Here’s a nice graph from the Financial Times:
These graphs are very manipulative, as we think we are seeing the impact of various presidents on the economy. But is that really so? I’ve argued that the performance of the US (economic, military, social, etc.) is about 3% the president and 97% other factors. Three percent is not nothing; it’s way more influence than a blogger has. But it’s not enough to be decisive.
This tendency to think in terms of a “Bush economy”, or an “Obama economy” is especially pronounced in election years. But which indicator is decisive? Should we look at the graph and conclude that Trump inherited an economy that was already improving, or should we acknowledge that it gets harder to create jobs once we reach a low unemployment rate, and hence Trump outperformed expectations? There’s a bit of truth in both views.
I don’t believe that, deep down, people actually believe the economy is a test of a president’s performance. They may make that claim when it’s convenient, but I don’t think they really believe it. Here’s why:
1. Ask a Democrat about the current economy and they’ll often say that Trump just got lucky; the low unemployment is not related to anything he did. He inherited an improving economy from President Obama. Republicans will argue just the opposite. So does that mean that Republicans believe that the economy is determined by the President, and the Democrats take my view? Not really.
2. During most of the past 100 years the situation was reversed. On average, the economy (and stock market) did better under Democratic presidents. So if the president actually did determine the course of the economy, then this would be evidence that “proved” Democratic economic policies were superior. FDR was an improvement over Hoover, The Kennedy/Johnson years were better than Nixon/Ford, or even Eisenhower (who presided over three recessions). Clinton did better than either Bush, etc. You might argue that Reagan did much better than Carter, but even that was mostly on inflation, not real economic growth (which was strong under Clinton).
Of course some Republicans will respond by pointing to initiatives during the Clinton years that were undertaken by the GOP Congress, but that just proves my point that presidents are less consequential than we assume. And even that can’t explain why real GDP growth was twice as fast under Lyndon Johnson’s big government policies than under President Trump. So I conclude that even Republicans don’t really believe that the economy is a measure of the validity of a president’s ideology.
Here’s how I look at things:
1. There are long swings in trend real growth (per capita) due to technology. Growth was fastest when low hanging fruit from fundamental inventions like electricity and gasoline engines were being rolled out across the economy. Once that was mostly accomplished (around 1973), growth slowed.
2. Presidential policies do affect the supply side of the economy, and this can have a modest impact on growth. Some good reforms happened during the Reagan and Clinton years. This partly explains why the US switched from under-performing other developed countries to outperforming them in the later 1900s.
3. At business cycle frequencies, it’s mostly monetary policy that determines the path of output. Presidents do have the ability to pick Fed chairs, but they often re-nominate people originally picked by the other party. Monetary policy is relatively non-partisan.
The first point explains why Trump could never hope to achieve LBJ’s 5% real GDP growth rate. The second point explains about 10% of why Hoover did worse than Coolidge, and the third point explains about 90% of why Hoover did worse than Coolidge. (Technological growth was strong during the 1930s; it doesn’t explain any of Hoover’s dismal performance.)
If people want to think in terms of the “Obama economy” or the “Trump economy” that’s fine. But your vision is almost all in your head; it doesn’t really conform to what’s actually driving the economy. At best, maybe 3% of the economy.
PS. Here’s another example. Both 9/11 and the 2008 banking crisis happened to occur when George Bush and Blair/Brown were leading the US and UK. Tony Blair and Gordon Brown were basically the UK’s version of Bill Clinton. There’s a lot of luck in involved in how a president (or PM) goes down in history.
PPS. That graph really shows the weakness of job growth during the 2001-07 recovery. Which is odd because RGDP growth was fairly decent.
The NO BID Evaporation of Wealth
COMMENT #1: Marty,
Good morning. I knew you were going to get blamed for having too much “influence”. And then after emailing you about it, I see the comment in the Fake News blog this morning, just too funny!
Can’t these people just try to learn why they were wrong? I always try to learn from my experiences and I’m nobody. I’ve learned more after college through trading experiences and attending your conferences than I ever did in college. They just fed me a bunch of BS that I had to repeat for a good grade, which is why I almost dropped out. I probably had two good professors total in Economics and Finance, they both had real-world experience, go figure!
There will always be haters.
COMMENT #2: Great article today
One question I can’t answer is when capital flees(whether it’s from virus or Bernie). It’s not flowing back towards Europe or Asia. So is It (mostly)all flowing into US Bond market? Which we know is the worst spot to be as investors flee the public sector.
Two instead of Bernie being the reason for the very large drop in the Dow (and I think he’s a large problem for equity markets). Could It be the Coronavirus will substantially reduce economies all over the world and therefore equity valuations and earnings as well = equity sell-off and into cash?
ANSWER: For now, the US debt market is the best in the world and really the only viable one. The comments about capital fleeing just illustrate the fake news. If capital was fleeing the USA, then you would expect to see the currencies move with such a capital flow. That has not been the case. They just make up excuses for they must always apply some reason to every market move.
