By David Swenson
Our economy is approaching $16 trillion in gross domestic product (GDP), and whoever is elected in November will not change that total. They would have us believe otherwise, but our presidents and presidential aspirants have little power over business cycles.
A president’s policies and preferences, though, can profoundly influence the distribution of economic benefits as well as who bears the burdens of economic failures. To the casual viewer, it might appear this presidential campaign represents an epic battle between a left-leaning redistributionist and a free-market fundamentalist, but the truth is that both candidates, given their publicly expressed economic policy preferences over the years, are not that far apart.
Historically, President Barack Obama tends center-left, and Mitt Romney tends center-right. They are likely closer to each other on most major economic issues than they are to their respective parties’ median voters or supporting political action committees.
It is common for conservatives to cast government as a bloated impingement upon the economy at large. Make government smaller, they argue, and the rest of the economy will grow. Those holding this reductionist view, however, forget that government is an intricately intertwined component of the economy: The economy is by definition the sum of private consumption and investment, our balance of trade, plus all government spending and investment.
Currently, however, the portion of our economy that is seriously underperforming is the private component, and it is not underperforming because of what government did to it. As a result of this underperformance, the federal government has grown to provide countercyclical cushions to maintain essential government services and ameliorate negative economic impacts on households. It must borrow to do that as objective need is high and tax receipts are constrained. When the economy improves, our government’s share of the economy will necessarily shrink.
Many liberals want government to have a more direct role in controlling aspects of the economy even though government activism frequently distorts markets and misallocates scarce public resources. Those holding this view of government influence forget that ours is overwhelmingly a market-driven society, and that 86 percent of the nation’s jobs produce private-sector supplied consumer and capital goods. The well-being of the vast majority of private households depends on the health of the private sector, and we have learned time and time again over the years that government is often lousy at picking market winners and losers.
Stereotypes aside, if you accept my argument that presidents have very little power over the larger economy, most especially the overall performance of the private sector, then the appropriate criterion for judging candidates’ economic credentials is how well either will manage the government portion of the economy, depending of course on enactments by the legislative branch — the latter factor a wild-card that simply cannot be predicted.
This is my bottom line: The bulk of the economy’s misfires have disproportionately impacted lower and middle income households. Obama’s policies and sentiments have explicitly focused on the needs of the middle class and those who would aspire to it. Romney’s sentiments appear to emphasize the prerogatives of the investing class over households’ needs.
In time, the larger economy will heal itself because of factors intrinsic to the market, not government. Until that happens, the federal government must provide broad-based support for households. They are, after all, who this economy ultimately serves. We are prone to forget that.
By that measure, this economy might not expressly favor, but nonetheless most needs, the re-election of Obama.
David Swenson is Associate Scientist in the Department of Economics at Iowa State University. Comments: email@example.com