Tuesday, April 30, 2013

Follow the Money

One of the truest things ever written about politics is something that renowned Yale political scientist Edward Tufte wrote in his 1978 classic, Political Control of the Economy: ?When you think economics, think elections; when you think elections, think economics.? One way or another, the state and direction of the U.S. economy strongly affects the political debate and the contours of national elections.

When the economy is good and improving, voters typically have one mind-set; when it is bad and getting worse, voters are in a different state of mind. When Americans feel they?re getting ahead economically, that?s one thing; when they feel they are either falling behind or just can?t get ahead, they view things?including their political leaders?very differently.

In recent months, economists have been watching the state and direction of the economy very closely, looking for signs that the softness felt about this time in 2010, 2011, and 2012 will occur again. In each case, the first few months of the year started out reasonably strong, but then around April, May, and into June, growth slowed appreciably before picking up again for the rest of the year. In each of the past three years, the reasons the economy slowed in the spring and regained momentum later in the summer differed. And although the economy improved a good bit in the second half of each year, coming out of what economist Sid Jones refers to as ?the longest, deepest, and most diffused? economic downturn since the Great Depression, what this economy needs is four or five consecutive years of strong growth. These fits and starts aren?t helping things. Simply put, Americans in the bottom three-quarters of income groups suffered enormously during the downturn, and even though that period is over, they are not having any fun yet.

To be sure, central banks around the world have been pumping money into their economies at a furious rate over the past few years, and, as a result, the U.S. stock market is doing great, investors are finally getting back into the market, the housing sector is at last coming back to life, and people are starting to buy houses again. Clearly, our economy is doing better than most on the other side of the Atlantic. Economists were further encouraged last week when unemployment claims hit the second-lowest level in five years.

One can focus exclusively on the good news in the U.S. economy, but the fact is, for each piece of favorable news another one is pointing in the opposite direction, and that is what is making some economists a little nervous. For example, economists are scrutinizing corporate reports and forecasting slower earnings, and businesses are showing caution by borrowing less and slowing down certain kinds of spending. That?s obviously not good for an economy trying to break completely free from a sustained downturn. While Monday?s Bureau of Economic Analysis report showed that consumer spending increased by a bit more than expected, personal income came in lower than forecast. Real disposable personal income, which had dropped sharply (by 4 percent) in January, picked up a bit (seven-tenths of 1 percent) in February, but gained only two-tenths of a point in the March report. After inflation and taxes, since the first of this year, improvement in personal income has been running well behind its pace for most of last year, and there has been less improvement than the general pace for most of the past three years.

While the slowdown in government spending, particularly with budget sequestration in place, is having a pronounced positive effect on the federal budget deficit, the decreased level of government spending is offsetting private-sector spending to some extent, again slowing the economy when it needs to be growing. In other words, something good is happening?deficits are dropping?but at the cost of dragging down the economy and further delaying a complete recovery.

How all of this fits into next year?s midterm elections is unknowable at this point, but voters who are cranky about not getting ahead think differently than those who are feeling more comfortable and hopeful about the future?and cranky voters are more likely to punish than reward. We don?t have a sense yet what the zeitgeist will be next year, what people will be thinking and worried about, or whom they will be grateful to or mad at. In a period of divided government and in the absence of a partisan wave, an improving economy might well result in more of a typical, all-politics-is-local election, the kind we haven?t seen since 2004. Economic uncertainty or despair, on the other hand, might make for a more turbulent political environment, with voters more likely to lash out if provoked by one side or the other. In short, we don?t know what voters are telling us yet, but it?s wise to listen very carefully.

Source: http://news.yahoo.com/money-193341072.html

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