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It’s the Economy, Stupid.

“If you want to make a bank financially shaky, convince all of your friends it already is.”   -Unattributed 

          The average voter does a very simple calculation in an election with during a down economy.  The candidate who holds the most promise to improve the state of the economy will likely win.  While many factors influence whose case is most convincing to voters, the results of the elections provide an unequivocal answer. 

            President George H.W. Bush’s approval peaked at just over 89% in February 1991.  A year later, his approval bottomed out at 29% and never again rose higher than 40% during the election cycle.  In the election that followed, the flagging economy figured prominently and Bush was defeated with the lowest percentage of the popular vote of any sitting President since 1932, hardly a coincidence considering that the nation was responding to similar economic distress.  Exit polling reflected that 75% of voters thought the economy was in “bad” or “very bad” shape, and that this was the primary influence on their votes.  

            The campaign of former Arkansas Governor Bill Clinton  was able to successfully link President Bush to the economy with the “Read my lips, no new taxes” ad campaign when the President, under pressure from rising deficits, agreed to a tax increase to help bring the federal budget into alignment.  Clinton won with a handy margin in the Electoral College and a plurality in the popular vote due to the strong showing of Ross Perot.

            However, this electoral outcome doesn’t tell the whole story.  Within a year of taking office, President Clinton was successful in passing the Omnibus Budget Reconciliation Act of 1993.  Essentially, this bill was a tax increase with some reductions in federal spending.  Although it’s rate increases were largely focused on the top wage earners (It created the 36% and 39.6% tax brackets) there was across-the-board increased taxation in the form of higher energy taxes and reductions in allowable deductions.

            Conventional wisdom, then and now, would predict that those increases would have a perilous effect on the nation’s economy. Republicans would say that the only way to stimulate the economy is by lowering taxes.  This “double-tap” tax increase (1992 under Bush and 1993 under Clinton) surely must have resulted in disaster. 

            Alas for the Republican argument, no.  In fact, the opposite occurred.  From FY 1993 until 2001, the United States experienced the longest and most rapid period of sustained growth in its history.  The economy created over 30 million new jobs and incomes rose at all levels.    This growth and the resultant increases in federal revenue led to sustained surpluses and a dramatic reduction of the gross public debt.  While it would be an exaggeration to say that tax increases were the sole cause of this, they clearly didn’t negatively impact the economy.  I would suggest though, that there is another linkage, one that both parties seem to not understand now. 

            For better or worse, free markets are dramatically impacted by public sentiment and that sentiment is dramatically impacted by the actions of government.  When government acts sensibly, reducing spending and increasing its revenue when faced with deficits, just like ordinary households, people, and by association, the economy respond favorably.  When the government becomes paralyzed in partisan gridlock and brinkmanship, the economy responds negatively.  Consider the stock market during the heat of the debt ceiling debate this summer.  Between July 22nd and August 12th, 2012, the DJIA fell from 12681 to 11269 while Congress played its high-stakes game of chicken.  The Dow wouldn’t recover to that higher level until January 20th, 2012. 

            Trust and confidence, the foundations of a free market, are fragile things.  While a strong historical argument can be made that the presidential candidates need to successfully link the other candidate to the weak economy to win, there are larger issues at stake.  Namely, without clear, sensible and bipartisan action to address spiraling deficits and the public debt, there is no right answer.  No party’s solution is correct.  They are correct only when taken in equal measure.  The very nature of our economy and our government dictate that no group be left behind or our confidence, and by association, our economy will suffer.  We can only hope that this election year the partisan shoving match in Congress ends quickly.  Our trust demands it.