The economic limits of politics

Economics takes a beating in the political season. Candidates make grand claims about the impact of their policies - or their opponents'. Economists try to peer into the future. But economies are so complex that they have difficulty sorting out what causes what and by how much.

So when Nov. 3 rolls around and Americans know (presumably) who their next president will be, will it make a dollar's worth of difference for their pocketbooks?

Yes, a little, according to recent research. But don't hold your breath for big change.

For instance, Sen. John Kerry excoriates President Bush for policies that pushed the United States federal budget from a $236 billion record surplus to a record $415 billion deficit. That's hardly fiscal conservatism. But does it matter to the economy?

The latest research suggests deficits do raise long-term interest rates. But the effect is "relatively small," says Francesco Caselli, an economist at Harvard University. He and two other economists looked at what happened after changes in budget deficits in 16 rich countries between 1960 and 2000. The authors' paper for the National Bureau of Economic Research indicates that the huge shift in the US deficit since 2000 suggests a rise in interest rates of 0.6 to 0.7 percentage points. So interest on a business loan may have risen from, say, 5 percent to 5.7 percent.

But, cautions Mr. Caselli, economic evidence also indicates that businesses and consumers aren't very responsive to small movements in rates in making decisions on investment and spending. "You need big swings," he says.

The 1980s showed that deficits don't matter, Vice President Cheney is supposed to have told then Treasury Secretary Paul O'Neill. Adds Caselli: "You can't say ... that Cheney is completely wrong."

Further, the Bush tax cuts may have stimulated business investments, offsetting in a degree the damage of higher interest rates. Economists, though, don't really know enough to calculate such effects accurately, says Caselli.

One caution: The US has a $600 billion trade deficit. If foreigners withdraw some of their resulting US assets, interest rates could really soar.

Another question: Did the Bush tax cuts stimulate job creation? The Bush administration repeatedly calls them a boon. Yet Federal Reserve economist Daniel Thornton says: "Government policies, monetary and fiscal policy, are relatively unimportant."

He and Thomas Garrett, a colleague at the Fed's St. Louis branch, found that the nation's payroll employment from 1946 to 2003 grew at an average 2.1 percent a year over all those 60 years. That pace declined a bit during recessions, picked up afterward. But otherwise, the trend line in their chart looks steady regardless of whether the country was at war; whether a Republican or Democrat occupied the White House; whether there were changes in tax law, inflation, the minimum wage, workplace safety; or whatever.

"Politicians don't create jobs," says Mr. Thornton. "The economy creates jobs."

Maybe unnecessary and unproductive regulation may discourage job creation, he suspects. But his chart offers no proof even of that view.

The chart still leaves some room for debate over whether government policies can slightly alter job creation in a recovery. Senator Kerry charges - accurately - that the decline in job numbers under Bush has not been experienced in any administration since that of Herbert Hoover during the Great Depression. But is that the president's fault?

Mr. Garrett looks to other factors, possibly the rapid shift in the US economy from manufacturing to services.

But Mark Zandi, chief economist of, places partial blame on the poor design of the Bush tax cuts. These cuts, however, combined with aggressive easing of monetary policy by the Fed, probably prevented the short-lived recession from stretching into 2003, he adds.

The economy, he notes, "suffered a string of misfortunes from the bursting of the Y2K stock-market bubble and corporate accounting scandals to 9/11 and the war on terrorism." But the massive tax cuts provided "a very little bang for the buck," he says. The benefits went primarily to "high-income households" with little propensity to spend their tax savings. So businesses created relatively few jobs. And "any near-term benefits will be eventually overwhelmed by the impact of the persistently large federal budget deficits expected to result from these policies."

Then there's the $3 trillion shortage that the Social Security system faces over the next 75 years. Former President Clinton wanted to enlarge Social Security; Bush wants to privatize part of it to rescue it.

But as scary as $3 trillion sounds, it represents a mere 1.86 percent of total taxable payrolls anticipated over those 75 years, notes Dean Baker, an economist with the Canter for Economic Policy and Research in Washington. Payroll taxes were raised at least that much in each decade from the 1950s through the 1980s.

Put another way: That $3 trillion is just 0.73 percent of the more than $400 trillion the economy is expected to produce in those years. Add in more serious US liabilities, such as Medicare and the national debt, and they total about $50 trillion. But that's still only 7.5 percent of the nation's long-term output.

So don't panic.

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