Presidential economics: Causation is dead

By Thomas Helgerman / Columnist

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“Correlation does not imply causality,” has become a mantra of the statistics community and is often heard in economic and political discussions. This is undoubtedly a positive trend, as ignoring it can lead to ridiculous observations — like the claims that the divorce rate in Maine drives changes in per capita consumption of margarine. 

But, even with the ubiquity of this advice, it seems to be ignored more often than not. This has been especially apparent in the recent evaluations of President Obama’s economic record, which are skewed due to the lack of attention paid to economic trends and the overemphasis of comparisons between Obama and presidents past.

Over the past month, analysts and pundits have bickered over the President’s performance, specifically in comparison to the Reagan administration.

Proponents have been eager to point to comparisons of employment statistics — especially unemployment, which is at a six-year low. For example, Adam Hartung of Forbes, writing in conjunction with the commentary of Bob Deitrick, CEO of Polaris Financial Partners, responded to last month’s U.S. Bureau of Labor Statistics’ employment report.

According to Deitrick, “President Obama’s job creation kept unemployment from peaking at as high a level as President Reagan and promoted people into the workforce faster than President Reagan.” 

Indeed, the graph presented in the article seems to corroborate this story.

However, this analysis is as simplistic as saying, “Well, the unemployment rate under President Obama looks better than the corresponding rate under Reagan, therefore President Obama has ‘outperformed’ Reagan,” i.e., correlation must imply causation.

But Deitrick fails to even mention the different economic climates each president faced during his administration. During the ’70s, the United States faced persistently high inflation because of supply shocks from OPEC oil embargoes. In response, the Federal Reserve, headed by Paul Volcker as of August 1979, tightened monetary policy to curb inflation in the early ’80s during the Reagan presidency.

As any economics student knows, such a policy maneuver will result in a drop in growth as well as in a rise in unemployment. What this analysis suggests is that, perhaps President Reagan would have outperformed President Obama in the absence of Volcker’s maneuvers, which were presumably outside of Reagan’s control.

That’s not to say that Volcker’s aggressive policy stance was mistaken, though — the taming of inflation is hugely beneficial to economic stability. In his article, Hartung does mention that inflation has remained low over the past six years, but he fails to acknowledge this related move towards stability under Reagan.

The takeaway here is that the economic conditions during a certain administration may not entirely be the result of that president’s policies. In fact, one of the tenets of the “Jackson Hole consensus,” which many members of the central banking community subscribe to, maintains that executive and legislative policy is almost entirely ineffective at guiding the economy. This leaves the task to central banks and their monetary policy toolkit.

Consequently, criticism of the same sort directed at the president is somewhat pointless. In August, Tracy Miller, who teaches at Grove City College, wrote a piece for The Daily Caller titled, “The Obama Economic Record: The Worst Five Years Since World War II.”

To the credit of Miller, his assertions are supplemented with a narrative describing how the President’s policies caused the slowest five-year period of growth since World War II. However, his simple comparisons of growth rates fall short, as they too miss a few crucial economic factors.

First, the United States has previously experienced and is now facing huge demographic shifts. For instance, while the U.S. labor force expanded because of baby boomers entering the workforce during the latter half of the century, it’s now facing their retirement. 

Consequently, potential growth is probably lower now than it was at most points in time since World War II due to a reduced workforce, which would make it silly for one to expect current economic growth to keep pace with that in the past, even with the productivity gains we’ve seen.

One can liken this criticism to that of Japan and its “lost decade.” This traditional story told by the economics community says that officials’ fundamental mismanagement of the Japanese economy, following their financial crisis in 1990, led to a decade, which has now stretched into over two, of economic stagnation.

However, a more nuanced look at Japanese economic performance — one that takes into account the severe demographic shifts taking place in the country — shows that Japanese growth is right where we should expect it to be.

Further, while Professor Miller correctly points out that, “an economy usually grows rapidly in the years immediately following a recession,” he fails to consider that this growth is dampened following a recession caused by a financial crisis (see 2007), as there is no pent up aggregate demand to fuel growth, like in the aftermath of a typical recession.

Granted, when working in the realm of social science, correlative evidence is often all that we have to establish causal links between different cogs and gears of the economy. However, one should always be skeptical of naive comparisons of popular statistics.

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