The Politics Of Economics

Texas Governor Rick Perry is running for president and is eager to take credit for his state’s relatively strong economic performance. But just how much accountability should we assign to politicians for economic outcomes? The answer is sure to be warm and fuzzy, reflecting the strange intersection of politics and economics. Rightly or wrongly, politicians usually receive the blame for their cities, states and countries when the economy suffers. Shouldn’t they also enjoy some of the glory in the good times?

Depending on your political preferences, your view is likely to wander. President George H.W. Bush’s failed bid at re-election in 1992 was widely seen as a referendum on the weak economy at the time. Many Republicans thought that was unfair, in part because the economy entered a long period of growth soon after the election and much of the credit went to Bill Clinton, who defeated Bush (with some ticket-splitting assistance from Ross Perot’s third-party run). Fast forward to today’s economy, and there’s no shortage of Republicans who are quick to blame President Obama and his administration for the ongoing ills.
Rick Perry, by contrast, isn’t shy about highlighting the relative strength in Texas these days. As the governor’s web site opines:

Governor Perry’s administration has focused on creating a Texas of unlimited opportunity and prosperity by improving education, securing the border and increasing economic development through classic conservative values.

During his tenure, Governor Perry has maintained a strong focus on fiscal discipline, becoming the only Texas governor since World War II to sign budgets that reduced general revenue spending. He has used his line item veto to scrub more than $3 billion in budgeted spending, while encouraging investments in the building blocks of a prosperous state: the economy, education and security.

The Texas economy is performing well in the current global economic crisis, thanks to a focused effort to keep taxes low, regulations predictable and legal system fair.

Recognizing that Texas is doing well, or at least better than the U.S. overall in some respects, is no secret. Richard Fisher, president of the Dallas Fed, recently told The Wall Street Journal that 37% of all new jobs in America since the recession ended in mid-2009. The Journal noted too that “Texas is also among the few states that are home to more jobs than when the recession began in December 2007.”
But there’s no shortage of analysts who question how much of this good news, if any, should be connected with Rick Perry. In fact, some observers go further, arguing that there’s really no there there when it comes to the Texas boom. Economist Paul Krugman, for example, claims that the so-called Texas miracle is a “myth.”
But other dismal scientists think that’s overly harsh and that Perry can rightly claim some responsibility for his state’s record. “I am going to have to give some credit back to the state leadership, who’s got us where we are,” says Ted Jones, an economist with Stewart Title Guaranty. “He’s been governor for a long period of time now. And obviously, we have set up a job creating machine and it’s working.”
Perhaps, but as Evan Smith, editor and CEO of the Texas Tribune, reminds:

The population of Texas is growing astronomically, and that may be one of the reasons that you’re seeing so many jobs created in Texas, particularly in the public sector. Since 2000, according to The Wall Street Journal, 19 percent growth in the public sector versus only 9 percent growth in the private sector, and a lot of that is fueled by population growth because of things like public schools where so many new kids are enrolling over the last 10 years. They’ve had to create a whole lot of jobs just to keep up with that growth.

In the end, it’s probably fair to give Perry some credit for the Texas economy if only because he’d receive quite a bit of the criticism if the state was suffering. Yes, that’s a political calculation, but it’s unavoidable given the subject matter. But if Perry’s great political strength is his economic record in Texas, one might wonder how his latest commentary on monetary policy fits in with this image. Taking aim at Fed Chairman Ben Bernanke yesterday, Perry asserts:

If this guy prints more money between now and the election, I don’t know what y’all would do to him in Iowa, but we — we would treat him pretty ugly down in Texas. Printing more money to play politics at this particular time in American history is almost treacherous — or treasonous in my opinion. We’ve already tried this. All it’s going to be doing is devaluing the dollar in your pocket and we cannot afford that. We have to learn the lessons of the past three years that they’ve been devastating. The President of the United States has conducted an experiment on the American economy for almost the last three years, and it has gone tragically wrong and we need to send him a clear message in November of 2012 that new leadership is coming.

That’s trash talk, according to Tony Fratto, the former deputy press secretary to George W Bush. Writing on Twitter, he complains that Perry’s comments about Bernanke and the Fed are “inappropriate and unpresidential.”
Meanwhile, it’s not difficult to find right-of-center economists who are sure to disagree with Perry’s Bernanke bashing as it relates to the policy implications. Scott Sumner and David Beckworth, for example, have written extensively that, if anything, the Fed hasn’t done enough to prevent and/or heal the economy.
More generally, there’s a case for arguing that Bernanke’s monetary policy is informed by lessons of history a la Milton Friedman, Barry Eichengreen, and others.
Clive Crook writes in yesterday’s FT that worrying about inflation and long-term debt is still premature in an economy that’s still struggling and perhaps on the verge of slipping into a new recession. As such, Crook argues:

Rather than targeting inflation, central banks should keep nominal incomes growing on a pre-announced path: say 5 per cent a year. Nominal gross domestic product is the sum of inflation and growth in real output – and is the variable that monetary stimulus directly drives.

Samuel Brittan made the case for this approach decades ago on this page. The crucial point – how an increase in nominal GDP breaks down between output and inflation – is not something the Fed can determine, or should have to explain. There are pros and cons to this approach, but that is the decisive political virtue of casting the target this way.

When nominal GDP falls below track, monetary stimulus pushes it back. If inflation rises temporarily during catch-up, that is tolerated. In current conditions, this makes all the difference. The new GDP figures showed demand has fallen much further below trend than had been appreciated.

But politics has a habit of trumping economics. At the very least, as Crook reminds, the politics of monetary policy are complicated. And with the presidential debate heating up, clarity is probably going to suffer more in the weeks and months ahead.