The Presidential Economy

July 5, 2004
from The Library of Economics and Liberty Presidential Economics:

What Leaders Can and Cannot Do about the State of the Economy

The Presidential campaign season is about to go into full swing. The conventions are coming, to be followed by a barrage of advertising and then almost certainly, we will have debates. Much of the focus will be on Iraq and American foreign policy, but inevitably, the economy and its performance over the last four years will play a crucial role in the campaign.John Kerry will focus on the mediocre performance of the economy, particularly the job market, in the first part of the Bush Administration. Bush will tout the performance of the economy over the last year or so as long as the job numbers continue to be rosy through the fall. Implicit in this discussion are two strange assumptions. The first is that the President “runs” the economy. The President hardly even runs the government. He certainly cannot direct the fortunes and failures of millions of workers, managers, investors and entrepreneurs. The second implicit assumption is that the success or failure of the President depends on his ability to “stimulate” the economy, as if the economy were an engine that simply needed a different setting for its carburetor or as if it were a lazy steer that needs prodding to speed its way on a cattle drive.

This presumption that the President is somehow in charge gives both the incumbent and his challenger something to talk about. All failings become the focus of the challenger. Why didn’t the incumbent do a better job of stimulating the economy? The incumbent points to anything good that happened during his watch as being part of his policy design. I don't think we're all Keynesians now, but it's alarming to hear George Bush explain that his tax cuts stimulated the economy by putting money into the hands of consumers so that they can spend it and create jobs.

I once heard a story that helps explain the problem with these views of the economy. Imagine coming across a young boy who is standing at the edge of the shallow end of a swimming pool. He holds a bucket in his hands and he looks crestfallen. What’s wrong, you ask. Well, he explains, I’m doing a science experiment and it’s not working. What’s wrong? For the last hour I’ve been emptying water into this pool with this bucket. But the water level hasn’t changed a bit. The pool hasn’t gotten any deeper. It’s a big pool, you explain. A few bucketfuls of water aren’t going to have much of a visible effect. The boy redoubles and retriples his efforts. A week goes by. You come back to the pool and he looks no happier than he did before. What’s wrong now, you ask. I’ve been doing the same thing eight hours a day for a week and I still don’t see any change. Is there a leak in the pool, you wonder. No, he says, no leak. I checked that out.

The boy shrugs his shoulders and gets back to work. You watch as the boy goes to the deep end of the pool, scoops up a bucket of water, walks the length of the pool and empties it into the shallow end.

What would you tell that boy? It would seem fairly straightforward to explain that taking money from your left pocket and putting it into your right pocket doesn’t make you any richer. So it is with water in the pool. The total amount is unchanged. But if it rained each night of the boy’s efforts, he might actually come to believe that moving water from the deep end to the shallow end actually leads to making the water deeper. You might find it difficult to make your case.

Frédéric Bastiat was one of the first to explain that when looking at an economic system as whole, it is not enough to look at what is seen—the pouring of the water. You have to also look at the whole system and the constraints that may bind it. Bastiat used the example of the a broken window. Repairing the window stimulates the glazier’s pocketbook. But unseen is the loss of whatever would have been done with the money instead of replacing the window. Perhaps the one who lost the window would have bought a pair of shoes. Or invested it in a new business. Or merely enjoyed the peace of mind that comes from having cash on hand. The repair of the window is seen. The loss is unseen and therefore easily goes unnoticed. So it is with most actions of the government to “stimulate” the economy. It is easily forgotten that the resources to do the stimulating must come from somewhere like the water at the deep end of the pool.

When I tell this story to students, they grasp the fallacy as easily as the swimming pool story. They understand that destruction is not good for the economy. Breaking windows is good for glaziers but bad for the economy as a whole. Hurricanes are good for builders and carpenters but hurt the economy as a whole. Students also understand that building a stadium for a new sports team mainly benefits the sports fans of the city, expands employment in the construction business, enriches the sports teams that play there, while hurting competing forms of entertainment.

But after the lesson of the broken window is absorbed, a question usually arises. If building stadiums does not enrich a city and if government spending generally doesn’t stimulate the economy, what does? What can a city do to increase economic activity? What can a President do in the face of rising unemployment?

The quickening pace of our times creates an impatience with delay. We want our food fast and our email messages now, on our phone. We want everything yesterday if we can have it that way. The idea that we can do very little about stimulating the economy in the short run is simply unacceptable. Surely there is some policy lever, some economic button to push that can speed things up. But the lesson of the swimming pool and the broken window is that the fundamental constraints surrounding the system make it very difficult to change events in the short run. A President can no more stimulate the economy in the short run than you can make a child grow a foot in a week. Genuine growth takes time. The most a President can do is to help create an environment for that growth to take place by unleashing the creativity inherent in a nation’s people and those they trade with in other countries.

Rearranging resources will not stimulate the economy even in the long run. But that is not to say that there is nothing a mayor or President can do to improve the economy. A city can always improve how it runs its schools, polices its streets or picks up its trash. It may decide that some of these tasks can be done more cheaply or effectively by private organizations or left to the private choices of the marketplace. Appropriately-designed tax cuts or tax reforms allow a city or a nation to finance its activities in ways that encourage wise and beneficial decisions. Any of these improvements will make the city a better place to live and will lead to economic growth. But all of these changes take time.

The low level of economic discourse in Presidential campaigns is our fault. The economists among us must do a better job reminding us of the constraints that inevitably constrain us in the short run. And we as citizens could be a little more skeptical of claims of blame when things go poorly or bragging rights when things go well. Let us expect a little less of our politicians in the short run and we will find a little more contentment with their performance.