What’s the economy for?

Who’s the economy for?

If history is a guide, Joe Biden’s reelection chances will depend in large part on the state of the American economy between now and November 2024. More than any other single factor, the economy has determined whether incumbents get returned to the White House. Reelection contests are referendums on the performance of presidents, and if voters approve a president’s handling of the economy, that president more likely than not gets another four years on the job.

This is an imperfect yardstick. In the first place, presidents have little control over the economy. Congress has more influence, through its power of the purse. And the Federal Reserve has more power than Congress, through its monetary policies. But the members of the Fed aren’t elected, and though members of Congress are, their large number dilutes the credit and blame imputed to them by voters.

The second problem with using the economy as a measure of presidential performance is determining what the American economy is supposed to do. How do we know if the economy is performing well or poorly?

For more than a century, the total production of the economy has been the standard measure. Gross national product (GNP) was preferred from the 1930s to the 1970s; gross domestic product (GDP) has taken over since then. The latter strips out production by Americans living abroad. When GDP is growing, especially if it is growing per capita, the economy is judged to be doing well. When it is stagnating or shrinking, the economy is doing poorly.

If a single measure has to be chosen to gauge the health of the economy, GDP is as good as any. In this regard it acts like—and has been linked metaphorically to—an individual’s body temperature. Doctors always take your temperature when you visit their offices. It gives them a starting point for assessing your health.

Of course the doctors don’t stop there. Nor do economists, or people simply interested in the condition of the economy. The unemployment rate is a proxy for GDP, one that touches individuals directly. It's easier to measure than GDP, since it requires simply asking people about their work status. When the unemployment rate is up, and especially when it is rising, voters get nervous and unhappy, with ill consequences for incumbents.

As the last letter of GDP indicates, it's a measure of production. Per se, it ignores the matter of distribution. When everyone's income is rising, the fact that some people's incomes might be rising faster than others' has comparatively little political salience. But when growth slows, distributional questions push to the fore.

The distribution question came into sharp focus for the first time in America in the late 19th century. Prices for farm goods declined relentlessly even as the industrial sector boomed. Farmers joined the Farmers' Alliance and then the Populist party, demanding government action to restore the earlier balance between country and city. Eventually, in league with progressive urban reformers, they restrained big business and imposed an income tax on the wealthy.

Business advocates complained that government was killing the goose that laid the golden egg. By diminishing the rewards of success, government discouraged the effort that gave rise to success. And by telling entrepreneurs how to run their businesses, government meddled where it had no expertise.

Since the early 20th century, presidents have had to pay attention to distribution as well as production. The New Deal of the 1930s addressed both. Franklin Roosevelt initially did better on the distribution side, providing relief for the unemployed and support payments for farmers. But preparations for World War II and then the war itself spurred production to unprecedented levels. Lyndon Johnson in the 1960s declared war on poverty, as part of the most sustained redistributional effort in American history.

Voters liked what Roosevelt and Johnson did, re-electing both presidents in landslides. But by the 1980s they had changed their minds. Ronald Reagan reemphasized production at the expense of distribution. He pared back government regulation and persuaded Congress to dramatically reduce income tax rates. And he got re-elected in 1984 by a margin comparable to that of Roosevelt in 1936 and Johnson in 1964.

Since the beginning of this century, voters have been ambivalent about where the balance should lie between production and distribution. Progressives have railed against the "one percent" and called for a wealth tax and new regulations on business. Leftish Democrats persistently try to move their party's policies back in the direction of FDR and LBJ.

But the presidency has remained in the middle. From George W. Bush to Joe Biden, tax rates have hardly budged and business is neither much more nor much less regulated than in the Reagan era.

Americans voters are where American voters typically have been on the relative weights accorded to production and distribution. Compared with people in other countries, they prioritize production. Mostly they want the pie to grow. They don't intend to let squabbling over the size of the pieces get in the way of that.

Biden lies squarely within this consensus. Now all he needs is for the economy to keep growing.