The Federal Reserve and the 2012 elections

It's shocking to me how little attention is being given to the Federal Reserve by the Obama administration and its supporters. Consider the following list of statements:

1. The economic downturn has been severe. The history of financial crises suggests that recovery may be long and difficult, particularly if the US enters a deflationary spiral.
2. A second stimulus can't pass Congress now and certainly won't pass after expected Republican gains in November.
3. The Federal Reserve plays the most important role in determining short-term macroeconomic outcomes.
4. While interest rates are at the so-called zero bound, the Fed could take other steps to try to stimulate the economy.
5. Some officials at the Fed are concerned about inflation; this appears to be limiting its aggressiveness.
6. Obama's Fed appointees are likely to be inclined to try to stimulate the economy. Their confirmation could help tilt the balance toward more aggressive measures.
7. There are significant lags in macroeconomic policy, which make swift action by the Fed especially important.
8. If successful, these measures could help millions of Americans who are struggling to make ends meet during the deepest downturn of their lifetimes.
9. The economy plays the most important role in presidential approval and presidential election outcomes. If economic growth does not improve significantly, Obama's approval ratings will decline and he is likely to be defeated in his re-election campaign.

I think most sophisticated Obama supporters and administration officials would agree with each of these statements, but few besides Matthew Yglesias seem to understand their combined implications. The economy drives American politics, and it's stuck in a ditch. Absent a macroeconomic miracle, the Fed is Democrats' best hope for getting the recovery moving, and their only direct leverage is Obama's appointment power. So why does no one care that Peter Diamond's Fed nomination was blocked yesterday? As bizarre as it sounds, there is no bigger issue in American politics right now in terms of the potential effects on future electoral outcomes.

Comments

[cat48]

I was waiting for recess before panicking. O may recess appoint him.

[Lee_Rosenberg]

9. The economy plays the most important role in presidential approval and presidential election outcomes.

I guess the question I would have - since we often like to draw parallels between now and the 1930s - is how did Roosevelt win such a landslide in 1936 if the economy plays the most important role? Was it that people just genuinely believed that things were getting better? Was it that the actions that Roosevelt took in his first term (establishing unemployment benefits, etc) were overwhelmingly popular?

It seems like there are similarities in the situation we find ourselves in, but not necessarily in the mindset of how Americans perceive the situation we're in.

[Opie Curious]

In 1936, things were getting better. GDP crashed from 1929 to 1933; from 1933 to 1937 it grew almost as rapidly as it had fallen. GDP is obviously a really crude metric, but at a certain pace of growth, some of it essentially has to trickle down to most of the (voting eligible) population.

[Lee_Rosenberg]

GDP has also gone back up today.

GDP is obviously a really crude metric, but at a certain pace of growth, some of it essentially has to trickle down to most of the (voting eligible) population.

I'm not sure I understand the basis for this statement. This depends on what sectors of the economy are contributing to that growth and how that translates into future expansion, does it not? I guess I'd need to look at what has driven GDP growth over the past year and a half.

[Opie Curious]

The rate of growth in GDP today and the rate of growth in 1936 are not similar. Theirs averaged 14.1 percent per year for three years; ours can't even keep itself up to 3 percent per year for more than a quarter. The word "most" was probably overstated, but I do have a hard time believing you could see annual growth of well over ten percent and not see it redoubt to a huge number of people.

But to look at just a couple more broad statistics:

both U3 and estimated U6 fell dramatically from 1933 to 1936. Over the last year, our U3 is essentially unchanged.

And M2 expanded by about a third between 1933 and 1936, while current M2 is only about 8 percent higher than it was in fall of 2008. M2 doesn't inherently mean people can buy more, but it sure makes it more likely.

This is a low baseline issue; I'd still rather have the country we have now rather than the country we had in 1934, but their rate of improvement was much better than ours. If they'd implemented a TARP-like program and stimulus in 1930, their rate of change may not look quite as impressive, but they didn't and things degraded for years, so improvement under FDR was obvious and dramatic. Voters may not be perfectly rational, but they're smart enough to recognize that FDR's baseline was much lower than Hoover's.

All that aside, I'd bet you're right about contribution by sector. And I'd bet a closer look today would tell a problematic story (financial market recovery on the strength of its own money rather than on the strength of significantly better output down the supply chain).

[Lee_Rosenberg]

Thanks, that answers a lot of the questions I had swimming around my head when I left my first comment.

Voters may not be perfectly rational, but they're smart enough to recognize that FDR's baseline was much lower than Hoover's.

I hope that's still true today. I don't get the sense that the average American is understanding the causes of our current economic decline and how best to climb back out.

All that aside, I'd bet you're right about contribution by sector. And I'd bet a closer look today would tell a problematic story (financial market recovery on the strength of its own money rather than on the strength of significantly better output down the supply chain).

Yeah, that was the example I had in mind.

Thanks for the replies.

[T]

Hasn't it occurred to you that Obama isn't paying much attention to the Fed precisely because he supports its current policies?

What makes you think anyone he picked for the Fed would be more proactive than Geithner or Summers, whom he picked for other economic policy roles?

Face it, Obama is as much an economic elitist as Bush was; he's just smoother about it. He is every bit as indifferent to the well being of the middle class as everyone else with power in this nation. If this Diamond fellow was likely to change the status quo, Obama wouldn't have appointed him.

[David in Cal]

Can the President and congress control the economy? Is it fair to blame them for a downturn and credit them for a recovery?

ISTM Brendan has implied that a President's economy is more luck than policy. Brendan certainly hasn't claimed that wrong-headed policies of Obama and the Dems are responsible for the current bad economy. On the contrary, I think he has said or implied that fedeal policies have not had much impact on economic conditions.

That POV seems at odds with the current post, which seems to say that a single Fed member will make the difference between recovery and stagnation. And, that dramatic difference would be apparent in less than 3 months.

If the President could fix the economy in 3 months simply by appointed a Fed member, then I think he would deserve a lot of blame for not having fixed the economy in a year and a half. My guess is that this Fed appointment won't matter much at all.

[Steve]

Obama is the servant of centrism. That's why he reappointed Bernanke, arguably his worst appointment to date. Well there is always Summers and Geithner.

Taking the actions Brendan suggests would offend the centrist consensus and Obama would never do that, even if it means the economy goes down the tubes. He would never upset that apple cart.

[bnyhan]

Remember, Obama has failed to fill three vacancies, not one. The economy is not going to be turned around before November, but more aggressive Fed action might spur the economy in the medium term. I'm not arguing that this will necessarily happen, but getting those three appointees confirmed is arguably Obama's best chance to try to spur economic growth before he's up for re-election.