A low volume, high quality source from the demand side perspective.The podcast is produced weekly. A transcript is posted on the day of.

Sunday, December 28, 2003

Presidential Economics Backgrounding

EQ 3 Backgrounding the Economy, Democrats v. Republicans

Whether it is fair or not, the President often gets the credit and takes the blame for US economic fortunes. For the most part, presidents have welcomed this responsibility and have even made their prescriptions for the economy centerpieces of their campaigns. A well-remembered slogan in the 1992 campaign was Clinton's sign to his staff, "It's the Economy, Stupid." Cynics claim that, at least since the Nixon years, the state of the economy at election time is the only thing that matters to voters. When the economy is strong, incumbent do well. When it is weak, a change is made. What is offered here is a complete comparison of economic performance -- as measured by GDP growth -- for all years, not just election years, by party and president.

Data is from the National Income and Product Accounts (NIPA), the authoritative source. There are two methods of computing GDP growth. The first is by simply averaged over the four quarters of seasonally adjusted data expressed at annual rates and measuring against the average of the previous year. The second is simply comparing the 4th quarter level, seasonally adjusted and expressed in annual rates, of one year to the 4th quarter of the previous year. The first method is the more conservative approach. The second, many feel, gives a clearer picture. Whichever is preferred, both are displayed here and their results compared.

Since World War II, when Republicans occupied the White House growth in real GDP averaged 3.1 percent with the annual averages methodology, and 3.0 when comparing the 4th quarters. The growth rate under Democrats averaged 4.2 percent with the first method and 4.4 percent with the second -- 35 and 47 percent better respectively. An economy growing at 3.0 percent will double in size roughly every 24 years. Growing at 4.4 percent, it will double every 16 years. After 50 years at the rate found for Democratic presidents under the 4th quarter methodology, an economy will be twice the size of one growing at the rate found for Republicans.

In terms of alternating party control of the White House (running the Kennedy-Johnson, Nixon-Ford, and Reagan-Bush years together) Democratic party administrations came in 1-2-3-4 using the 4th quarter methodology, and Republicans 5-6-7. The annual averages method puts the Eisenhower years 0.3 points ahead of the Carter years, so the scorecard reads: Democrats 1-2-3-5, Republicans 4-6-7.

By individual president, Democrats come in 1-2-3-4-7 with both methods, and Republicans 5-6-8-9-10. Reagan came in 0.1 point and Eisenhower 0.3 points in front of Carter using one method. Reagan and Ford are in front of Carter using the other. The annual averages method ranked presidents as Johnson-Truman-Kennedy-Clinton-Eisenhower-Reagan-Carter-Nixon- Ford-Bush. The comparison of 4th quarter levels changed the order to Kennedy-Johnson-Truman-Clinton- Ford-Reagan- Carter-Eisenhower-Nixon-Bush.

Critics from one side of the aisle would be quick to point out that Johnson's "guns and butter" policies leading into the Viet Nam War inflated growth in his tenure. Critics from the other side would likely point to the trillions of dollars in deficit spending during the Reagan administration as generating artificially high growth rates. In both cases the succeeding president suffered anemic growth rates, and in both cases the succeeding president was a Republican -- Nixon and Bush.

Comparing by four-year term, both methodologies show Democrats having seen annual growth rates of over 4 percent in four of six terms. Only in Eisenhower's second term and only when counted under the annual average methodology did a Republican see growth averaging 4.0 percent per year. In no Democratic term was annual growth below 3.2 percent, using either methodology, while growth below this level happened in four of seven Republican terms using annual averages and three of seven when comparing 4th quarters.

    It is not particularly useful to keep score by years, since a year of surging growth often follows a year of dismal economic performance. One striking comparison can be made with the number of years under 4 percent growth. Out of twenty-four years of Democratic presidencies, years under 4 percent numbered only seven or nine, depending on the method of calculation. Out of twenty-eight years Republicans were in the White House, growth fell below 4 percent eighteen or nineteen times, again depending on the methodology.

    Negative growth happened twice to Democrats, in 1949 and 1980, using 4th quarter levels for comparison. For Republicans, the same methodology saw three years of negative growth -- 1970, 1974 and 1982. Annual averages again found 1949 and 1980 as negative years for Democrats, and it erased 1970 from the Republican column, but added 1954, 1958, 1975 and 1991, for a total of six years of economic contraction.


    Economic stability is a necessary condition for good business planning and a key ingredient of consumer confidence. Both in terms of consistency from year to year and of resistance to slides in growth over two or more years, Democratic presidents have again fared much better than their Republican counterparts.

    One measure of volatility is the swing of four or more percentage points in growth, either in the positive or negative direction. Using 4th quarter comparisons, such a swing occurred in six of twenty-four Democratic years and nine of twenty-eight Republican years. Such a swing has occurred only twice since 1975, though it happened fully nine times in the thirteen years prior to 1962.

