Economic Lessons for 2016 Candidates from Jimmy Carter
President Jimmy Carter is generally considered the worst president since World War II (and perhaps for a much longer period of American history), so you might wonder what lessons candidates can learn from him. Yet, there are many lessons for the crop of candidates starting to jockey for position in these earliest stages of the 2016 presidential elections. Here are the most important.
First, while the economic stagnation of the Carter years is not quite the same as the slow growth experienced under President Obama, it is close enough to offer an important lesson to today's candidates. The Reagan recovery was one of our country's strongest and it was spurred on by a combination of lower taxes, fewer regulations, and simple optimism. Today's tax rates are already fairly low by historical standards, so candidates might focus more on the last two conditions. Further, they should be bold in doing so.
If there is a lesson from American history that should not be forgotten it is the resiliency and basic inclination toward growth and prosperity that our national character and economic system engenders. Candidates should not assume that the "new normal" is normal or that it will continue. Rather, if an elected candidate would simply get the government out of the way and allow the economy to steer itself, strong economic growth will almost surely return and such a return will happen much faster than people expect.
It took about two years for Reagan to get things going full steam after Carter, but that was starting from high inflation that we do not have to worry about at the moment. With the more solid job growth of the past few months and GDP growth that is respectable if not spectacular, candidates would be mistaken to act like a major improvement would be difficult or slow to develop. We bounced back from Carter and we can bounce back from this.
Second, have a message of optimism and confidence. Never underestimate how much of the economic turnaround under Reagan was simply due to his convincing ordinary Americans to be confident again. People who are optimistic about the future see the expected returns to business investment as higher which means that they are more willing to undertake such investments. Expecting a brighter future means more business and job creation, two things which have been lacking for most of this recovery.
Five full years since the end of the recession, consumer confidence has still not returned to a healthy level and that holds back both consumer spending and business investment. The media focus on bad news certainly doesn't help, but presidential leadership in this arena can make a positive difference. A candidate (or president) that inspires confidence in economic policy making will lead people to be more optimistic about our economic future and that optimism becomes self-fulfilling. If we think things are getting better, businesses create jobs which means things really do get better. Fake it until you make it can work in macroeconomics.
Third, trust the market, not the government. Much of the weakness in this recovery can be attributed to government interference that blocked the market from correcting its own excesses. The U.S. economy was overinvested in the real estate, finance, and automobile manufacturing sectors. In the normal course of a recession business failures, consolidations, and downsizing would reduce those industries back to their appropriate sizes. Meanwhile, investment capital that is not completely lost in those sectors would be removed and redeployed into sectors with better prospects for generating a return on those investments. Such reallocation of capital to more efficient and productive uses is a major part of how recessions help to keep the economy function properly and meeting the demands of consumers.
Unfortunately, government bailouts kept low-performing assets in both the auto manufacturing and finance sectors. Worse, the Obama administrations penchant for picking winners and losers in as many facets of our lives as possible has translated into the government steering resources to favored industries such as alternative energy. By assuring that capital will be misallocated into sectors that would not attract the same levels of investment in a free market, we are guaranteed to have lower overall economic growth.
Capital markets naturally allocate capital to the sectors where it is expected to produce the highest returns. When government changes the allocation, the only direction for the return on capital to go is down. Lower returns on capital means fewer jobs produced both now and in the future.
Candidates hoping to attract support from the business community and ordinary citizens who would like to see more jobs available should promise to get the government out of the business of guiding our economy. Reasonable regulations are fine, but the government should not be deciding which sectors of the economy should be growing or shrinking.
After all, professional money managers and venture capitalists still make bad investments all the time; they simply make enough good ones to offset those losses. Politicians and bureaucrats will not be better at capital allocation than an industry full of investment professionals. Worse, politicians and bureaucrats are not even trying to allocate capital efficiently, but instead are trying to allocate it politically to serve their agendas and further their political careers. If we leave capital allocation to the market, we will be much better off.
Before politicians accept the "new normal" as permanent they should look back to how our economy recovered from the Carter years. If freed from its government-imposed shackles and current pessimism, the American economy can return to rapid growth with a vengeance. Smart candidates for president in 2016 will take this lesson to heart and preach a return to optimism, American confidence and ingenuity, and less government interference in the market. Reagan proved it can be done and we can do it again if we choose.
