“Ideology is often used to think about issues without actually using their brains”-The Badass Economist

As the economy enters its sixth year of what appears will continue to be sub-par growth, the suggestions coming from the political-economic sub-set of chattering class do not appear to have changed much from what they were 6 years ago. Indeed, despite facing generational economic challenges, it really doesn’t appear that either of the political parties, the current Administration, or their critics/defenders in the press have many new economic ideas from what they had 5, 10, 15, or even 20 years ago.  While politics is politics and one would expect the politicians to advocate programs & policies that benefit them politically, it is the dearth of new ideas from the commentators and observers that is most puzzling.

The reason for this is that the (partisan) commentators appear to have succumbed to economic ideology. From the commentators on the left, we are told that government programs are the solutions to all ills, and we are told from the right that tax cuts and less regulation will unleash economic growth. Whether these prescriptions will help what ails us at any given time is not the point. The point is that these are the same economic prescriptions that are offered in all circumstances by the various parties. When the economy is expanding, the right offers more tax cuts and less regulation. When the economy is contracting, the right offers more tax cuts and less regulation. When the economy is stagnant, the right offers more tax cuts and less regulation. The left’s prescription for all three of those scenarios is more government expenditures. However, when the promised policy doesn’t deliver the promised result (such as the Obama stimulus not allowing the unemployment rate to exceed 8%), there is no reexamining the underlying premise of the policy. Instead, while the attackers point out that the stimulus didn’t function as advertised and added more to the national debt, the defenders (aka Paul Krugman) repeatedly argue that the stimulus would have worked if it had only been larger.

What these discussions reveal is that our political-economic institutions (including the media) are stuck in the past. It is not that there are no longer appropriate times for more government spending or lower taxes/less regulation, it is that our institutions have calcified around a couple of solutions that did work well once upon a time under certain conditions. Reagan’s tax cuts helped to spur economic growth, it could be argued, for the better part of 15 to 20 years. And increasing government expenditures helped to mitigate some of the worst aspects of the Depression.

However, the economy today is structured completely differently than either of those economies were. The industrial economy of the Depression years was one in which the level of specialization needed was much less than today. For example, an industrial worker could switch from an auto assembly line, to a furniture making assembly line, to a washing machine assembly with minimal difficulty. A person with a strong back was employable in a variety of industries. Today, the economy is much more specialized and the skills in a certain job in a certain industry may not translate easily into another industry. Even from Reagan’s day, there are large numbers of jobs that existed when Reagan first became President that no longer exist today, and there are large numbers of jobs that do exist today that didn’t in the early 80’s.

The point is that with an economy that is structured differently from when the economic ideology was formed, we cannot expect that policy prescriptions that worked well at a certain place and time are appropriate today when facing what may appear, at first glance to be similar economic challenges. Much of what appears today to be an elite with little idea of what to do is likely the effects of economic ideology. Until the political-economic institutions come up with a new economic paradigm more suited to the economic structure that we have today, the U.S. economy is likely to struggle and will not achieve the full potential that it has.

Watching the problematic rollout of the ACA and the political jockeying that has accompanied it over the last few months has been fascinating as people on various sides of the political spectrum have rushed to put their spin on each new fact that is revealed. Still, the CBO’s report that the ACA would hurt economic growth and the spin from some quarters that slow economic growth may actually be a good thing appears to have caught many people (on both sides of the political aisle) by surprise.

In many ways, it is surprising that the report was as surprising as it was, because the CBO is still seen as a non-partisan arbiter. Those who have been saying for years that the ACA would damage economic growth should have been expecting a report such as this for some time. However, what is even more surprising was the positive face that the White House tried to put on this news. Stating that people now had the option of more free time on their hands as they don’t have to stay working just for the health benefits (also known as ‘job lock) was part of a unique argument. It is not that this is necessarily untrue (although the verdict is still out on that), but the unique part was the implication that lower economic growth resulting from this is a good thing. If people are losing their jobs or if they are deciding not to work because they don’t need a job for health benefits, this cannot possibly be an economic positive. Economic growth, and the associated higher standards of living, occurs when more people work producing more things. To the extent that people are not working (whether voluntary or involuntary), economic growth, living standards, etc all are lower than what they would otherwise be.

Trying to pretend that this is a good thing, especially when we are currently in a problematic employment environment, is fundamentally dishonest from the standpoint that the White House cannot truly believe this. Whether the ACA ends up ultimately being a drag on economic growth in the long run remains to be seen. However, those of certain political persuasions lose credibility when they try and pretend that slow economic is a good thing, and imply that perhaps that this was what the ACA was intended to produce all along.

Last week, GDP numbers were released showing that the economy expanded at an annual rate of 3.2% in the 4^th quarter. This follows an expansion of 4.1% in the 3^rd quarter. Overall, the last 6 months of the year show an economy expanding at its best rate since 2003. In fact, the numbers are so good that the Fed is continuing to unwind the extraordinary measures that it put in place after the financial crisis to prop up the economy. Although this is certainly good news, one is still left with the sense that there is still something wrong with the economy in spite of the numbers.

One must take note that while the unemployment rate recently dropped to 6.7%, this was largely due to people leaving the labor force. Since 2008, America’s GDP has increased by $1.7 trillion dollars (12.34%) and yet the number of people employed has increased by only 7.5%. While about 10 million more people are employed today than was the case in 2008, the American population has expanded by 12 million. While this might seem okay, consider that there are roughly 2 million fewer people in the labor force now than when the population was 12 million less. This situation points to an extraordinary pool of discouraged workers who have dropped out of the labor force.

What all of this implies is that the GDP statistic as a measure of national prosperity appears to perhaps be reaching some limits. In the post-war period, rising GDP numbers pointed to broadly rising prosperity for most Americans. Today, while a rising GDP number is better than a falling one, it doesn’t necessarily mean what it once did. In earlier generations, rising GDP may have been more visible to most people. A recent poll revealed that 74% of Americans think that the U.S. is still in a recession. This is incredible!! What would cause a result such as this? It can’t be that these folks are looking at their investments and drawing this conclusion as the stock market has been on a tear over the last year. It certainly can’t be that 74% of Americans are listening to Republicans and conservative media outlets describing how terrible the economy is. The only thing that can truly explain a number like this (barring an epically inaccurate poll) is that what 74% Americans are seeing in their own lives and in the lives of people that they know is more consistent with a recession than with an expansion (even an anemic one).

If true, the political usefulness of the GDP statistic may be different going forward than has traditionally been the case. While a rising tide in the post-war period did traditionally lift all boats, that general rule may no longer apply. If so, while the GDP statistic may continue to be useful for stock market investors and others, it may no longer be useful as a gage of prosperity for a broad swath of the population. New measures will have to be found.