    The conservative annual averages method produces similar results. A four-point swing occurred a total of twelve times, three under Democrats (the last in 1967) and nine under Republicans (the last in 1984). Many economists would ascribe the absence of volatility in later years to the work of the monetary authority, the Federal Reserve Board, which has become much more active since the high inflation years of the late 1970s.


    While perhaps not as alarming as economic contraction -- or negative growth -- a decline in the growth rate over two or three years causes economists to look at the underpinnings of the nation's economic framework. Since 1948, GDP growth has declined two consecutive years nine times using the 4th quarter comparison. Seven of these were under Republicans. A decline of three consecutive years has occurred only twice, 1984-86 and 1988-1990. Annual averages accounting again found a decline of three consecutive years occurred twice, once in the Eisenhower years and again during the transition from Reagan to Bush. A three-year decline also technically occurred in the 1984-86 Reagan period, but the drop from 1985 to 1986 was a tiny 0.2 percent, and was counted as no change.

    What Does It Mean ?

    Why would the economy consistently perform better under one party than another? There are probably as many answers as there are economists, and perhaps twice as many as there are politicians. It is true that Democrats since Harry Truman and his Full Employment Act have been much more comfortable with demand management or Keynesian-style policies, while Republicans have tended to promote a more laissez-faire regime.

    In terms of individual presidents, economists point to the administration of John F. Kennedy as a time when politicians listened and the program worked. Lyndon Johnson reversed any emerging trend in that direction when as chief executive he led the domestic economy into the New Society while at the same time ramping up the Viet Nam war, a "guns and butter" program which had wide public appeal but which his economic advisors did not support.

    Jimmy Carter would very likely have seen growth figures similar to the Kennedy-Johnson years had he not abruptly changed policies in mid-course from economic recovery to inflation fighting. His first two years averaged 5.8 points of growth, but in the face of the Iran oil embargo and soaring inflation, he and the Fed put the clamps on the economy, resulting in meager growth in 1979 and the negative growth year of 1980. Carter lost the election held that year.

    Bill Clinton is in many ways the most astute economic mind of any president in the post-war period. He is also very fortunate that enough slack existed both in the domestic and in the global economy to allow for a continuous expansion without disturbing inflation and bringing down the intentionally contractionary policies of the Fed.

    On the Republican side, in spite of Richard Nixon's oft-remembered proclamation "We are all Keynesians now," the attitude and approach have been much more laissez-faire, with a penchant for cutting taxes in any economic weather. Dwight D. Eisenhower's tenure was marked by extreme volatility, but a relatively healthy bottom line. Richard Nixon inherited the inflation of the Johnson program, suffered the first oil shock, and added to his problems with ill-conceived commodity policies. Thus began the decade of "stagflation." His mandatory wage and price controls were a notable failure among economic initiatives. Gerald Ford's primary policy was to fight inflation by jawboning. A strong 4th quarter in 1976 came too late for his re-election aspirations.

    The "supply side" economic policy promoted by Ronald Reagan had little support among serious economists. His mix of tax breaks and increased military spending, leaving the Fed to do the inflation fighting by itself, resulted in enormous deficits and high interest rates. This was a legacy for George Bush that could not be overcome in four years, particularly when meaningful tax increases were not an option for the Republicans.

    Also, to be fair to the Republicans, their ability to influence the economy was reduced by an activist Federal Reserve Bank, which in the last two decades has not hesitated to use monetary policy as a tool of inflation control first, and economic expansion second. The Fed has been accused on more than one occasion of applying the brakes before the locomotive has left the station. Some point to Fed action in 1990-91 as helping to short-circuit a promising recovery during the late years of the Bush administration.

    What's Next

    The Bush administration had to deal with higher energy and commodity prices and the slowdown authored by a hypervigilant Fed. The hundreds of billions of dollars in the annual trade deficit was a problem that haunted the Reagan administration. During the Clinton expansion it has been largely ignored, but it is now moving to cause serious difficulties for the dollar. These were tough times for anybody, and it's too bad the current president was so far from being up to the task.

Monday, December 22, 2003

Alan Greenspan panned EQ #2a

The Economic Question
Alan Greenspan
Program 2a

ANNOUNCER: Today on the Economic Question, Alan Harvey takes a look at a prominent personality in the making of economic policy, the nation's chief central banker, Alan Greenspan.


No single person exercises more control over the economy than the chairman of the Federal Reserve, with his control over monetary policy. He's not elected and he doesn't need a spotless private life, yet he's held office through four Administrations -- Democrat and Republican. When he talks, people listen. They often have to listen very closely. Back with a look at the surprising personality behind the power of the Fed right after this.


