Odd statement for a psychiatric blog? I decided to address my favorite economic fallacy of election season and that is the effect of the President. It came up as recently as four days ago in the Presidential debate. During that debate – Trump claimed that he created the “greatest economy” and made the following statement:
“When I had it, I had tariffs and yet I had no inflation.
Look, we've had a terrible economy because inflation has --which is really
known as a country buster. It breaks up countries. We have inflation like very
few people have ever seen before. Probably the worst in our nation's history.
We were at 21%. But that's being generous because many things are 50, 60, 70,
and 80% higher than they were just a few years ago.”
It was not clear to me if his statement abut 21% was
supposed to be under his administration or Biden-Harris, especially when he
makes the claim that “I had no inflation.”
That brings me to economic fallacy #1 in the Presidential race:
1: Inflation is a
fact of life in the American economy and there has never been a recent
President with “no inflation”:
You don’t have to believe me. The evidence is abundant
staring with retirement savings. All the
retirement advice you get gives you strategies on how to keep pace with
inflation over the next 30 years. There
will be additional advice on how to keep up with inflation during your
retirement years. There is no advice
that you can forget about inflation because it does not exist at times. The title of this post refers to an ad for
the Ford Mustang in 1964 that ran constantly on television with the title “$2368
F.O.B Detroit.” The starting
price for a Ford Mustang today is $30,920.
You don’t have to rely on those kinds of memories. There is actual economic data tabulated. The only problem is that it is not typically
tabulated by Presidential term. You must
add that yourself. I used the Bureau of
Labor Statistics purchasing power calculator that uses a broad index of
consumer goods to look at the last 7 administrations:
|
President |
Years |
Inflation |
|
Biden |
2021-2024 |
20% |
|
Trump |
2017-2021 |
12% |
|
Obama |
2009-2017 |
15% |
|
Bush |
2001-2009 |
22% |
|
Clinton |
1993-2001 |
24% |
|
Bush |
1989-1993 |
12% |
|
Reagan |
1981-1989 |
42% |
The rhetoric of the economy often leads people to come up
with lists of commonly purchased items and how those prices have been affected. First off – price inflation is expected
irrespective of who is in the White House, but I encourage anyone to not take
these lists at face value and do an easy recheck. Here is one I did not too long ago after
somebody posted their list of inflated items on Facebook.
Note that the GOP version in the first two columns does not match the prices I got off a Walmart web site on May 7, 2024. The GOP version shows uniform increases in all prices between 2020 and 2024 and that is not the case. Half of the items are less than they were in 2020 (see sparklines in last column). Anyone can do this exercise when they see these postings about price increases of common items over time.
Do these lists really prove anything in terms of the
candidates? Not really because once
again inflation is expected. The
political rhetoric is such that the GOP is portraying the current inflation as
catastrophic. Certainly, the higher end
of the range that Trump describes has not happened. A much more reliable index of inflation is
available from the Federal Reserve.
The only relatively flat spot on that curve was at the peak of the COVID pandemic with decreased demand for goods and services. As demand increased the CPI increases and the Biden administration took over at that point. The commonly quoted inflation numbers are consumer prices defined as: “Inflation as measured by the consumer price index reflects the annual percentage change in the cost to the average consumer of acquiring a basket of goods and services that may be fixed or changed at specified intervals, such as yearly. The Laspeyres formula is generally used “
2: The most direct and sustained effects on inflation are initiated by the non-partisan Federal Reserve Bank:
The Federal Reserve Bank has been independent
of political influence since 1951.
Between 1935 and 1951 “monetary
policy would basically be dictated by Congress and the White House…”. Even after that period, the Fed has come
under pressure from the executive branch.
The Fed actions are a potent driver of the economy and check on
inflation as evidenced by the following graphic on interest rate
adjustments. These interest rate
adjustments are done based on macroeconomic rather than political
considerations and many administrations have disagreed with them because they
did not seem politically expedient. Note
the differences in interest rates over the past 2 administrations. It is also generally agreed that the US
economy has recovered
post pandemic better than other high-income countries. Should an
administration take credit for that or the Fed?
3: Academic comparisons of the impact of Presidents on the economy show little effect.
The best-known study of the issue was done by Blinder and
Watson (3). They conclude that by all
measures the economy does much better under Democrats in Congress and the White
House. It is not even close. But they did not leave it there and went on to
see if there was any clear explanation for this phenomenon at the policy level
or based on the make-up of administrations and there was not. They take it a step further and look at
whether the economy was just poised for rapid growth at the time Democrats were
elected and that was also not an explanation.
They consider various luck factors that are shocks to consumer
expectations and find that makes up part of the difference. In the end they find no complete explanations
but suggest more favorable international conditions and consumer optimism may
have something to do with it. In short,
the economy does better under Democrats but there is no clear explanation why
that is. Why then is is a top priority
for the election?
Conclusion:
If you are really basing your vote for the President on the
economy – find a different issue. There
is very little to no evidence that the President has much of an effect. If you do your own research - there is
a ton of information on this that is as accessible as doing a simple Google
search on: “Does the President have any effect on the economy?” There
are papers, podcasts, blogs, interviews, radio programs, and more academic
papers that say the same thing – probably not much if any of an effect. When I
hear that polls suggest that most Americans think one party or another can
manage the economy better – what is that based on? A candidate saying that during his term he
had the “best economy ever.”? There is
absolutely no evidence for a statement like that.
So “its not the economy stupid.” Move on to another issue. If you vote based on that issue – you are
voting on unsubstantiated rhetoric,
George Dawson, MD, DFAPA
References:
1: Overview: The
History of the Federal Reserve.
September 13,2021: https://www.federalreservehistory.org/essays/federal-reserve-history
2: de Soyres,
Francois, Joaquin Garcia-Cabo Herrero, Nils Goernemann, Sharon Jeon, Grace
Lofstrom, and Dylan Moore (2024). "Why is the US GDP recovering faster
than other advanced economies?," FEDS Notes. Washington: Board of
Governors of the Federal Reserve System, May 17, 2024, https://doi.org/10.17016/2380-7172.3495
3: Blinder AS, Watson
AW. Presidents and the US Economy: An
econometric exploration. National Bureau
of Economic Research. Working Paper 20324, July 2014. http://www.nber.org/papers/w20324
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