Tuesday, November 14, 2006

Two Year Delay

I have posted on this before, but it came up recently, and I repeat it because I think it is one of the keys to understanding the effects of presidential decisions on the economy.

The premise is that a president does not have any real effect on the economy for two years after taking office. If that seems sensible to you, and you don’t need it proven, you can skip down to the **** ****

Because really, the argument for it is boring. So, down to the **** ****

The day a president is elected, he has had 0% effect on the economy. Agreed?
The day a president is inaugurated, he has had 0% effect on the economy. You might make an argument that he has had some small psychological effect, but by definition, none of his actions have had any impact.
Legislation takes time to pass. It is traditional to speak of a president’s First 100 Days, to see what he has accomplished. Accomplished in this setting means “bills passed by Congress.”
Economic and tax policy legislation have starting dates, usually Jan 1 of the following year. There was general brouhaha when Clinton made a tax increase retroactive, and when Bush made a cut retroactive, but even these were not about all taxes, but only personal income taxes. Also, taxes are only one portion of economic legislation.

So let’s hold right there for a moment. A president gets elected, and it is 14 months before almost anything happens that can be measurably attributable to him. All change to this point is anticipatory, psychological, or attributable to the previous president/congress. It cannot by any stretch of the imagination be more than 10% attributable to the sitting president. 2% may be more likely.

Once policies go into effect, they then start to have an impact. Start. If they are going to have any effect at all (and some policies might have small, or offsetting effects), the gears don’t start grinding until this point.

How long before things change after that? Depending on the intervention, this varies enormously, as a moment’s reflection reveals. Some decisions won’t have full impact until years down the road. Entitlements would fall into that category. Other legislation, like the standard snake-oil of a “jobs bill” affects at least a few people pretty quickly. Jobs bills are actually among the few which sometimes get started before January 1. Trade and tariff, capital gains, research, education – all these are in the middle and take months to come to effect.

Let’s say, just on average, that this Great Middle of economic legislation which the president and congress has put together, takes 6-12 months to really get rolling and shoving the economy in whatever direction. So by July 1st, we can attribute about 30% of whatever change has occurred to the current president, which means that the previous president is still deserving of some credit or blame. By September 50%. We are by that time in full swing for the mid-term elections. Almost two years have passed since election day. November 70%. January 90%.

Ignoring for a moment what the Fed, the Congress, Microsoft, and sugar prices do to the economy, and sticking to the usual oversimplification of what effect a president has on an economy, there is a two-year delay in who gets credit or blame. When President B wins in 2012, it won’t fully be his or her economy until 1/1/2015. It will still be President A’s through all but the last of 2014.

**** ****
This means the Nixon/Ford economy runs from 1971-78
The Carter economy runs from 1979-82
Reagan 1983-90
Bush41 1991-94
Clinton 1995-2002
Bush 43 2003-2010

Keep that in mind, whoever we elect in 2008. It's more Bush's economy than theirs until 1/1/2011.

When you read GDP, inflation, unemployment, deficit, or other general economic information, this 2-year offset is almost always ignored. Left or Right, columnists or commenters give blame or credit to a president starting in the year he was inaugurated, effectively backdating his starting date weeks before he takes office. The general public is even worse, seeming to think that the clock should start ticking the day after the election.

And worst of all are the deeply partisan, who start the clock when the person last campaigned there. In NH, that's quite a step back, but I received emails from people in 2003 detailing what the economy was doing when Bush was last campaigning here, in February of 2000.

With that concept in place, here is an interesting set of grades, quarter by quarter, for the economy in general. You can figure out for yourself who gets which grades.


bs king said...

Based on the communist at my work who I've mentioned before, I will tell you what the extreme left would argue here. He believes that the entire economy is controlled by just a few individuals, and that therefore their feelings about the president can and will have immediate impact, since they only let Congress pass the bills that they want them to pass. That's why gas prices were dropping recently, duh. I have to stop this comment now, I'm going to hang out with Enlightenment, the only guy I've found who grasps the truth about 9/11. Lemmings.

Elvis lives.

Assistant Village Idiot said...

Durn. I forgot about the Illuminati, and their effect on world trade. Whether the president is a member of the Illuminati would have a significant impact, of course.

People who are really into this stuff can find out the Real Truth, as revealed to David Icke, at http://en.wikipedia.org/wiki/David_icke

bs king said...

You forgot to mention the Creature from Jekyll Island.

copithorne said...

In 1993 Bill Clinton's evident commitment to reducing the budget deficit had an immediate impact on the bond market, which responded by lowering real interest rates in the first few months of his term.

Assistant Village Idiot said...

Yes, and his grades for the four quarters of that year were D, C, C, A, suggesting that if the bond market led the economy, it didn't do so for over half a year.

And that's if.

copithorne said...

Conventional wisdom is that real interest rates by the bond market do take six months to show up in GDP figures. So if you are telling me that Bill Clinton moved the economy from a "D" to an "A" within the space of a year, I couldn't be more impressed.

Your thesis that the only way a president has a measurable impact on the economy is by the consequences of legislation passed is demonstrably false. Real interest rates are a measurable impact -- one of the most decisive ones.

Other dimensions of a government's impact on the economy wouldn't show up for a generation. If a government improves the educational level of the nation, you wouldn't see the fruit of that investment for many years.

Assistant Village Idiot said...

First, I believe that 6-month estimate is generally accepted, yes. But I am not sure what you mean by Clinton's "evident commitment" to reducing the budget deficit means, independent of concrete actions. Do you mean rhetoric? That actually does have a short-term impact, if those in power appear to at least intend to go in the right direction.

The "A" was short-lived. The long-term gains from that were modest, as reflected in the 1994 numbers. Clinton's record wasn't at all bad, though. It's not as good as he and his supporters would suggest, as he takes credit for a recovery already started and no blame for a recession he left underway, but it still wasn't bad. And that sort of slanting the data is done by all politicians, so it would be unfair to single Clinton out for that.

Clinton critics would give him credit for no more than luck, being president during the computer and communications boom. I think that underevaluates him considerably. Not screwing things up seems beyond most elected officials, and knowing when to keep hands off is a good thing. His NAFTA and GATT arm-twisting was also enormously beneficial.

There may have been other free-market things I wish he had done that he didn't, but overall, he gets good grades. Even the recession starting is very tricky to lay at Clinton's door. The feds going after Microsoft exposed the tech bubble, and the NASDAC collapsed. But should they have given Microsoft a pass? And overoptimism in the market is not much the President's responsibility. He tried to grab credit for it when the bubble appeared briefly to project a budget surplus, but I imagine any president with that windfall would do the same thing.

copithorne said...

By "evident commitment" I mean whatever persuaded the bond market that Bill Clinton and the Democratic congress would succeed in reducing the deficit. Bill Clinton said reducing the deficit was a priority. The bond market believed he would succeed and bid interest rates down. It turned out that the bond market's expectations were realistic.

Assistant Village Idiot said...

Let me repeat my partial agreement, copithorne. The bond market did adjust at the time you said, and absent a better explanation, I am willing to accept that Bill Clinton's statements were the driving force behind that change, early on in his presidency. My objection is that such things are inherently temporary unless they are followed with concrete action. In Clinton's case, he did some of the right things, and after a spike and slight slowdown in the economy, things perked along.