An incident related in Bob Woodward's book on Alan Greenspan titled MAESTRO describes the end of a meeting with Clinton advisors in 1993. The Fed chairman wrote a figure down on a piece of paper and passed it across the table.

That figure was 140 billion dollars in deficit reduction. The Clinton budget bill came in at exactly 140 billion dollars. Fed-controlled interest rates came down.

Who is this man, so powerful, yet unelected, unimposing, and often nearly incomprehensible. Woodward's book describes a data wonk, a man combing price indices looking for signs of inflation or hints of recovery.

Perhaps this is not surprisingly if you start from his owlish appearance, his coke bottle glasses and deeply furrowed brow. But Woodward's book also describes a master manipulator of the Fed's processes and bureaucracy and a consummate Washington insider. Few couples are more prominent on the A- list social scene than the Fed chairman and his wife NBC White House correspondent Andrea Mitchell.

His speeches make the eyes glaze over and it is this habitually obscure and convoluted manner of expression which most remember. It is said that he proposed marriage twice to Mitchell before she accepted. She had not understood or it had failed to register the first time.

Let's take a look at two samples. First from March of 2000:


"Economic conditions and considerations addressed by the committee are essentially the same as when the committee met in February. The committee remains concerned that increases in demand will continue to exceed the growth in potential supply, which could foster inflationary imbalances that would undermine the economy's record economic expansion."


That statement was accompanied by a quarter-point hike in the federal funds rate. Seems to make sense in a way, except there was never any inflation.

Second, from July of 2001:


"Our accelerated action reflected the pronounced downshift in economic activity, which was accentuated by the especially prompt and synchronous adjustment of production by businesses utilizing the faster flow of information coming from the adoption of new technologies."


This was accompanied by a lowering of the federal funds rate. Please note that between these two pronouncements Greenspan's stock tumbled as far as that of any dot-com start-up.

Once revered as the architect of permanent prosperity, Greenspan was then blamed for an unnecessary slump then almost forgotten in the fallout from the tragedy of September 11. We'll take a closer look at this remarkable moment in history next time on the Economic Question.


EQ 2b
The Fall of Alan Greenspan

ANNOUNCER: Today on the Economic Question, Alan Harvey looks at the remarkable rise and fall and rise again of Federal Reserve Board chairman Alan Greenspan.


Two years ago, Alan Greenspan directed the economy the way a conductor directs the symphony Greenspan was applauded from all sides. A masterpiece of umpteen dozen straight quarters without negative growth. Then the economy began to fail. Until September 11 the recession was laid at Greenspan's door. What happened? That is today's economic question.


I'm not sure if Alan Greenspan is going to appear on the cover of any more national magazines soon. If he does, the caption will not read The man who led the American economy into the promised land of permanent prosperity without inflation.

It was Greenspan's eagle eye on fundamentals that many credited with the remarkable growth of the Clinton years. It was Greenspan's itchy finger on the interest rate that many blame for the first three quarters of the slump that began in two thousand one.

At the beginning of 1999 the American economy was booming, the stock market was booming, help wanted signs were everywhere. In the nineties we barely paused on our upward trajectory as Russia defaulted on its bonds and Asian currencies melted down. We thought we were invulnerable.

Then Alan Greenspan saw inflation in the tea leaves of his economic reports, and the Fed began to ratchet up interest rates. Wall Street scratched its collective head. What inflation?

The only inflation worry came from the rise in oil prices and a subsequent explosion in energy costs -- definite drags on an economy which certainly did not need the additional burden of higher interest rates.

Widely considered an inflation hawk, Greenspan's four terms as Fed chairman saw interest rates — in real terms — much higher than the post-war average. Fed controlled interest rates rose throughout 1999, and when they stopped late in the year, the prime rate stood at 9.5 percent, the highest in ten years. In real terms it was the highest since early in the Reagan years.

Then, led by the collapse of the dot.com bubble, the stock markets began to fall. GDP growth fell. And the reputation of Alan Greenspan fell as well. His about face on interest rates continued through the tragic events of September eleventh.

The prime rate is now well below any level since 1980. But as the Fed chairman and the rest of us in the economy are learning, it is easier to stop an economy with monetary policy than it is to restart one.

Barring extraordinary circumstances, it is extremely doubtful that Greenspan will be around for another four-year term. Initially hired by Ronald Reagan, Greenspan has survived four administrations.

But even though he is a Republican, has made no friends in the Bush family. George Bush Senior is on record as saying "I reappointed him and he disappointed me."

When he is out of office and another Fed chairman charts the course of monetary policy, it may be a while before people again remember the architect of permanent growth without inflation.

Next time on the economic question, we'll take a look at the historic ups and downs, ins and outs of the interest rate.