free and deregulated market environment...
...At a minimum, the requirement is a much stronger public effort to mobilize investable funds and allocate them to productive use than we have seen since the Second World War...
...The booming U.S...
...they are long-run rather than short-run...
...The unemployment rate is down more than 3 percentage points since it peaked in late 1982 (that it is virtually the same as when Ronald Reagan took office hardly seems to matter...
...The gravest problems of the U.S...
...Faced with this plethora of often conflicting statistics, empirically minded election analysts have looked for systematic relationships between economic variables and election outcomes in the United States...
...But none of this implies the kind of major reversal of economic fortune, before the election, that would shake public confidence in the Republicans' economic competence...
...400...
...And this will lead to a variety of localized or short-run hardships, as we have seen in recent years...
...In the context of such fundamental supply-side changes, it would be possible to pursue a consistently expansionary demand-side policy to promote full employment with little fear of inflation...
...As Herbert Gintis has expressed it, the U.S...
...Unfortunately—both for the prospects of defeating President Reagan and of promoting a sustained economic recovery—the most problematic aspects of the current economic situation affect the longerterm health of the U.S...
...They are symptomized by the long-run slowdown in U.S...
...One way to address these supply-side problems would be to develop an economic strategy to encourage a much more rapid pace and productive pattern of investment...
...economic recovery, pointing to evidence not only of rapid GNP growth but also of rising capital spending and higher productivity growth...
...And events in the Middle East, as the Reagan administration has so ably demonstrated, remain quite beyond U.S...
...Benign as this may be for an economy still characterized by high unemployment and excess capacity, it is bound to turn increasingly malign as (and if) the cyclical recovery continues...
...economy is threatened by an insufficiency of aggregate demand, it can be rescued by new allocations for the Pentagon or by tax breaks for the affluent...
...Productivity growth can also be stimulated by thorough-going reorganization of our society's pattern of labor relations and workplace organization...
...economy is feared to be heading for an inevitable fall, as increased demand for funds and goods (stimulated to excess by the huge structural deficits in the federal budget) drives up interest rates and prices and eventually chokes off profits and growth...
...As a result, the net U.S...
Vol. 31 • September 1984 • No. 4
