Obama's visions of Carter, the Misery Index signaling trouble.
After Barack Obama assumed the presidency of the United States there were some speculation that the young and charismatic Democratic leader was going to become the next Lincoln (Newsweek even ran a piece comparing the two men that at the time seemed a tad premature). Yet my view back then given Obama's inexperience and skewed perception of where America should go was such that Obama has a much better chance of becoming the next Jimmy Carter rather than some great emancipator.
Fast forward to today and it would appear that the conjecture was correct. One of Carter's notorious legacies was the Misery Index (MI), a very simple number denoting inflation and unemployment. While some can dispute the accuracy of the index given the difficulty of relying on Government data for inflation, nobody can dispute that using the same formula the index has been steadily rising. Although the MI numbers only go back to the Truman error, you can see here that Carter's accomplishments consist of registering the highest MI year ever with 20.76 in 1980.
Zoom forward to the era of Obama. We would need to go back to 1983 to find a number higher than that of what we have today. Because Americans and most casual observers of politics and economics generally remember headlines, tidbits and convenient numbers this statistic does not speak of well of Obama's ability to govern nor does it speak well of Obama's chances of being reelected.
Now, let me spend a moment and discuss the actual index in terms of how fair it is and whether one can actually draw any meaningful conclusion of a president based on the MI.
The chart above breaks the index up into unemployment (blue) and inflation (red). Although the President should not be actively involved in controlling employment most people disagree and expect the Federal Government to "fix" employment and become very angry when the "fix" takes too long. Since most people have only a limited understanding of how the economy works, what role Congress plays and no understanding of money - the result is usually to either blame or praise the President.
It is true, certain policies can affect employment, but we usually see the Government react too slowly and even when the reaction succeeds there are nasty consequences that manifest themselves elsewhere. This brings to the more important point and the second part of the index, inflation, a phenomenon that has very little to do with the President. Sure, the President does appoint the sole individual responsible for controlling inflation, the Federal Reserve chairman, but it is only the Senate that can ultimately decide whether or not the individual actually becomes chairman.
In fact if you scroll back up and observe the Carter era you will see that employment in the stagnant 1970s was actually lower than today, it was the inflation that spiked the index and ultimately cost Carter the presidency! It was the inflation that created the misery and it was in the inflation that still evokes horrible memories from Americans when they are asked to reflect on the economic condition of that decade. Similarly, looking at Reagan's era the employment rate barely budged by the time he ran for reelection, but through his appointment of Paul Volcker to the Federal Reserve he was able to enjoy a significant reduction in inflation. Ask people about the 1980s and they will tell you that the economy was booming and times were great. Was Carter to blame for the high misery? My answer would be, Carter should get as much blame for the high misery as Reagan should get credit for the low misery.
Now, before you make the conclusion that we need to throw Ben Bernanke out (not a bad idea regardless) and replace him with someone like Paul Volcker, let me remind you that the policies during Reagan's time were misleading and planted the seed for the violent booms and busts we experienced over the past few decades. I will encourage you to explore my piece on Reagan and the Economy, where you will find a straight forward explanation of why the 1980s were so "good" and why Reagan receives much more credit than he deserves. In a nutshell, Volcker flooded the economy with liquidity by dropping interest rates which made money cheap to borrow and in combination of a new industry (software, hardware, telecommunications) with lower tax rates created a perfect combination of growth. Ironically enough the true measure of inflation (amount of money in the system) grew, but was simply offset by rapidly increasing production which percolated through every facet of the economy.
The cold hard truth, is that neither the President nor the Federal Reserve should be in control of something as large and complex as the economy. Yet even whey do succeed in creating temporary relief through manipulating the amount and cost of money in the system or playing with tax rates there is always a price to pay in the future. This is precisely why Bush Sr. suffered through a recession upon Reagan's departure, because there is a price to pay for flooding the system with money and that price is called a contraction or commonly known as "recession".
Alas, until more individuals become aware of just how much intervention occurs in our everyday lives by powerful people, nothing will ever change.
