What will Republicans do if the economy doesn’t collapse?

David Frum wonders what GOP messaging will be if the next four years doesn’t see another recession or a debt crisis. “As the economy improves, that doom-saying will seem even more out of touch than ever,” Frum writes over at CNN. And by “improves,” I will assume Frum means 2% GDP growth the next two years, closer to 3% after. Unemployment in the 6% range by 2016. Frum sees two things happening:

1) President Obama will begin to claim more credit. In 2012, the word “stimulus” went unmentioned by Democrats. It was Republicans who tried to make political use of the $800 billion spent on job creation in 2009-2011. In 2013-2014, however, the shoe may suddenly rematerialize on the other foot.

2) Republicans will discover that their old “Obama isn’t working” theme has become obsolete. By 2014, again assuming that Congress does not leap off the fiscal cliff, it will likely look as if Obama is working. What then? If negative messaging failed in 2012, it will fail bigger in 2014.

Republican political chances will depend on the Republican ability to devise a positive program to address the country’s fiscal problems in ways that improve people’s lives.

I think the economic scenario is entirely possible, as I explored recently. Now this would hardly be a boom. Indeed, employment and output would still be way below their pre-Great Recession trend lines. Income growth would be no great shakes. Indeed, Ben Bernanke said recently that U.S. GDP potential growth pre-recession was 2.5% vs. the 3.4% average since WWII.

So message #!1 would be “We can do a lot better” with specific pro-growth ideas from taxes to immigration to basic research. A focus on competitiveness and productivity with a goal of returning to 3-4% growth.

Message #2 would be “We care about middle-class families” with pro-parent policy tilt. One example: A great expanded child credit. And a specific healthcare reform plan would be helpful.

Now even under the Frum scenario, publicly held debt as a share of GDP would be around 80%, with entitlements still ready to take it  stratospheric levels. So that issue isn’t going away. Indeed, that level of debt makes the weak expansion look unsustainable. Will Democrats still not have a plan?

Voters in 2014 and 2016 could be looking back at an economy that has not performed well, at minimum, since 2006. Lots more talk about a Lost Decade turning into a Lost Century – especially if China becomes the world’s largest economy during Obama’s second term.  I don’t think Democrats will be able to run again on a “stay the course” message when that course looks like one of stagnating living standards and geopolitical decline. Seems like plenty of room for the GOP to make their case — even without an economic apocalypse.


26 thoughts on “What will Republicans do if the economy doesn’t collapse?

    • yeah…Clinton’s 1995 flip-flop on tax cuts (“Probably there are people in this room still mad at me at that budget because you think I raised your taxes too much. It might surprise you to know that I think I raised them too much, too.”) was driven by his sudden ideological awakening…had nothing to do with the 1994 republican congressional victories. yeah….

  1. This is a great point. For too long the Republicans have been stoking fear of an economic collapse as a way to attract voters, which is risky because:

    1. it might not happen,
    2. if it does, who’s to say that Republicans won’t be blamed.

    this strategy also grossly underestimates the human ability to adapt to new economic circumstances. pretty soon, unemployment lower than 8% is going to be portrayed as an accomplishment.

    • In the context of a European rate of nearly 12% it is. And as the US economy returns to its normal trajectory in the next couple years it’s almost certainly going below 6% ie. Normal

    • Not only that, but much more important than hitting pre-Great Recession numbers is the expectation of economic gains (or losses). If we don’t hit those benchmarks but enthusiasm remains high enough, there will be plenty of political capital with which to reward the Democrats. And the scenario described above is exactly what we are in right now, just after an election in which the GOP, despite having no real answers themselves, tried to make this election about the economy but were thumped at the polls.

    • Since the economy is currently producing more goods and services in real terms than at the pre crash peak it clearly hasn’t collapsed. In fact in strictly utilitarian terms it’s operating much more efficiently. As a presumed supporter of free market capitalism you should be applauding this.

  2. Focusing on Republicans is a distraction.

    Voters chose a president who wants a European-style economy. Democrats in Congress will fight like hell to make that happen. The federal bureaucracy will continue a flood of economy-crippling regulations. We are going over the same financial cliff as Europe unless we change course radically – the type of reform done in the 1990′s by the Scandinavian nations, Australia and New Zealand.

