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.