The danger of making policy by the numbers

The statistical disappearance of the US 'recession' has undermined the overt logic of the latest set of tax cuts, says Amity Shlaes.

You have to hand it to the US. It is the world's greatest Comeback Kid. Knock it down and it comes back - and back.

Witness the much-touted recent "recession". Just a few months ago, America believed itself to be confronting a slowdown so serious as to cast doubt on the validity of the 1990s expansion. Now we learn that it was not a recession after all, at least not in terms of the standard definition of two consecutive quarters of contraction.

What we called a recession must best be labelled a sag. So suddenly it turns out the longest, greatest expansion in the history of the world is still alive. And suddenly Republicans can claim a part of the credit for that expansion, along with President Bill Clinton. Hurrah for both parties!

In fact, America's overnight passage from the dark winter of "recession" to the sunny spring of "growth" illustrates the somewhat arbitrary nature of such specific inflection points and of their vulnerability to political abuse. Indeed, lawmakers who rely too heavily on these official turning-points for political purposes do so at their own peril. It is especially dangerous to claim that short-term stimulus medicine can cure an economy.

Consider the economy and the Republican party over the past decade or so.

Right after he was elected president, George W. Bush wanted to pass tax cuts, a legitimate pro-growth move. But both he and his advisers believed that there was only one way to prevent opposing Democrats from killing their rate cut: to sell it as an emergency nostrum for a weakening economy. Even Democrats would not risk being seen as job-killers. Republicans were not confident enough to argue for tax cuts on their merits alone.

One could contend that the fates favoured the Bush White House here. Even as recession seemed to become real, the tax cut passed through Congress. The White House then went about claiming that its rather limited and gradual cuts would make the recession less severe. Now this month's suggestion that there was no recession seems to confirm their argument. Score one for the Grand Old Party.

But the miracle of 2002 is also working against the Republicans. When the national mood turned worse after September 11, the administration capitalised on the trouble to call for a second "recovery" package. Again, instead of arguing for tax cuts for their own sake, it leant on the downturn.

This time, though, it did not get its stimulus passed in time. And now the whole adventure begins to look silly. On the one hand we have Paul O'Neill, the Treasury secretary, proclaiming to the world that there was no recession; on the other we have the president uncapping his pen to sign "recovery legislation".

And Democrats now have fresh material for attack: they can argue that the "stimulus" was a pointless deficit creator, a costly pander to the rich. Had the administration stuck all along to a line more dependent on principle - tax cuts are good for growth in any weather - it would be less vulnerable today.

Mr Bush's father, of course, suffered far worse losses in the numbers game. The downturn of the early 1990s was used by Mr Clinton, then the Democratic presidential candidate, as a battering ram. For his part, President George Bush seemed to lose faith, and believe in the dire nature of the downturn. Today we know that he was defeated over a "bad economy" in a quarter when the annualised rate of growth was 5.4 per cent. The revised numbers that favoured Mr Bush were published far too late for his political schedule.

Or take the Reagan years. Everyone believed they were good - but just how good were they? Eight years ago, people used to cite the Economic Report of the President, which suggested that growth in the mid- and late 1980s bumped around the twos and threes. Today, they cite revised editions of the same volume, which show that growth in the period was really in the threes and fours. But did we really need this adjustment to show pro-growth policies are good?

Such faith in numbers is understandable. There is something about human beings that loves the reassurance of data, if only as emotional confirmation: Americans felt bad after September 11, so they latched on to a "recession" that seemed to reify their mood. And specific data are even more welcome because they seem to convey particular accuracy.

But it is a fallacy to believe that estimates and forecasts that stretch out a number of decimal points are necessarily more accurate than round figures. If a teacher insists a child deserves a mark of B plus, does that mean the teacher is correct in his assessment that the child performed two increments better than his B-minus class mate? Perhaps both deserved a B.

This is not to say that the US is any worse a user or abuser of numbers than other nations. Gerhard Schroder's government in Germany is currently suffering from the humiliating discovery that its labour office misrepresented the number of job and training placements the office facilitated.

Nor is it right to conclude that the golden ideal of accuracy is not worth striving for, or that there are not true downturns and upswings. In the downturn that brought Mr Clinton victory, the US economy really did lose jobs - a million of them. The economy bled jobs last autumn as well. The great upswing of the 1990s had real causes: computers and a flexible labour force made the economy more productive.

The point is simply that consumers, market operators and voters are too trusting when they assume the precision of official numbers and allow lawmakers to use those data to short-term political ends. Economics makes sense when applied to the long term, not in the next election cycle.

© Copyright 2002 Financial Times

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To book Amity Shlaes for a speaking engagement, contact Jamie Brickhouse at the Red Brick Agency, 646.281.9041.
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