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Can anyone fix this economic mess? | Russ Roberts

Political reality overtakes principles so winner won’t matter

By Russ Roberts
September 18, 2011

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HOW IMPORTANT is the 2012 presidential election? Imagine being visited in 2008 by a time-traveler with news of the future. He tells you that in 2011, America is still in Afghanistan and Iraq, but has also added bombing Libya to its list of military adventures. Guantanamo Bay remains open. Osama bin Laden is dead - killed in a covert operation on an ally’s soil. On the economic front, unemployment is sitting at 9.1 percent, but had been as high as 10 percent. The Bush tax cuts have been extended.

You would reasonably conclude that Republican John McCain, the foreign policy hawk who proudly proclaimed his ignorance of economics, must have been elected.

That’s not to say that the outcome of the 2008 election was irrelevant. I doubt McCain would have pushed anything close to ObamaCare. He probably would have spent less than Obama did to fight the recession. But my point is that candidates often disappoint us. They respond less to what we perceive as their principles and more often to the political winds.

I suspect the same will be true for the election of 2012. We face an immediate problem of persistent unemployment and the looming demographic train wrecks of Social Security and Medicare. On those issues, there seems to be a big difference between the Democrats and Republicans. Start with the lingering unemployment and the potential for a double-dip. Which political party has the best chance of putting us back on the road to recovery?

That should be an easy question to answer. After all, we just spent $820 billion to stimulate the economy. Federal spending has increased dramatically. So if that worked, we need to do more of it, as Democrats generally prefer. If it didn’t work, we need to try a different approach, either cutting taxes or doing even spending less, as Republicans prefer.

So which is it? It’s shocking and a bit sobering to realize that economics can’t seem to answer that question. Economists who are sympathetic to government intervention tell us the stimulus worked fine, but that we just didn’t spend enough. Economists less inclined to intervention say the stimulus only increased our debt problems.

But didn’t the non-partisan Congressional Budget Office conclude that the stimulus created between 1.2 and 3.3 million jobs? It did. You might be a bit surprised by the imprecision of that estimate. But the technique it used is even more alarming. It didn’t look at what actually happened-what happened to employment, for example, after the stimulus passed. The CBO conceded that “isolating the effects [of the stimulus] would require knowing the path the economy would have taken in the absence of the law’’ and “that path cannot be observed.’’ That’s fancy talk for admitting it can’t model the economy accurately. Instead, the CBO used the model it had used to predict the effect of the stimulus in advance and just plugged in the amount the government actually spent.

So a little agnosticism is in order. Maybe you shouldn’t be rooting so hard for the party that supports stimulus or the one that’s against it.

But even if the supporters of stimulus are correct and that the stimulus was a great success, just not big enough, it doesn’t matter. Because the American people give Obama failing marks for his handling of the economy. A lot of Americans think the stimulus failed and that we’ve borrowed too much money already.

That’s why the president’s $447 billion jobs package is dead in the water. Not because the Republicans are against it - they are. But because even the Democrats don’t want to vote for it. So even though the current occupant of the White House is a Democrat with Keynesian sympathies, we’re done borrowing and spending for a while.

And the next president, Republican or Democrat, will spend less than we’ve been spending. But not a lot less. So those Tea Partiers are in for disappointment. Oh, we might go back to the level of government spending way back in the Dark Ages of 2007. But you have to go back to Calvin Coolidge to find a Republican president who presided over a smaller government when he left office than when he arrived - Congress doesn’t like taking away things from voters who’ve become accustomed to free lunches paid for by other taxpayers.

What about the longer-run problems of Social Security and Medicare? The Republican front-runner, Rick Perry, has called Social Security a Ponzi scheme.

Social Security isn’t exactly a Ponzi scheme. But like a Ponzi scheme, the money to fund Social Security doesn’t come from productive investments but from getting money from future beneficiaries. Unlike a Ponzi scheme, you can’t decline to participate when you discover that reality. The government forces new workers into the system and can raise the tax rate on workers before they retire.

But that distinction doesn’t change the fact that Social Security faces a serious problem and that people will not get the same level of benefits under the same rules as current retirees. The benefits might start later. They might be smaller. They might get smaller if you’re richer or wealthier. I suspect all these changes will be on the table. I’m also confident that no president, Republican or Democrat, will take money from current retirees. At least not in an obvious way.

Who wins the election of 2012 will matter. But it’s not likely it matters nearly as much as the partisan fever suggests. My advice is to be less partisan. Care less about who wins. That will soften the blow when your favorite candidate or party betrays you in response to political reality.

Russ Roberts is host of the weekly podcast, EconTalk, a professor of economics at George Mason University, and a research scholar at Stanford’s Hoover Institution.