  3. This isn’t going to play in Peoria James dear boy given the events of 2001-8. I’m not a raging bull but the economy has definitely turned the corner in my judgement and once it starts to accelerate it will easily exceed growth rates of 2% and unemployment will be below 6%. Why do I think this? GDP is already well ahead of the pre crash peak in constant dollars. Housing is coming out of the tank (look at starts and the Case Schiller price increase forecast is 3% y/y). Auto sales are brushing 15 million this year and will exceed 16 million next (the highest they’ve ever been is just under 17 million). The fiscal drag from the states is at worst going to be neutral in the next year and will turn positive thereafter. Money will remain cheap for the next two or three years. Americans are showing signs of re-leveraging. Well over 5 million of the jobs lost in the recession have been recovered despite construction being in the doldrums. There are a couple of clouds. Europe… but they’ll probably muddle through and personal incomes are flat. But whatever way you cut the mustard it’s mainly upside. I know you’re paid to be a member of the gloom and doom industry when Democratic presidents are in office Jimmy but trust me Obama is going to be smelling of roses in three years time.

  4. How long will Republicans be able to flog “Field of Dreams” (FOD) school of economics as their solution to slow growth/stagnation? For those unfamiliar with this term, FOD economics posits that if you build it (invest) they (growth & jobs) will come. It worked in the film, but it doesn’t in real life.

    It’s a classic case of correlation being assuming to represent causation. The idea that more investment would give more output makes sense since over the long run per-capita GDP is highly correlated with accumulated capital. But this correlation does not mean causation. This can be demonstrated by a simple historical experiment. If investment creates more output then increasing the rate of at which companies retained and reinvested profits historically should have resulted in increased historical per capita GDP growth.

    Over the long run the rate of profit has been over 4% of capital, about half (2%) of which was re-invested. And GDP per capita has grown at the same 2% rate. If FOD worked businessmen could have reinvested about 3/4 of their profits instead of half and GDP per capita would have grown at 3% instead of 2%. Had this happened, GDP today would be north of $60T.

    This actually was tried. By the beginning of the 20th century it was dawning on businessmen and investors that company shares were intrinsically different from bonds in that the value of shares could increase by the mechanism of profit retention and reinvestment (i.e. growth in book value). This realization eventually led (in 1914) to stocks being priced in dollars instead of relative to a par value like perpetual bonds. As this idea took hold one could surmise that you can grow share value and EPS by plowing profits back into enterprises. Growing the bottom line typically involves growing the top line, so retaining and reinvesting profits faster should give faster growth in output and profits.

    If you look at the profit retention and GDP growth data decade by decade, you will find that the rate of at which profits were retained has varied as has growth. The first decade of the 20th century (i.e. when this idea first was developed) showed the fastest rate of retention, but the *slowest* growth. It didn’t work. Instead we got the first equity bubbles, leading to the Panic of 1907, the first panic associated with an equity bubble instead of a real estate bubble. (We got a second bubble/panic of the same type a quarter-century later)

    If you look plot GDP per capita growth versus profits retention for all 14 decades since 1871 no correlation between the two is found.

    Policy that tries to encourage investors/entrepreneurs to invest more will not lead to faster growth, just has throwing more people into the workforce isn’t going to work either. Neither people (labor) or investment (capital) are limiting factors, although both are required to produce output.

    The factor that limits growth is opportunity. When businessmen perceive opportunity they exploit it to expand profit-producing output, investing as necessary to do so. Of course “opportunity” is simply a dummy variable I know of no way to measure it or track it over time, so this doesn’t help all that much, but it at least focuses attention on the real issue.

    • “The factor that limits growth is opportunity.”

      Thank you for saying in just one sentence what not one of the AEI rubes could imagine to be a factor in the economy. Back to the charts, Jimmy.

    • the idea that preferential tax treatment would encourage a company to hire more employees when there is no increased demand for their products is downright laughable.

      but that’s what they believe.

      • the idea that preferential tax treatment would encourage a company to hire more employees when there is no increased demand for their products is downright laughable“…

        Absolutely larry g, can you say Chevy Volt?

        • re: ” can you say Chevy Volt?”

          can you say supply side economics?

          that’s the Volt idea times thousands.

          I’ve yet to see any company hire workers to stand around because they got good tax breaks….

          at least the Volts are being produced and they do idle the plants when inventory exceeds supply.

          • does the “economics” website tell you to hire people when you don’t need them and call it supply side?


          • larry g with the ever dependable stupid question asks: “does the “economics” website tell you to hire people when you don’t need them and call it supply side?“…

            Gee “larry g! Apparently reading the contents at the web site must be a real toughie for you, eh?

    • the idea that preferential tax treatment would encourage a company to hire more employees when there is no increased demand for their products is downright laughable.

      but that’s what they believe.

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