When I was called into the 1987 Brady Commission, they too began with the proposition that some mythical person sold the market and they were going to hang them. I explained that every investigation began with that same directive and nobody has ever been found. I asked if they even understood how markets functioned. They said simplistically that you borrow stock from one person and sell it to another. I asked, “Then how does a short ever outnumber the longs?” I had to explain that a crash takes place when people try to sell and there is NO BID. They never understood that. Value evaporates, it does not flee dollar for dollar.
These people will look at Buffet or Bill Gates and have no idea that their “wealth” is based upon share value — not cash. Bernie stands up and says he will go after the 1% and fails to understand that if he confiscated all their wealth, assuming it was cash, he would not even balance the budget for one year. It would make no difference. But people like Bernie love to point the finger at the rich rather than government because they cannot admit this is the worst management debacle in recorded history.
Is it time for Hannah Mather Crocker?
Sometimes women’s contributions to the political and economic life of past centuries are overlooked, not because they were minor, but simply because they were seen as stories of daily ‘domestic’ life and therefore inherently less significant than accounts of war, conquest, and statecraft. Since the 1960s, there has been a movement within the discipline of history to correct these omissions. Historians like Gerda Lerner, Anna Firor Scott, Deborah Gray White, and so many more began the work of filling in forgotten and otherwise neglected aspects of history, often in the newly emerging subfields of women’s history and black history.
However, despite all the excellent work that has been done over the past sixty years, there are still gaps in our knowledge. The evidence that I’d like to offer on that point today is the life and work of Hannah Mather Crocker. Despite being a leading political theorist in the post-Revolutionary era and the first woman to write a book-length discourse on women’s rights, Observations on the Real Rights of Women (1818), Crocker was overlooked for most of the 20th century. A 2006 APSR article—one of only a handful of academic publications to deal seriously with Crocker’s work—suggests that Crocker may have been set aside in part because Elizabeth Cady Stanton, Susan B. Anthony, and Matilda Gage were critical of her arguments in their first-moving and highly influential 1886 History of Woman Suffrage. This goes to show the importance of going beyond standard ‘textbook’ accounts of intellectual history. Every contribution is a filter, and what was filtered out when answering yesterday’s questions may be exactly what we want to understand today.
In defense of Stanton and friends, Crocker’s ambitions do seem pretty modest compared to those of the later 19th century feminists. She prefaces Observations on the Real Rights of Women as a “little work” that was “not written with a design of promoting any altercation or dispute respecting inferiority or superiority, of the sexes” (p. 2; all page numbers below refer to this same book). She also often seems to uphold traditional gender roles, conceding to her contemporary readers that the actions of “females trespassing on masculine ground” are both “morally incorrect, and physically improper.” (p. 3). Yet! She writes to us from 1818 in defense of an idea that remains in dispute 200 years later: that despite any and all biological differences, woman are every bit as capable of intelligence and discernment as their male counterparts and deserve the same rights to make their own decisions. Despite the biological reality of being a woman, with all its “duties peculiar”—the most singular of these being childbirth and childcare–“the wise Author of nature has endowed the female mind with equal powers and faculties, and given them the same right of judging and acting for themselves, as he gave to the male sex” (p. 2)
Perhaps the most consistent argument throughout is this argument about how much is lost when women do not or are not able to cultivate their intellectual capabilities. Like other early thinkers on questions of women’s rights, including Mary Wollstonecraft and John Stuart Mill, this emphasis leads focuses on barriers to women’s education as particularly harmful: “it has been fairly proved, even to demonstration, that the female powers and faculties are equal with the men; but their mode of education often checks their progress in learning” (p. 26). Part of the harm Crocker sees in limiting women’s education is that any ignorance will be transmitted to the little “olive branches around her table.” This prioritization of women’s role as mothers is a tough one to grapple with. In emphasizing maternal responsibility, Crocker is well in line with her times. Yet this idea that women’s most appropriate role is as the caretaker will later on come to be twisted for use in political arguments about whether or not women should be allowed particular rights or admitted into particular spaces. This may be another reason why her contributions have been discounted by later generations of feminists.
Overall, Crocker’s treatise on women’s rights may be much more important than it’s been given credit for. She makes strong arguments about women’s intellectual and moral equality. Further, she is offering these arguments during a period of time in American history that was arguably the most restrictive in terms of what women were considered capable of managing. My next post will share some ideas from Crocker that deal directly with women’s productive and managerial roles, particularly in civil society and household government.
 Botting, Eileen Hunt, and Sarah L. Houser. 2006. “‘Drawing the Line of Equality’: Hannah Mather Crocker on Women’s Rights.” The American Political Science Review 100 (2): 265–78.
Jayme Lemke is a Senior Research Fellow and Associate Director of Academic and Student Programs at the Mercatus Center at George Mason University and a Senior Fellow in the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics.
