It was during the early 1990s that Bill Clinton advisor James Carville famously declared that “It’s the economy stupid” when debating why U.S. President George H.W. Bush should be and would be replaced by the Arkansas Governor. This rule will clearly apply with the coming 2012 election, perhaps more than ever. Yet the question always lacking from such political conversations is: Why is the economy thriving or struggling? That is, while an administration’s policies will be argued to be working or not working, praiseworthy or blameworthy; what is rarely if ever discussed in any detail are the reasons for particular policies being successful or successful using reliable data that can be tied to understood mechanisms. The result can only be trial and error without any corrective feature such that errors are repeated over and over again.
The Lag Factor
Relying on data alone is particularly challenging with regard to economic matters because a policy’s implementation and its effects will always involve a lag to one degree or another. Hence, an administration can easily be assigned blame for economic results while effective policies have not yet had their beneficial impact realized; or an administration can easily be assigned credit for economic results while ineffective, or perhaps destructive, policies have not yet had their detrimental impact realized.
The default scenario is that a new U.S. president inheriting a bad economy will be given around two years to correct the situation. And if the economy is good during the second two years, a reelection bid will likely prove successful. While, on the flip side, a president who inherits a strong economy will also own it after around two years, and will likely not be reelected if an economy takes a serious turn for the worst during the latter two. Thus, U.S. presidents tend to get serious about economic policies only during the latter two years of a term primarily with the next election cycle in mind.
Hence, sound long-term economic policy decisions tend to give way to short-term manipulations of the economy that tend to sacrifice a nation’s long-term performance for the short-term personal gains associated with staying in power. Of course, this is precisely the same dynamic that has existed within the corporate world for the last several decades, as strong quarterly results have taken precedent over strong decadal results.
The Interactive Factor
Relying on data alone is also particularly challenging because it is extremely difficult to separate causation from correlation when so many economic dynamics are in play. This is where the lack of a coherent understanding of valid economic theory—including the mechanisms that are actually at work—renders it impossible to make long-term predictions on anything, relegating all interested parties to making short-term predictions based on historical trends and apparent correlations, often without even attempting to establish any true causation, let alone the ultimate causation that drives everything else. Obviously, this too will lend itself to a short-term outlook for those within the private and public sectors alike.