Arnold Kling  

Economic Attribution Error

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During an election year, a President is assumed to control the economy. For example, Paul Krugman writes,


For three years many economists have argued that the most effective job-creating policies would be increased aid to state and local governments, extended unemployment insurance and tax rebates for lower- and middle-income families. The Bush administration paid no attention — it never even gave New York all the aid Mr. Bush promised after 9/11, and it allowed extended unemployment insurance to lapse. Instead, it focused on tax cuts for the affluent, ignoring warnings that these would do little to create jobs.

On the other hand, Russell Roberts writes,

Bastiat used the example of the a broken window. Repairing the window stimulates the glazier’s pocketbook. But unseen is the loss of whatever would have been done with the money instead of replacing the window. Perhaps the one who lost the window would have bought a pair of shoes. Or invested it in a new business. Or merely enjoyed the peace of mind that comes from having cash on hand. The repair of the window is seen. The loss is unseen and therefore easily goes unnoticed. So it is with most actions of the government to “stimulate” the economy. It is easily forgotten that the resources to do the stimulating must come from somewhere

I call the tendency to overstate the importance of the President as a determinant of growth and employment the Economic Attribution Error.
For Discussion. Many economists have pointed out that the most striking feature of the economy under the Bush Administration has been the rapid pace of productivity growth. What are the policy implications, if any, of this fact?


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CATEGORIES: Macroeconomics



COMMENTS (10 to date)
Martin O. writes:
What are the policy implications, if any, of this fact?
The short answer to this question is - none. The error is in taking this measurement of productivity as a fact. The statistical methods used to derive the deflator component in the measurement of productivity growth can be argued to be somewhere in the spectrum between somewhat and totally arbitrary. The level of monetary spending used to derive total output is a function of the amount of fiat currency created by central banks. To base policy on this statistic would be (pardon the pun) unproductive.
Lawrance George Lux writes:

Josef Stalin remains supreme title holder in the race for leader with the highest rates of productivity growth during his total reign. One must remember George W. Bush lost a real expected twenty percent of Productivity, before he started to have his tremendeous Productivity gains. I agree with Roberts more than I do with Krugman, but overall examined, George W. Bush has a very poor record on social policy, a poor record on national defense actually--remember 9/11 was on his watch without his exercising due caution, and he has did little for the Economy--other than tax giveaways to his political supporters. lgl

DSpears writes:

Presidents have very little effect on the short term health of the economy. Presidents can have enormous long term effects on the health of the economy. The inflation of the 70's was the fault Aurther Burns more than Jimmy Carter. The long term growth of the 1990's had a lot more to do with Reagan, who pushed through serious reforms that freed the US economy from the sclerosis that Europe now suffers from. Clinton did almost nothing yet reaped tremendous credit.

For anybody that thinks that economic growth was higher during the Clinton years because Clinton rasied taxes from 36% to 39%(I'm still not sure what economic theory this is based on) remember, tax rates were higher on average during Reagan's 8 years than during Clinton's. Is it any wonder that economic growth and governemnt revenues followed the Laffer Curve in the 1990's? Especially after he ripped the hearts out of liberals everywhere and cut taxes on capital gains (actually, he just signed the bill). The 90's boom was Reagan's not Clinton's, and certainly not Robert Rubin's, whose government bond policies inverted the yield curve and pushed the country into recession.

As for Bush being responsible for 9/11: 8 months or 8 years? Who is responsible?????

Sam Jew writes:

Inverted the yield curve. You mean reduced interest rates by balancing the budget, right?

DSpears writes:

The years when the budget was in "surplus" were hardly a time of low interest rates, or declining trade deficits for that matter. Of course that makes sense because the same thing that causes government revenues to grow (and budget deficits to shrink) also causes interest rates to be higher: Economic growth.

If you believe that low interest rates are the end-all, be-all of economic existence (like Robert Rubin does) then the Bush administration has produced the best economy in 40 years.

Now I don't believe that, but anybody that does should be voting for Bush in the fall.

The relative balance of the budget has little to no effect on the level of interest rates. Interest rates are primarily a function of the market's expectations of future inflation, and a number of other complicated and contradictory conditions. Government borrowing is a very small component of the overall market for financial capital, which is why the history of budget deficits and interest rates shows no correlation whatsoever.

The fact that the economic wizards in the Clinton administration totally misunderstood this is partially why we were pushed into recession during Clinton's last year in office. Remember, manufacturing employment peaked in 1998, long before anybody even would have imagined there would be a second president Bush.

Mike Everett writes:

The policy implication is that lowering the costs of productivity increases productivity.

