Why is this man smiling?

There are few new jobs -- and even fewer new good jobs. But the economy is growing, and if history holds, George W. Bush will be reelected easily.

Topics: U.S. Economy, Great Recession, Unemployment, Federal Deficit,

Why is this man smiling?

For three decades, Ray Fair, an economist at Yale with a jones for predicting the future, has been forecasting the winners and losers of American presidential elections.

In the mid-1970s, after poring over economic data, Fair developed a mathematical equation that factors in economic growth rates, inflation and an incumbent’s general record on economic matters to arrive at an estimate of the popular vote on Election Day. His model rests on a simple truth — the prevailing economic conditions of an election year provide an excellent guide to voters’ behavior in November — and it is stunningly accurate. Fair’s equation predicts the popular vote to within 2 or 3 percentage points for almost every presidential election since 1920. He forecast the toss-up in 2000, the reelections of Bill Clinton and Ronald Reagan, George H.W. Bush’s victory in 1988, and Jimmy Carter’s loss in 1980. And based on the current health of the U.S. economy, Fair predicts an easy win for George W. Bush in November.

But this year’s economy is different from all the others. After nearly four years of Bush’s presidency, many experts believe the United States is facing an unprecedented situation: The economy is recovering, but the number of jobs, and in particular, good jobs isn’t. Could this be the year Fair’s crystal ball breaks?

By historical standards, the U.S. economy is growing reasonably well, and as the incumbent president, Bush is well-positioned to benefit. The total economic output was up 3.1 percent in 2003; by way of comparison, in 1995, the year before Clinton’s reelection, growth was 2.5 percent. In 1996, the economy grew by 3.7 percent, and analysts predict that output will grow by at least that much this year. Moreover, inflation and interest rates are currently low, and the stock market is up.

In campaign events across the country, the president is aggressively selling this record. “The last six months of growth have been tremendous,” Bush declared in Florida Feb. 16, attributing the gains to his tax cuts. “Things are looking better for America.”



If some of this sounds like news to you — Why doesn’t it feel like things are looking better for America? — your skepticism is understandable. On paper, Bush’s election-year economic record might look like a winner, but to voters, the situation seems much less certain. On Tuesday, for example, the Conference Board, a business research group, reported that consumer confidence “weakened significantly” in February. Recent polls show Americans to be tremendously dissatisfied with Bush’s stewardship of the economy. They are worried about a host of issues, including budget deficits and rising healthcare costs, but they are mainly concerned with the dismal employment market. (Other polls suggest Bush will face a tough election fight. For instance, a Gallup poll taken at the end of January shows John Kerry beating Bush by 53 to 46 percent; according to Gallup, Gerald Ford was the only other postwar president to trail his challenger in January of the election year. Ford, of course, lost to Carter.)

The current situation has many economists baffled. Employment usually rises in an economic recovery, but in the last few months, despite strong economic growth, few jobs — and fewer good jobs — have been created. Some economists point to globalization, others to structural changes in the U.S. econonomy, but most agree that we’ve never been in a situation quite like this before, and they’re not sure what will come next.

The lackluster employment market is the Bush administration’s main economic weakness, and it is trying desperately to convince Americans that good times are just ahead. To that end, on Feb. 9, the White House Council of Economic Advisers released its annual Economic Report of the President, predicting extremely optimistic job growth this year. Despite the disappearance of hundreds of thousands of jobs in 2003, the CEA said that at least 3.8 million new jobs would materialize in 2004.

The White House seems to have expected the public to embrace its rosy jobs numbers. Instead, the pie-in-the-sky projection backfired, and economists across the political spectrum criticized it as being ridiculously out of touch with economic reality. Many wondered whether the report, which is prepared by economists, had been the victim of a “sexing up” by White House political operatives.

Administration officials are now backing away from the prediction. “I think we are going to create a lot of jobs. How many I don’t know,” Treasury Secretary John Snow told reporters on Feb. 18. Bush, too, refused to answer reporters who asked him whether he stood by the CEA’s estimate.

It’s obvious why the White House might have wanted to fool the public into thinking job growth would be stratospheric in 2004. As pundits are fond of saying, Bush is on track to become the first president since Herbert Hoover to preside over a net loss in jobs during his term. While many economists say that powerful economic forces like globalization and technological innovation are slowing down employment growth during the economic recovery, many also fault Bush’s policies, especially his tax cuts.

“Those were not tax cuts structured for short-term job growth,” says Jared Bernstein, an economist at the Economic Policy Institute, a left-leaning Washington think tank.

Still, if the White House hyped the jobs projection, it will prove to be an idiotic political strategy. That’s because if Bush gets even modest job growth this year — which is in line with what economists predict — that won’t be so bad for an election year, so why raise expectations?