Note: There are only three Presidential candidates as of now that are determined to limit or restrict the amount of intervention in the economy by the central planning Federal Reserve. Ron Paul, Gary Johnson and Michele Bachmann. So when you think about who to support, think about the Misery Index.
Fast forward to today and it would appear that the conjecture was correct. One of Carter's notorious legacies was the Misery Index (MI), a very simple number denoting inflation and unemployment. While some can dispute the accuracy of the index given the difficulty of relying on Government data for inflation, nobody can dispute that using the same formula the index has been steadily rising. Although the MI numbers only go back to the Truman error, you can see here that Carter's accomplishments consist of registering the highest MI year ever with 20.76 in 1980.
Zoom forward to the era of Obama. We would need to go back to 1983 to find a number higher than that of what we have today. Because Americans and most casual observers of politics and economics generally remember headlines, tidbits and convenient numbers this statistic does not speak of well of Obama's ability to govern nor does it speak well of Obama's chances of being reelected.
Now, let me spend a moment and discuss the actual index in terms of how fair it is and whether one can actually draw any meaningful conclusion of a president based on the MI.
The chart above breaks the index up into unemployment (blue) and inflation (red). Although the President should not be actively involved in controlling employment most people disagree and expect the Federal Government to "fix" employment and become very angry when the "fix" takes too long. Since most people have only a limited understanding of how the economy works, what role Congress plays and no understanding of money - the result is usually to either blame or praise the President.
It is true, certain policies can affect employment, but we usually see the Government react too slowly and even when the reaction succeeds there are nasty consequences that manifest themselves elsewhere. This brings to the more important point and the second part of the index, inflation, a phenomenon that has very little to do with the President. Sure, the President does appoint the sole individual responsible for controlling inflation, the Federal Reserve chairman, but it is only the Senate that can ultimately decide whether or not the individual actually becomes chairman.
In fact if you scroll back up and observe the Carter era you will see that employment in the stagnant 1970s was actually lower than today, it was the inflation that spiked the index and ultimately cost Carter the presidency! It was the inflation that created the misery and it was in the inflation that still evokes horrible memories from Americans when they are asked to reflect on the economic condition of that decade. Similarly, looking at Reagan's era the employment rate barely budged by the time he ran for reelection, but through his appointment of Paul Volcker to the Federal Reserve he was able to enjoy a significant reduction in inflation. Ask people about the 1980s and they will tell you that the economy was booming and times were great. Was Carter to blame for the high misery? My answer would be, Carter should get as much blame for the high misery as Reagan should get credit for the low misery.
Now, before you make the conclusion that we need to throw Ben Bernanke out (not a bad idea regardless) and replace him with someone like Paul Volcker, let me remind you that the policies during Reagan's time were misleading and planted the seed for the violent booms and busts we experienced over the past few decades. I will encourage you to explore my piece on Reagan and the Economy, where you will find a straight forward explanation of why the 1980s were so "good" and why Reagan receives much more credit than he deserves. In a nutshell, Volcker flooded the economy with liquidity by dropping interest rates which made money cheap to borrow and in combination of a new industry (software, hardware, telecommunications) with lower tax rates created a perfect combination of growth. Ironically enough the true measure of inflation (amount of money in the system) grew, but was simply offset by rapidly increasing production which percolated through every facet of the economy.
The cold hard truth, is that neither the President nor the Federal Reserve should be in control of something as large and complex as the economy. Yet even whey do succeed in creating temporary relief through manipulating the amount and cost of money in the system or playing with tax rates there is always a price to pay in the future. This is precisely why Bush Sr. suffered through a recession upon Reagan's departure, because there is a price to pay for flooding the system with money and that price is called a contraction or commonly known as "recession".
Alas, until more individuals become aware of just how much intervention occurs in our everyday lives by powerful people, nothing will ever change.
Note: There are only three Presidential candidates as of now that are determined to limit or restrict the amount of intervention in the economy by the central planning Federal Reserve. Ron Paul, Gary Johnson and Michele Bachmann. So when you think about who to support, think about the Misery Index.
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