Campaign season. These two words conjure up images of stump speeches, issues debates, super PACS and truth stretching. Okay, maybe stretching is too harsh; perhaps manipulation of facts is more accurate? Nonetheless, the phrase “lies, darn lies” seems to come to mind more often these days.
Because of this, in the coming months, you will hear much rhetoric about the economy because it is considered to be the pivotal topic for candidates on all sides of the fence. The irony is that you will hear some folks say we are doing as well as can be expected and others pronouncing economic Armageddon is just around the bend.
The Economic Reality
Personally, when I look at the fundamentals in the market, it seems clear (at least to me) that things really are on the upswing. No, the economy has not yet fully recovered from the downturn (and may not ever completely return to its pre-recession path of growth), but it is clearly growing. For the vast majority of American workers and businesses, the situation today is better than it was yesterday. Manufacturing output is growing at a healthy pace, employment and incomes are increasing and business bankruptcies have declined substantially.
If you listen to the news, however, you wouldn’t know it. Every article or story about a statistic that has positive implications for the economy is followed with an obligatory disclaimer that, while there might be a bit of good news, overall things are not well. Disclaimers that the unemployment rate is still well north of 8 percent immediately discount stories on solid employment gains.
Human-interest stories invariably seek out people struggling to find a job rather than the 3 million who have gone back to work since we hit bottom in the labor market. Reports on the housing crisis continue to focus on foreclosures with little mention of the rapidly falling delinquency rate in existing loans. We are told consumers are too scared to spend, businesses are too scared to hire and banks are too scared to lend. Unfortunately, election year posturing hasn’t helped the mood of the discussions.
The Politics Of Economics
Republican candidates keep telling us the economy is broken, and how the country would be better off if they land in the White House so they can get busy fixing the situation with tax cuts and deregulation. President Obama tells us the economy was broken when he inherited it, and we better let him continue repairing it by borrowing more and spending. We are told the middle class is disappearing, businesses are fleeing the nation and that nothing is produced in the United States nowadays.
Sounds pretty bad, doesn’t it? Fortunately, the negative hype is not borne out when you leave the rhetoric behind and look at the data. The labor markets are bouncing back with private sector growth well above average. The consumer is buying, the manufacturing sector is once again on pace; exports continue to expand, banks are starting to lend again and even the beleaguered home sector is seeing some increases in building permits in certain parts of the country. While the nation has a long way to go, the trends point in the right direction. Yet the debate continues to focus on how bad things are.
Politicians have always campaigned by promising they will make our world better, while the other guy (or gal) will make it worse. Realistically, neither side has nearly the command over the economy they pretend to have. And the press will inevitably dwell on anecdotes rather than focusing on the larger situation because, let’s face it, sob stories sell.
This being an election year has particularly interesting ramifications for the economy and vice versa. In fact, you might remember the phrase “It’s the economy, stupid” that was made popular during Bill Clinton’s successful 1992 presidential campaign against George H. W. Bush. One of the questions that I keep getting asked of late is how the economy impacts election results. So let’s start here: Political analysts typically refer to unemployment as a predictor of incumbent chances of reelection. One article in the New York Times last summer referred to the fact that “no American president since Franklin Delano Roosevelt has won a second term in office when the unemployment rate on Election Day topped 7.2 percent.” That was the unemployment rate in November 1984 when Ronald Reagan resoundingly won a second term.
Interestingly, however, history does not support this proposition. Historically, unemployment has been a poor predictor of election outcomes. The problem is that the unemployment rate itself is subject to fairly significant measurement error. Voters also tend to interpret the unemployment rate in different ways and assign the president varying amounts of credit or blame for it. In addition, the unemployment rate accounts for only one of a number of salient economic indicators.
Even if you consider gross domestic product (GDP) and inflation (along with unemployment) in an economic model to predict elections, these economic variables account for a little less than half of the variability in election results. The other half falls into the “everything else” category, including factors such as foreign policy successes and failures, major scandals, incumbency track record, candidate quality, controversial social legislation and structural factors, like changes in partisanship.
Technically speaking, some of the variability may also be explained by economic factors that weigh upon voters’ minds but are not easily quantified by measures like GDP and inflation. So perhaps, “it’s half the economy and half everything else, stupid” is a pretty good way to think about presidential elections. That doesn’t make for a very catchy bumper sticker.
As entrepreneurs in the green industry, the bottom line is that you can’t control the economy or the outcome of the election, but you can control the strategies you employ to capture the opportunities afforded or mitigate the negative externalities that arise. The key is to know enough to understand the difference and position your business accordingly. And, for goodness sake, don’t let media hype (or the lack thereof) formulate a strategy for you.