It’s not at all clear how much the president’s jobs record (and, to a lesser extent, his deficits) will damage his chances for reelection; with an expanding economy, it might not hurt him at all. Experts say there’s no historical election-year analogue of today’s growing, yet jobless, economy. “We haven’t observed it in the past,” Fair says. But James Campbell, a political scientist at the State University of New York at Buffalo who also forecasts presidential elections based on economic conditions, doubts that weak employment will be so bad for the president.

When “there’s economic growth, somebody’s benefiting from that, and usually there are enough voters benefiting from it” that it helps the incumbent, Campbell says. A growing economy tends to put the public in a forgiving mood. “The impact of the economy can’t be interpreted as a just dollars and cents kind of thing,” says Campbell. “Economic growth conditions the public mood about everything. If the audience is fat and happy, they are more than willing to listen to your explanations for weapons of mass destruction or tax cuts or whatever it is.”

But Campbell’s analysis makes the CEA’s predictions even more perplexing. The Council of Economic Advisers is a three-member panel of economists charged with providing a president with objective economic analysis. The CEA’s work is generally thought to be divorced from politics, and panel members are often selected from academia. Bush’s CEA is headed by N. Gregory Mankiw, a Harvard professor and the author of several popular introductory economics textbooks. Mankiw is well-regarded in the profession; even critics of the White House have kind words for him, and few feel comfortable asserting that Mankiw’s optimistic job-growth numbers were the result of political, rather than economic, calculations. But many have their suspicions.

What is clear is that CEA’s dizzyingly ambitious predictions seem completely divorced from sound economics. The panel predicts that in 2004, total employment in the United States will run at an average of 132.7 million jobs, about 2.6 million more than the average of 2003. The word “average” is important here. It’s been widely reported — even in papers like the New York Times and the Washington Post — that the CEA is predicting a total of 2.6 million new jobs, but that’s not correct.

As the Economic Policy Institute and the Center on Budget and Policy Priorities — two left-leaning economic-policy groups — explain in their assessment of the CEA’s report, in order for the average number of jobs in the economy to rise to 132.7 million in 2004, there must be many more than 132.7 million jobs in the United States by December (since there are fewer than that many right now). The CEA, then, is predicting that more than 2.6 million jobs will be added in one year. According to the think tanks, for the economy to produce as many jobs as the CEA predicts, American businesses would need to hire more than 460,000 new people each month from February until December. That’s a whole lot of new jobs. In January, only 112,000 jobs were added, and that was the best month for jobs since 2000. Even in the economic boom of the late 1990s there were only a handful of months in which a half million jobs were created.

“It’s not going to happen,” Kevin Hassett, an economist at the conservative American Enterprise Institute, says of the administration’s prediction. “My surprise meter will be at 100 if it did. The economy teaches us humility.”

Part of why we should expect tepid employment growth, says Mark Zandi, the chief economist at Economy.com, is that there are “some major constraints on employment” in the current economy. Zandi believes that some of Bush’s economic policies have made it more attractive for businesses to invest in equipment rather than new people. The Bush tax cuts were “improperly focused,” Zandi says. “They’re focused on making it cheaper for businesses to invest. They’re not designed to lower the cost of labor, to make the labor force more skilled, or to rein in the rising costs of healthcare premiums. One of the fruits of that is job loss.”

William Dickens, an economist at the Brookings Institution who worked at the CEA under Bill Clinton, also faults the tax cuts. “There’s no doubt in my mind that the tax cuts had an effect” on economic growth, he says. But “by directing the tax cuts at wealthy people who don’t spend as much money, the short-run impact was a lot less than it could have been” if the tax cuts had been more targeted toward poor and middle-class people.

Economists also say that the United States is undergoing major structural changes that are at least temporarily making the job market more difficult — but these changes can’t really be pinned on Bush. Zandi says that globalization is contributing to a steady loss of jobs in the manufacturing sector, and “that’s only going to grow in intensity.” Dickens, of Brookings, disagrees, arguing that the hue and cry over “outsourcing” is overblown, and that it causes only a very tiny number of job losses in the United States — but he agrees that forces like technological innovation and international trade are altering the economic landscape and that these changes are affecting labor.

“Structural, long-term changes to the economy are probably what we’re seeing in these numbers,” Dickens says. As the economy shifts to adjust to innovations, people need to move between different industries, and that takes time.

There is one other explanation for the current bad job-growth numbers, put forward mostly by conservative economists: Our expectations are too high, they say. The current unemployment rate is 5.6 percent; we shouldn’t expect it to get much better. While this rate is significantly higher than the rate during the boom, when unemployment dipped as low as 3.8 percent in April 2000, it’s not that high in historical terms. Unemployment is in exactly the same place it was in January 1996, before Clinton’s reelection.

“We didn’t have a whole lot of unemployment in this recession,” says Daniel Mitchell, an economist at the Heritage Foundation. “For the person who lost their job it’s a dismal situation, but we weren’t up at 7.5 percent, we weren’t at the 10 percent that we saw in 1982. If you look at the unemployment rate of our major trading partners, most would give their left arm for what we have.”

