Mark Thompson, a loyal MR reader, writes:
I’m wondering
if you would be willing to address the question of whether and how much
of an economic effect a President can have simply by making people feel
good about themselves.
Mark’s own answer is here. I’ll say that the personality of the president matters most in models with multiple equilibria. There can be a high-output equilibrium and a low-output equilibrium, and perhaps the mood and demeanor of the President can shift the country from one to another. "Good morning, America!" etc.
But are these models true? I’ve never seen general evidence for their applicability, although I recall Ronald Reagan’s smile and Jimmy Carter’s pessimistic sweater. Furthermore GDP growth rates are statistically indistinguishable from a random walk (NB: in a test with low power), which doesn’t help these models either. Since the temperament of the politician seems to persist over time, you would think that patterns in GDP would be more predictable than they are. But they aren’t.
Note that if you buy into multiple equilibria models of business cycles, it is a matter of great importance when the Fed acts to stimulate the economy. It would probably be too late now because the pessimistic mood already has set in. But more vigorous action, say a few months ago, might have kept spirits high. That’s if you buy into those models.
I don’t know about presidential demeanor, but this post certainly does nothing to improve my confidence in economists’ understanding of the national economy. No offense intended, really.
Ned:
I had forgotten about that study, which is quite influential, if a profound oversimplification. From what I recall, most political scientists still regard it as useful as a loose predictor of Presidential performance.
It’s a bit different from my initial question, which was more economics based, but it’s worth keeping in mind nonetheless. At the very least it leads to the conclusion that style matters, albeit not necessarily in the way my question speculated.
Except that real GDP growth was actually stronger under Jimmy Carter then it was in Reagan’s first term.
There is probably also a component with what the country needs at the time.
Much like when the economy is sluggish, you don’t worry too much about an inflation uptic (unless The Fed is particularly clueless at that time), when the country is too cocky, it doesn’t need, and wouldn’t benefit from an unrealistically upbeat President.
When the country was in the doldrums, they didn’t need a Jimmy Carter. They needed a Ronald Reagan.
And today, likewise, now that the country is clueless and scared about the domestic economy and terrified of thugs with boxcutters that have no country, while overly belligerent and cocksure with other sovereign nations, and our place in the world…yes, this would be my shameless plug for Ron Paul.
And one more thing. Dr. Cowen made a comment about Ron Paul being elected causing the Dow to drop. Well, Philip A. Fisher makes a brief analysis of such pronouncements.
He says that when the outcome is predictable, that the benefit of a pro-economy President will be discounted, in fact too much so. So, once the results are finalized, the market will drop…because the pre-election runup was too high. So, yes, if Ron Paul the Republican nominee, and he is elected, the market will drop. But not for the reason Dr. Cowen implied.
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