Homepage Heard on College Hill Funding Our Public Officials Brown Policy Reports Brown Polls Financial Disclosure Lectures RI Factbook PS111 Contact Us Site Search Help Support this Site		Benchmarking Economic and Political Recovery (posted March 8, 2009) We live in a time of extraordinary challenges. If the goal is to exist during exciting times, we have succeeded beyond our wildest imagination. National unemployment is rising quickly and our country’s Gross National Product is dropping just as fast. Consumer confidence is pessimistic, and major financial institutions have melted down. Trust in government and business are at all-time lows. In this situation, it is easy to get confused and not know what to think. The blur of daily reports and varying expert interpretations make it difficult to evaluate information and determine what lies ahead. It is possible to become overly pessimistic in a time of great fear and anxiety. But people should step back from the daily blur of reports and think about long-term indicators of vitality. There are a variety of economic and political measures that are quite informative about our collective dilemma. People should watch them and understand what they tell and don’t tell us regarding our future. Macroeconomic Indicators Most of the common macroeconomic indicators are retrospective in nature, meaning they tell us what happened in the past. As financial advisors are fond of quoting, we have to remember that past performance is no guarantee of future results. Dismal pasts can lead to more successful futures, and vice versa. Most retrospective measures do not have predictive power because trend lines can change in either direction. The most widely-watched economic indicator is Gross Domestic Product. It measures overall national output and income based on the sale of final goods and services. In the fourth quarter, 2008, GDP fell by 6.2 percent, following a much small third quarter decline of 0.5 percent. It is a conclusive measure of where we have been, but it suffers from a lengthy computation schedule. Its readings are publicized two months after each quarter ends. They have the least predictive utility because we are in the middle of the next quarter before we learn what has transpired in the last one. More up-to-date are the unemployment numbers. They are announced on a monthly basis and come out within days of the end of each month. For example, the February, 2009 unemployment rate hit 8.1 percent, a jump from 7.6 percent in January. The February number was announced March 6^th so is closer to being up-to-date than is true with GDP. The February report was alarming because it revealed that 651,000 jobs were lost in that month alone. This increases the overall U.S. unemployment to 12.5 million people. It is the highest percentage in 25 years and the largest raw number of unemployed since records were started in 1940. Both GDP and the unemployment rate offer valuable long-term information, but the most personal measure of day-to-day living is real disposable personal income. That indicator taps people’s income after taxes and inflation, and therefore reflects the actual spending power available to people. Current disposable real personal income numbers are not as discouraging as other aggregate macro-economic indicators. A good thing about our current fiscal environment is that inflation has dropped to near-zero and taxes are being reduced for those making under $250,000. These features off-set the dramatic slowdown in economic growth, and suggest a less pessimistic situation. Income levels actually increased 1.5 percent in January, following a 0.4 percent rise in December, 2008. Of course, as unemployment spreads, personal income numbers will drop to reflect lost paychecks. But unlike the GDP and unemployment readings, personal incomes are holding up better than one would expect during a time of rising joblessness. As the Obama Administration’s stimulus package is dispersed, it will shield some people from what would be even worse declines in personal income. Consumer Confidence The biggest limitation of macroeconomic indicators is that they represent lagging measures. They tell us what has happened in the past economy, but this doesn’t necessarily reflect what may happen in the future. More revealing for the upcoming economy is consumer confidence. Two-thirds of our nation’s economy is based on consumer spending. If people are confident, they are more likely to make purchases. And if they are gloomy, their expenditures will reflect that fact. The Conference Board releases monthly measures of people’s confidence based on a national sample of 5,000 households (with 1985 set to the baseline of 100). In January, 2009, the consumer confidence index stood at 37.4, but then it dropped to 25.0 in February, reflecting people’s growing economic pessimism concerning the overall economy. This represents an all-time low since the index began in 1967. As long as consumers are pessimistic, they will be reluctant to spend. Combined with rising unemployment, this weakens our macroeconomic situation and prolongs the recession. Poor readings on consumer confidence virtually guarantee that things are likely to get worse before they get better. The economy will not improve until these monthly readings start to strengthen. Anything President Obama and congressional leaders can do to boost consumer confidence will be good for the long-term economy. Leader Performance In addition to national economic indicators, there are valuable political measures that measure how we are feeling about our leaders, institutions, and overall direction. For example, public opinion surveys track assessments of the president, congressional Democrats, and congressional Republicans. Recent numbers indicate that President Obama is winning the public opinion battle. In a 2009 Washington Post/ABC News survey, 68 percent of Americans said they thought Obama was doing a good job, compared to 50 percent who felt that way about congressional Democrats, and 38 percent who believed that of congressional Republicans. These contrasts reveal how various party appeals are playing with the general public. Obama’s popular support indicates