There's a rule of thumb in politics that whichever party is in power "owns" the economy -- good or bad.
It's not, of course, that simple.
The first hurdle in assigning ownership is divided government -- when various branches of the federal government are controlled by different parties, in addition to statehouses and legislatures, the provenance of many fiscal policies and their impacts is hard to trace.
The second problem is with the premise itself. The power of the government to simply "fix" the private sector by making the correct decisions is wildly overrated -- except by politicians at election time.
So today, four years after the greatest freefall in GDP in a single quarter (9 percent) since the Great Depression, the candidates are still arguing over who was responsible and who should get credit -- or blame -- for the partial recovery.
Meanwhile, in Flagstaff, as in most other small cities in the Mountain West, the economy is following a similar track, regardless of which governor or mayor is in power. It bottomed out about two years ago and has since climbed back about halfway to its former peak. Some sectors, such as hospitality, simply plateaued for four years. Others, like construction, are still bouncing along at the bottom of the trough.
TREND FINALLY UPWARD
But as we reported last Sunday and as the chart at right shows at a glance, the trend in the local economy is upward and likely to continue, absent global shocks like a European Union collapse or another war in the Mideast that disrupts oil supplies.
Does the similarity of Flagstaff's chart to most other cities' mean government is irrelevant, or at least powerless to affect the basic drivers of the U.S. economy?
Economists would likely say government, through taxes, regulation, infrastructure, credit and foreign policy, has the power to influence the private sector on the margins. When things are going well, its main role, most say, should be to assure a level playing so that all in the private sector have a chance to compete fairly.
But when things are going badly, life becomes more complicated. As the saying goes, it is easier to smash a vase than to piece it back together. This year's campaign is about not only which pieces should go where but what the vase should look like when it is fixed.
The bursting of the housing bubble in the fall of 2008 and the near-collapse with it of the major banks ought to send a pretty clear message that when our smashed vase of an economy is finally fixed, it shouldn't look like it did four years ago. Federal regulators charged with keeping the financial playing field level instead allowed speculators to leverage government guarantees and wildly overvalued mortgage instruments into risky credit investments that had little hope of ever being paid off. When the house of cards collapsed, household credit dried up, shrinking consumer demand for housing, cars and most retail goods. Jobs that depended on that demand soon evaporated, and government jobs funded by the tax revenues from that spending soon followed.
BAILOUTS AND STIMULUS
How did the federal government respond? As a global financial meltdown neared, it bailed out the major banks, thus stabilizing world credit markets. To avoid the loss of the domestic car industry caused by the sudden freeze on car buying, it bailed out General Motors and Chrysler. To avoid major layoffs in key government sectors like public education and private sectors like construction, it "stimulated" the economy to the tune of $780 billion.
In Flagstaff, as we have reported in the past two years, the impacts were numerous. NAU put up several new buildings and repaired others with the money. Long stretches of I-17 and I-40 were repaved. FUSD could avoid laying off massive numbers of teachers because of the stimulus. The major banks with branches in Flagstaff kept their doors open. And several renewable energy projects in town were funded.
So how does the Flagstaff economy chart, with its declining trend lines between 2008 and 2010, reflect all that federal intervention? The answer might be in what is not on the chart without those measures: a trend line in even steeper decline that would extend farther out toward the present rather than turning upward.
On the other hand, the line might have been flatter if immediate and more effective homeowner mortgage relief had been implemented. And there is also some support, in hindsight, for forcing the banks to expand their lending in return for the bailouts. The stimulus ballooned the deficit even more, hastening the day when steeper spending cuts or taxes -- or both -- must come.
SLOW RECOVERY EVERYWHERE
For now, though, it looks quite possible that the economy, in Flagstaff and most everywhere else in the U.S., will continue to slowly recover, regardless of who occupies the White House. The inventory of bank-owned homes is finally being cleared off the books, paving the way for new home construction. Families have paid off credit card debt and are finally ready to spend again, especially young adults who have postponed forming households. New spending and more credit will lead to rehiring, which will increase consumer confidence even more.
In other words, another business cycle in the U.S. economy -- albeit one with a deeper trough -- is about to come and go. We'll count on federal policymakers to have learned their lessons from the last housing and credit bubble and not allow the same mistakes to happen again -- at least not too soon.
The next big teachable moment for politicians vis-à-vis the economy will be the fiscal "cliff" that is looming for the federal budget, absent a compromise on taxes and spending by Congress. We would hope members learned their lesson from last year's debt ceiling drama and not risk this country's credit rating once again. The debt crisis has been decades in the making, and it won't be fixed all at once, which means compromise should be the watchword of the day.
But if things go badly, we know who will "own" the problem: We will. It's time voters got up to speed on what is needed to bring the deficit and federal debt under control, whose plans have those elements, and how they will carry them out. We own the economy, and it's time we acted like it.
Our View: Government can affect the private sector when it doesn't keep the playing field level and stable -- and get out of the way when the tide has finally turned.