The Entrepreneurial Advantages of Building Human Capital While Young
While you were young, did you gain knowledge and learn skills that gave you the human capital necessary to become an entrepreneur or a small business owner? Human capital consists of the knowledge and habits developed as a youngster that form skillsets that later in life can be used in the business world. These skills are developed either through the family unit, culture, or regional location and determine the success or failure of entrepreneurial pursuits and performance. In the young, the development of skills and knowledge are applicable to future ventures in entrepreneurship or small business ownership.
Everything you learned from family dinner conversations and your culture served to build your human capital. Across the globe, the people of various regions cultivate certain skills that enable individuals to consider entrepreneurship as a viable choice of work. Some of you never had the social or family setting that gave you entrepreneurial insights. Some people get this while they are young, and some do not. Acquiring human capital at a certain age bolsters the chance of entering entrepreneurship or small business ownership. If human capital or business insights are not embedded culturally or acquired at a certain point, some individuals will never consider entrepreneurship or be successful at it.
We cannot all become successful entrepreneurs, especially if only a few of us come from a cultural background that rewards an ethic of hard work and related values versus a cultural background in which achieving entrepreneurial success is never even thought of.1 What is valued in the family unit and what is rewarded or praised contributes to our future entrepreneurial skills. Ludwig von Mises noted, “the inequality of men, which is due to differences both in their inborn qualities and in the vicissitudes of their lives, manifests itself.”2 The region of the world in which one lives and the context of the acquired human capital skills are equally vital to having an entrepreneurial skillset.
We hear from many entrepreneurs, and those who are not entrepreneurs per se, that much of their education occurred around the family dinner table, or that they lived in a place where small business activity was plentiful.3 Human capital that is based on family, culture, and regional differences has consequential effects for many considering entrepreneurship.
Cultural factors are critical in developing entrepreneurship. Often these cultural factors are overshadowed by the technical aspects of operating a business—the seen versus the unseen. Parents and the elderly pass on their values to their children, values such as taking risks, being independent, challenging uncertainty, etc. Children who are rewarded or not rewarded will either be encouraged or discouraged to pursue entrepreneurial activities in the marketplace. If a child is never taught to be independent, how is he or she able to systemically think of and identify potential profit opportunities and bring opportunities to fruition?
Habits form over time, and many are culturally based. In some cultures, some children spend up to twelve hours a day playing videogames and entertaining themselves on social media. In other cultures, children are expected to work long hours helping mom and dad with their business or studying to earn the best grade. These youths may work at an uncle’s garage learning all about vehicles or attend college to gain business knowledge. In either situation, these youths are learning about private property, e-commerce, revenues, profit and loss, bookkeeping, and so on—gaining skillsets and knowledge in order to run a business of their own in the future.
Generally, whatever is cultivated in the family unit and culture will manifest and have consequences in the marketplace. Children who acquire a work ethic and values related to entrepreneurial success will have an advantage over their peers who have not had the same experience. The children who have not learned these things will have a much later start or never acquire the skills and the know-how needed to pursue entrepreneurship or small business ownership.
Not everyone has an equal opportunity to become an entrepreneur, as some must acquire a collection of basic skills, knowledge, and habits that may take decades to develop. Taking risks, working longer hours, and making critical decisions require a certain upbringing. Entrepreneurs are not created overnight but over time. However, ten years of working with mom, dad, or an uncle as a youth, gaining practical knowledge, surely provides advantages later in life.
We cannot disregard the location and region in which we lived during the time of our early human capital acquisition. Being located in one region of the earth versus another can surely impact our ability to develop a predisposition or entrepreneurial insights needed for entrepreneurial behavior. Perhaps we live in an area where several industries exist. Being surrounded by these industries allows us to either work for or start a business in a vein that is familiar to us.
As with any location or local market, our human capital can be stymied in a region or location where a product or service is not valued or not supported although it might be highly valued in another market (i.e., if one has to take their product knowledge to another region where the consumers have higher subjective valuations of their productive goods or services).
Unfortunately, the opportunity to attain the same human capital at the same time and place that leads to entrepreneurship is not equally available to everyone. Without the requisite human capital, one can only dream of becoming a successful entrepreneur or business owner. Families and family cultures vary among peoples across the globe, and so does the dissemination of knowledge at the family dinner table. We all come from backgrounds that either reward or punish certain behaviors that later transform into predispositions and values that underpin our ability to, at a minimum, think like and be an entrepreneur. Ludwig von Mises said that entrepreneurs “owe their position exclusively to the fact that they are a better fit for the performance of the functions incumbent upon them than other people are.”4 An interpretation of Mises on this point is that the skills and knowledge develop over time that enable entrepreneurs to uniquely perform the production of products and services for the consumer.
- 1. See Thomas Sowell’s The Quest for Cosmic Justice. In the section titled “Freedom versus Equality,” he discusses equal performance and social barriers.
- 2. See Ludwig von Mises’ Planning for Freedom.
- 3. See Ryan McMaken’s article “Three Economics Lessons I Learned from My Dad.” For example, three lessons that he learned were: lower the cost of doing business, politicians drive up the cost, and the world is always changing.
- 4. See Ludwig von Mises’s Human Action on the Entrepreneurial Function.
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