With all of the obstacles in the way of a suddenly booming labor market, however did the CEA’s economists come up with a forecast of millions of new jobs? The panel won’t say. The CEA did not return Salon’s calls, and it hasn’t given any other reporters clues as to how it determined that 2004 would see incredible job gains. In this silence, economists suspicious of the White House have come up with their own ideas — the main one being that the jobs report was a political hack designed to make sure that the White House wasn’t predicting what many economists believe will be true, namely, that the administration will end its term with fewer jobs than when it started.

“When George W. Bush took office, the estimate of payroll employment stood at 132.5 million,” writes J. Bradford DeLong, a University of California at Berkeley economics professor whose popular blog has been buzzing with criticism of the CEA’s report for the past two weeks. The CEA’s report puts employment in 2004 at 132.7 million, because “a less optimistic employment forecast would make the 2004 number below the payroll employment number when George W. Bush took office.” This, DeLong stated, would have led reporters to write, “Bush administration forecasts that 2004 employment will be lower than at start of administration,” and “one must wonder if somebody, somewhere, sometime” decided that such sentences “should never be written, and that in order to keep them from being written the forecast had to have a 2004 employment number above the start-of-the-administration 132.5 million.” In other words, the report was massaged to prevent the media from reporting bad news.

“Statements by this administration,” DeLong added, “are simply not credible, and cannot be naively taken at face value.”

But concluding that the White House doctored the report to sidestep bad news raises more questions than it answers. “There’s something strange about that explanation because the truth would have come out eventually,” says Bernstein, of the Economic Policy Institute. “People will know whether the Hoover label sticks by the time the election comes around” — so if it is going to happen anyway, why doesn’t the administration want to take a political hit now? Why, instead, would it choose to raise expectations of huge job growth, only to have to see the economy continually fail to meet those expectations each and every month from now until the election?

“I would think that for an administration to play this game would be useless,” says Mitchell, of the Heritage Foundation, who stressed that he does not believe that the CEA hyped its report. “Saying that everything is going to be rosy, what does that get you? It’s politically smarter to underestimate these things and say, ‘We beat expectations.’”

The White House’s strategy seems especially silly when you consider that, according to most economists, jobs are poised to slowly flow back into the economy. Even though the number will likely be much lower than what the CEA predicted, a steady accretion of new employment from now until the election would surely bolster Bush’s campaign and hurt his opponent.

Lackluster job growth, says Hassett of the AEI, is “the best card the Democrats have” right now. Once job growth begins, though, the issue could slowly dry up. “I don’t think history suggests the approach will work for them,” Hassett says. “Most people have a job. We’ve got 8 million people who are unemployed. I really wish we can make their lives better than they are — but in a population of 270 million people are you going to base your whole election strategy on 8 million people?”

Democrats can take some solace in the fact that Ray Fair, the Yale election forecaster, has been wrong before. In the 1992 election, when the economy was just recovering from a recession and inflation was low — a climate not too different from today’s — Fair’s equation showed Bush beating Clinton. Of course, Clinton won that race with about 43 percent of the popular vote, compared to Bush’s 37 percent. But Fair’s model might have broken down only because of the odd candidacy of Ross Perot, who probably attracted many of Bush’s supporters. (Perot won about 18 percent of the popular vote.)

Some Democrats are starting to see that unemployment might not remain a winning issue as the country approaches Election Day. “The CEA may be proved right — the jobs situation is going to be better by November than it is now,” says Dickens, of Brookings. He suggests Democrats instead fight Bush hard on the issue of fiscal responsibility. “No one believes the Bush administration is going to cut the deficit in half in five years. That’s pure nonsense,” he says. “The only way they could get it to that is if they ignore the thing they want to do. It’s a joke — there’s no way in the world the administration is on a sustainable course.”

There are signs that voters appreciate hearing candidates advocate fiscal responsibility. In polls, people often say that reducing the deficit is a great way to boost the economy. Hassett says that in January, he traveled in New Hampshire with Sen. John McCain, who was acting as Bush’s emissary in the primary election there. During speeches, when McCain called for reducing the deficit, “there were amazing cheers. It seems like people themselves get nervous when they owe more money than they have coming in, so there’s a visceral response to it.”

Democrats would do well to take advantage of that response by explaining to voters the real dangers of running huge deficits, Dickens says. “The fiscal health of the country is in serious question, and that has to resolve itself somehow, and it could easily resolve itself in a crisis,” he says. “We have borrowed a whole heck of a lot of money from the rest of the world. If it looks like our interest rate is going to go up, that the dollar is going to depreciate further, if it looks like the economy is going to inflate, we could very well have a financial crisis. We could end up with sky-high interest rates and it could create a catastrophic situation in the country. That’s a serious possibility. It’s something that I would hope the Democratic candidates would talk about.”

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