Originally published in The Boston Globe
Tuesday, May 23, 2000
Economy's hot, but Gore's not
By Martin and Kathleen Feldstein
"Today's Voters know politicians can't always take credit"
Undoubtedly, the country is experiencing the best of economic times. There is no sign that the economic expansion, now the longest on record, is unwinding; inflation continues to be moderate, and unemployment is lower than it has been in decades. Importantly, consumer confidence continues to reflect optimism about the next year.
All of this should be encouraging to Vice President Gore. Yet polls show that Governor George W. Bush is leading the vice president overall and in most major demographic groups. What is going on? The first explanation is, of course, that it is not just the economy, and there are previous presidential elections that confirm this.
In 1968, Lyndon Johnson resigned and the Republicans took the White House because of the Vietnam War. And President Ford's chances in 1976 may have been damaged as much by his pardon of Richard Nixon as by slow growth and escalating inflation.
So if the vice president loses in November, the explanation may be sought in the baggage he carries from the Clinton presidency, as Hubert Humphrey carried the Vietnam legacy from the Johnson presidency. And given the close association that both Bill Clinton and Gore have emphasized, it is not easy for the vice president to distance himself now.
But we think there is an additional explanation that lies in the growing economic sophistication of the American public. Voters know they are better off than they were four or eight years ago. And they have a better understanding about why.
It is widely understood that the low rate of inflation that has underpinned much of recent economic growth is the work not of the politicians in the White House but of Alan Greenspan, his predecessor, Paul Volcker, and their colleagues at the Federal Reserve. The actions of the Fed in this election year to increase interest rates only underscore the independence of the central bank.
The chief driver of the outstanding economic performance of the last five years has been the rise in productivity. After a decade and a half in which out put had risen only 1.5 percent a year, in the second half of the 1990s productivity doubled. That has translated directly into faster growth of total output and in turn has contributed to the rise in tax revenue that has reversed the federal budget from deficit into surplus. Rising productivity has also held down inflation, making it easier for the Fed to accommodate low unemployment.
The key to this success lies in the private sector. Better management and innovation have created the foundation. Computer technology and the rising use of the Internet in business are the result not of policy changes but of developments in science and engineering.
If a link is to be found between faster productivity growth and economic policy, it's necessary to go back several years to the tax changes and deregulation of the 1980s. At that time, economic decisions by consumers and businesses alike were being distorted by inflation, both directly and through its interaction with tax rules. The tax reforms of the 1980s and the lower inflation driven by the Fed strengthened incentives for individuals to work and to invest and improved the allocation of business investment.
Because of long and complex lags in policy changes, it took years for the positive impacts of low inflation and lower regulation to work their way through to im proved productivity. Eight years ago, the Clinton campaign was able to exploit the old rule of thumb that White House incumbents are judged by the state of the economy. The empirical fact that the economy was already in recovery from the brief recession of 1990- 1991 was lost in the relentless message of a sluggish economy that the Clinton campaign drove home.
The Clinton administration has not changed economic policy in any fundamental way. That steady policy and continuation of the reforms of the 1980s have been good for the economy; it has also meant that voters are not likely to give Gore credit for today's good economic performance.
Martin Feldstein, the former chairman of the Council of Economic Advisers, and his wife Kathleen, also an economist, write frequently together on economics.