Ed Dolan's Econ Blog

Latest Economic Data Begin to Shift the Counterfactual in Favor of Democrats

For all of last year, as the parties tested their rhetoric in the early stages of the election campaign, Democrats were stuck in the unenviable position of arguing a counterfactual: “The economy is bad, but without what we have done, it would have been even worse.” That could very well  have been true, but it was not exactly a stirring closer for a stump speech.

Now, in light of the latest economic data, the situation is beginning to shift. Suddenly the Republicans are the ones left with the counterfactual: “The economy is getting better, but if we had been in charge, it would be better still.” Not nearly as good a line as “failed stimulus,” “economy in free fall,” or “record unemployment.”

The most prominent numbers come from the latest jobs and GDP reports. Just to remind anyone who has had their head in the sand, private sector payroll jobs were reported to have grown by 257,000 in January, continuing an upward trend, and the unemployment rate continued to fall.

Of course, there is no guarantee the trend will hold; payroll jobs data are notoriously volatile, and a better economy could send the unemployment rate back up a bit as previously discouraged workers return to the job market. The same is true for the GDP numbers for Q3 2011: They are better than they have been for a while, but they are  subject to revision, and the U.S. economy faces headwinds from slowing growth in Europe and emerging markets.

These well-known and potentially reversible numbers are not the only ones that are turning the political dialog around, however. Some less noticed but more robust trends are also undermining key Republican campaign themes.

“Runaway growth of government” is one such theme. The line is sure to draw applause at any Republican rally, but just look at the charts. Far from running away, the government sector of the economy has been shrinking since the start of the Obama administration, and the downward trend is accelerating.

How can that be? The answer is simple. The chart shows total government, not just federal. The fiscal stimulus program of the early Obama administration was barely enough to offset cuts in budget-strapped state and local governments. As the peak months of the stimulus passed, total government began to fall. For much of 2011, strong defense spending provided some support to federal spending, but now that is tapering off, too. Not just government spending as a share of GDP is falling, but also government employment as a share of the labor force.

Another charge leveled against recent economic policy is “debasement of the currency.” It is a favorite of Ron Paul  but it is not his best line. “Debasement” has no precise economic meaning, but it appears to refer either to the threat of inflation or to a collapse of the dollar’s exchange rate. Neither is happening. Inflation is nowhere to be seen. On the contrary, the Atlanta Fed’s index of deflation probability, although inching down in recent days, remains well over 10 percent. As for exchange rates, the Real Effective Exchange Rate index from the BIS shows the dollar strengthening slightly from the low point it reached last July. Fortunately, it has not appreciated enough as yet to derail robust growth of exports.

Of course, not all is well with the U.S. economy. The trouble is, its weakest aspects are not ones the Republicans can easily exploit for their election campaign. Take poverty, for example. Last year working age poverty in the United States hit an all-time record high. GOP front-runner Mitt Romney is trying out a new line: “We don’t have to worry about the very poor because if the safety net is broken, we’ll fix it.” Not terribly persuasive.

Another weak spot in the economy is the trend of real hourly earnings. Over the past couple of years, earnings have fallen more often than they have risen. The downward trend in earnings is the dark side of the recent better employment numbers. To some extent, the employment rate seems to be falling not so much because the job market is a lot better, as because people are settling for jobs with lower pay than they would like to have. Of course, the Republicans have an answer for the pain of the working class: Cut taxes on millionaire “job creators.” It is a line they will keep repeating, but if the jobs being created have consistently low hourly pay, it is not as persuasive as it might be.

It is a long time still until the election. There will be many more data releases and many revisions of data already released. Unless there are some unexpected reversals of the trends, however, it looks like the Republicans will have to work harder than the Democrats to make their slogans fit the realities.

2 Responses to “Latest Economic Data Begin to Shift the Counterfactual in Favor of Democrats”

sierra7February 14th, 2012 at 1:16 pm

From a non-partisan voter:
Wages have been falling since the 1980's vs any accounting for inflation….(or "deterioration of the value of the dollar)
SS payments have not kept up with "inflation" by thousands of recorded articles over the same time frame.
CD's held by conservative (just not wealthy enough to play with their money) retired individuals and families are getting killed by the Fed's interest rate policies.
"Official" unemployment numbers are bogus in the least measurements.
States' drop in employment because of lack of tax revenue is reflected in the "shrinking" of the "total government" spending.
Wait until long term unemployment money has to be cut off…just wait!

Ed Dolan EdDolanFebruary 14th, 2012 at 1:53 pm

Well, as I said, "Of course, not all is well with the U.S. economy. The trouble is, its weakest aspects are not ones the Republicans can easily exploit for their election campaign."

I do not share your view that the official unemployment numbers are "bogus." They are subject to statistical error, and there are other alternative ways to measure unemployment, but still, the numbers, on balance, point to a stronger job market. Yes, part of the reason people are getting back to work (as I noted) is that they are taking jobs that don't pay as much as they'd like. Still, the fact that they are taking those jobs means they would rather be working than not.

As for long-term unemployment benefits, yes a lot of people will be angry if they are cut off, but if that happens before the election, it will happen in such a way that the blame falls on Republicans.

In short, I stick by my point that taking the good and the bad numbers together, they look politically favorable to Democrats (for the moment, at least).