It’s the Economy, not Politics, Stupid!

Many democrats and republicans are wrestling with President Obama’s proposal to extend the Bush tax cuts and other items, each believing their party’s approaches to be superior for solving our immediate and long term economic problems. Even the President enlisted the support of former President Clinton to sell his proposal in an attempt to capitalize on his administration’s prosperity during the mid-to-late 1990s. Republicans point to the Reagan 1980s and to supply-side economics employed at that time as holding the key to our economic prosperity going forward. Of course, republicans claim Clinton’s success should be at least partially attributed to republican influence in congress at that time, just as congressional democrats claim to have reined in Reagan. The fact is that notwithstanding political differences, key economic metrics from those periods are remarkably similar. Each period grew jobs at approximately 2 percent per year; Clinton added more jobs, but GDP grew slightly faster under Reagan.

Each party discounts the role of non-political factors to Clinton’s and Reagan’s success. However, both administrations coincided with a dramatic decline in long term interest rates and stable low inflation. Neither administration had to manage an active war, although Reagan presided over and spent us through the successful completion of the Cold War. Reagan benefited from following the economically turbulent and eventually stagnant 1970s and Clinton benefited from the global technology boom including the proliferation of the internet, probably the most transformational change since the invention of the printing press.

Going forward, many professional economists place limited confidence in democrat-favored government spending as an economic stimulus, and typically point to its failure during the Great Depression and, more recently, during the first two years of the Obama administration. The recently fortified republican congress is aggressively seeking a more supply-side approach, emphasizing tax cuts for small businesses and individuals. The republican view is that putting money in the hands of the private economy will succeed in stimulating the economy where massive public spending could not.

Notwithstanding all the uncertainty about economic policies and the confusion added by all the politics, it should be clear that growing our economy is one of the necessary ingredients to solving our hopefully short-to-medium term economic doldrums and our long term deficit. If the past thirty years of prosperity has shown us anything it’s that policies that stimulate economic growth and employment are ultimately good for stimulating tax revenues.