Costs of productivity affected by fiscal policy include income and capital gains taxes.
Lowering these taxes had a direct effect on productivity gains.

Lawrance George Lux writes:

*************************

The long term growth of the 1990's had a lot more to do with Reagan, who pushed through serious reforms that freed the US economy from the sclerosis that Europe now suffers from. Clinton did almost nothing yet reaped tremendous credit.

*************************

It is rewarding to see Republican rheturic propounded again (by the way, I am not a Democrat). Reagan did so much like compounding the national debt, raising Taxes on basically the consuming lower classes, allowing tax evasion by the wealthy and business interests, and suppressing the real takehome pay of Labor. Clinton did nothing except lower Taxes for the consuming Labor force, and cut excess Government spending.

I have long contested the common Public perception that low Interest rates are beneficial to the Economy. I find it a basic evasion of a business cost, and a heavy contributary cause for Inflation. Low Interest rates basically allow for economically unsound business ventures which destroy Capital equipment usage schedules. DSpears is quite right about the lack of connection between Government spending and Interest rates, though there is an immense correlation between Government spending and Inflation.

By the way, how long must a President be in power to do his job? Is 8 months long enough? Is four years long enough? Is eight years long enough? Maybe We should dig up Washington's grave, he has been at it for a long time.lgl

DSpears writes:

Whatever you claim to be, you have summed up most of the falsehoods perpetrated against Reagan.

"Reagan did so much like compounding the national debt"

Reagan increased the national debt? Obviously you need a civics lesson to learn about who makes and passes the US government's budget. Reagan could only say yes or no to the entire package. Every year Tip O'Neil and the Democrats would have a little ceremony on capital hill and pronounce Reagan's budget "Dead on Arrival". Then they would proceed to spend gobs of taxpayer money. Now I wish Reagan would have vetoed one or two of those spend-fests, but considering the situation with the Soviets it just wasn't a reasonable thing to do at the time.

The national debt went from $2 trillion to $5.7 trillion on Clinton's watch. That's a lot more than the economy grew or the rate of inflation. Hardly a fiscal conservative.

" raising Taxes on basically the consuming lower classes,"

I don't know what the "consuming lower classes" are, are you implying that the lower classes are not productive, only consumptive?

Again, I don't recall Reagan ever proposing such a thing, although he was forced to sign a tax increase that Democrats thought would "save social security". As Democrats always tell people, it's their money that they will get back when they retire, so it wasn't a tax increase at all, right?

"allowing tax evasion by the wealthy and business interests,"

Letting people keep their own money is not tax evasion.

"and suppressing the real takehome pay of Labor."

The significant decline of organized labor over the last 50 years has been the best thing that ever happened to the American consumer and every non-unionized worker in this country. While Reagan didn't have anything directly to do with that (it started a long time before his presidency) it is the foundation of the remarkable productivity that America has experienced over the last 25 years.

"Clinton did nothing except lower Taxes for the consuming Labor force,"

The only taxes Clinton cut were capital gains, and that was only for the "rich" right? I think that was one the best things he did and the economic growth it enabled certainly helped the "consuming labor force" (whatever that is).

"and cut excess Government spending."

Really? Bill Clinton fought every spending cut forced upon him by the Republican controlled Congress. Again, a little civics lesson is needed. Bill Clinton vetoed a budget and shut down the government (and yet the country still functioned!) because the Republicans wanted to reduce the RATE of GROWTH in spending. Even this modest accomplishment was practically over Clinton's dead body. There were no CUTS in government spending, at best only reductions in the rate of growth. Remember, in 1992 Bill Clinton said it would be "dangerous to the economy" to balance the budget. It's a wonder what a complete lack of any guiding principle can accomplish.

"By the way, how long must a President be in power to do his job? Is 8 months long enough?"

Considering the Democrat controlled Senate had barely confirmed any of his cabinet during that time, (since the country had to wait in limbo to do umpteen recounts, all with teh same result) 8 months is a short time to fix problems that had been ignored for 8 years. Of course we are now coming up on 3 years without a terrorist attack on American soil, so you tell me how long it takes.

Sam Jew writes:
The policy implication is that lowering the costs of productivity increases productivity.

Costs of productivity affected by fiscal policy include income and capital gains taxes.
Lowering these taxes had a direct effect on productivity gains.

Costs of productivity also include things like "wages."

Lowering these costs has also had a direct effect effect on productivity gains.

Sam Jew writes:
If you believe that low interest rates are the end-all, be-all of economic existence

No, I don't.

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