Worst Economic Leadership in a Couple of Generations?

Jeff Madrick

It would be difficult to imagine more incompetent political leadership on economic matters than we in the developed world now have.  Is this the worst era for economic leadership in the post-war period?  It is not a foolish question.

We have David Cameron in England demanding government spending cuts in the midst of economic stagnation.  On the American side of the Anglo-American pond, we have both Democrats and Republicans agreeing that balancing the budget, more through spending cuts than tax increases, is the economic priority. All this in the face of another possible recession with unemployment still above 9 percent.

In Europe, we have the spectacle of Angela Merkel telling the world early this week that the poor indebted nations have to shape up and tighten their belts, the rich Euro nations won’t bail them out of their obligations. “Get competitive,” she scolds them   Her finance minister warns us again of inflation. Neither acknowledges that if those “less competitive” Euro nations were not buying their products, they could not sustain their economy. She and Nicolas Sarkozy refused to put more money in the bailout pot.

And if we cross the Pacific to China, an emerging nation, we find leaders who still hesitate to let their currency fall adequately—though it must be said that they did stimulate a couple of years ago when necessary.

It is stunning that the advanced world has adopted policies whose underlying assumption is that austerity economics will lead to growth.  But does this make it the worst leadership in the modern era? Let’s look back at a few of the great economic blunders since the 1930s.  Almost always they are associated with too much fear of inflation.

The Federal Reserve’s policy errors in the early 1930s are candidates for the top award, although Milton Friedman’s laying virtually all the blame for the Great Depression on them was more than a little extreme.   But even Franklin D Roosevelt tried to step on the brakes in 1937, as did the Fed, leading to one of the sharpest collapses in economic activity of the nation’s history only a few years after the recovery from the early 1930s devastation had begun.

Skipping to Dwight Eisenhower, he was always timid about government spending, the fear of inflation on his mind. When Richard Nixon asked him to pump up the economy before he ran against John Kennedy for the presidency in 1960, Eisenhower refused and a high unemployment rate made it almost impossible for Nixon to win.

JFK’s presidency was short but, against the advice of John Kenneth Galbraith, he preferred to cut taxes than raise public investment to stimulate the economy.  A mixture of both might have made far more sense. But when the economy was overheating, Lyndon Johnson refused to raise taxes in 1967 to finance the Vietnam War even though Keynesianists argued he should have done so.  It was the “defeat of the New Economics by the old politics,” as Keynesian Arthur Okun put it.

Richard Nixon was correctly worried about rising inflation and froze wages and prices in 1971. But then he stepped on the fiscal gas to get re-elected in 1972 as his newly appointed Fed chairman cut interest rates. Pent-up inflation burst forth when the freeze was ended.  A true incomes policy experiment was never really tried.

Jimmy Carter vacillated between his fiscal conservatism and his concern for the poor. His appointee as Fed chairman, Paul Volcker, did not.  Volcker was a strong-minded leader and a believer in government and regulation, but he also hated inflation and unions. He pushed interest rates far higher than necessary to tame inflation, and disrupted a lot of the American economy.

Reagan of course was the nation’s great tax cutter and deregulator—and deficit creator.  He left America with high budget deficits even after several years of expansion, and even more important ineffective government.

Bill Clinton raised taxes and presided over a boom, but pushed financial deregulation hard and never used the budget surpluses to invest significantly in education, infrastructure or energy technologies. To the contrary, he was dedicated to paying down the debt with the money—like a good loyal Republican.

George Bush sharply cut taxes for the wealthy, and under him GDP grew more slowly than in any other comparable period, not including the devastation that began in 2007.

Need we say anything more about Alan Greenspan, deregulationist par excellence and the century’s greatest inflation hater?

So giving the current world economic management the top incompetence award is not obvious.  What we should note, however, is that amid the mistakes of presidents and Fed chairmen past, there were many achievements. FDR’s New Deal stands out.  Eisenhower built the highway system.  JFK and LBJ built a modern safety net.  Richard Nixon signed onto the EPA, OSHA and the Consumer Product Safety Commission.

After that, presidents and Fed chairman were generally more dedicated to stopping inflation than supporting growth.   There were few social achievements, save expansion of the earned income tax credit under Reagan and Clinton and Medicare part D, more designed to make insurance companies rich than anything else.  Obamacare is still an open question.

But what’s disturbing about today’s disappointing and dangerous set of leaders is that we have accrued a lot of economic knowledge that earlier leaders did not have. And they now act in defiance and/or ignorance of it.  We know that to stop a financial collapse, you should act early and with a lot of resources. The US government did that with TARP, the QE2, and the Obama stimulus. I think TARP and the stimulus turned out to be seriously inadequate, but compared to Sarkozy, Merkel and Cameron, these were near genius.

As for austerity economics, even the IMF issued a study that it would not work in the current environment.

Because we have accumulated experience and knowledge, I vote these leaders among the worst of the last 75 years.   If events continue as grim as they now look, they will stand alone at the top of this disreputable heap.