that people right now accept his arguments that change is necessary and the federal government needs to become more protective of the public interest. Many Americans like the President and feel he is doing a good job in a very difficult situation. The low support for Republican leadership suggests that their opposition to Obama’s economic recovery and reinvestment package has not gone over very well with the general public. GOP arguments that we can revive the economy through tax cuts and limited government are not as very compelling as they were from 1980 to 2006. The poor poll numbers for Republican leaders indicate how dramatically the political environment has shifted in recent years. During preceding decades, the GOP won many elections by making these types of policy arguments. The general economic well-being for most of that time resonated with many Americans and helped Republicans control the presidency for 18 of these 26 years. However, with the financial meltdown of the past year, it is harder for the public to buy tax cuts as the major policy prescription. They are open to new approaches to policymaking and a different role for government. Whether they buy Obama’s expansionist philosophy ultimately will depend on the results his policies produce. If Democrats make the economy better, they will be in a strong political position. If not, Republicans will get another opportunity to lead. Right Track/Wrong Track A key number to watch in gauging voter sentiment is the right track/wrong track number. Most pollsters ask some variation of the question, “is the United States headed in the right direction or is it seriously off on the wrong track?” Responses to this item represent a summary judgment of overall sentiment about out nation’s performance. It includes how people feel about economics, politics, and society at large. During December, 2008, 83 percent of American felt the country was headed in the wrong direction. This is one of the highest numbers recorded in recent memory and helps to explain why Democrats were able to recapture the chief executive’s job. When people feel the nation is off on the wrong track, they become more open to leadership and policy changes. In January, 2009, the wrong track number dropped to 78 percent. More people hold Bush and Republicans responsible for our dismal circumstances. A recent Wall Street Journal survey found that 84 percent thought Obama had inherited economic problems, while only 8 percent felt he was responsible for those difficulties. However, at some point, blame will shift, and Obama will “own” the problem in the public’s eyes. The crucial undetermined question of his presidency is whether this occurs after three months, six months, or a year. His ability to lead will be strong as long as his honeymoon lasts. When support starts to fade, it will be more difficult for him to make major policy changes. This explains his eagerness to make fundamental changes in health care, energy, and education during 2009. Trust and Confidence in Government/Business Beyond support for individual leaders and the country as a whole, it is important to track trust and confidence in government and business. Unfortunately, the news is not very positive. Trust in government is at an all-time low, but confidence in business is even lower. The problem of public mistrust of government is challenging because cynicism makes it hard for voters to trust leadership motives, especially on tough votes calling for national sacrifice. People will sacrifice if they think everyone is sharing equally in the burden. But they get very resentful if they think they are bearing a disproportionate share of the givebacks. In this situation, it is easy for opponents to claim wasteful spending or wrong-head policy priorities because that is what people already think about the federal government. Unlike the 1930s, when Franklin Roosevelt faced a more trusting public and media, the dominant feature today is extensive political cynicism. But mistrust is not just directed at government. In the wake of the financial meltdown, Americans no longer trust business and financial leaders. They are upset at how institutions were led and decisions got made. This pervasive mistrust makes it more difficult for elected officials to take steps to solve our current difficulties. Political Polarization One of the biggest problems facing our country has been excessive political polarization over the last few decades. Republicans and Democrats have very different policy visions and it has been difficult to get elected officials to work together. There was some hope during the 2008 election when each party nominated candidates (Obama and John McCain) who talked about bipartisanship and the need to overcome past divisions. But these hopes faded early in the Obama Administration when Congress passed his economic stimulus package on a straight party line vote. Nearly every Republican in the House and Senate opposed the legislation, while most Democrats favored it. If Congress can’t be bipartisan at a time of national crisis, bipartisanship is not likely to develop on contentious issues such as health care, climate change, Social Security reform, or immigration reform. Each of those issues is even more contentious than fiscal stimulus and suggests polarization is going to be a huge problem over the next two years. This likely will push both parties to ideological extremes and make it difficult to forge pragmatic, centrist alliances. To see how polarization unfolds in the future, you can look at party divisions in assessments of President Obama. The Gallup survey tracks public sentiments on a daily basis and both reports an overall number and breaks it down for support among Republicans and Democrats. In the most recent period, 90 percent of Democrats approved of Obama’s performance, compared to 42 percent of Republicans. This party gap of 48 percentage points represents a measure of party polarization that can be charted overtime. In recent administrations of former Presidents Clinton and Bush, polarization increased during time in office. If this happens with Obama, it will be more difficult for the President to exercise leadership.