Elections, Unemployment and Inflation

This paper analyzes the issues of employment and inflation as they relate to both the economy and the electoral political environment. In doing so, the reader gleans the risks and potential benefits of extensive economic analysis for a candidate's election or reelection.

Keywords Equilibrium; Inflation; Macro-economy; Recession; Revenues

Business & Government > Elections, Unemployment & Inflation

Overview

John Snow was not a very good politician. Certainly, his qualifications were impeccable: a former Chairman and CEO of transportation giant CSX Corporation, co-Chairman of several business association boards (including the prominent Business Roundtable), and high-level official with the Department of Transportation, Mr. Snow was certainly well-experienced enough to serve as the point-man on the issues of economic growth and job creation. Few could argue against this point when President George W. Bush tapped Snow to become the next Secretary of the Treasury in 2003.

However, during his three-year tenure, John Snow was charged with balancing an extremely complex, volatile and unpredictable US economy, which left him and his agency continuously welcoming positive news but acting as if the other shoe was about to drop. Where a career politician might publicly embrace favorable trends in the economy and at the same time downplay problems that may exist, Snow's task was to see the whole picture. By doing so, he had the unfortunate duty to inform the public that the best news may not be the complete news.

In one instance, then-Secretary Snow was asked for his assessment of the post-recession economy. The nation's gross domestic product (GDP) was experiencing high output, employment figures were strong, and all signs pointed to continued economic expansion after a painful first few years of the 21st century. Any observers who might have breathed a sigh of relief at the news, however, were quickly brought back to reality by Mr. Snow's blunt assessment: "that's an environment in which the Fed needs to continually be alert to early signs of inflation," he cautioned ("John W. Snow quotes," 2007).

In an American election season, few voters would have the time to hear a comprehensive economic analysis from the candidates. An era of sound bites and short, energized campaign speeches forces candidates to offer the sort of candor that Mr. Snow presented regarding the economy. In fact, his assessment of strong economic growth would have likely come across to voters as apparent pessimism, as if he managed to envelop a silver lining with the dark cloud of inflation. In this regard, Mr. Snow had the good fortune to not be an elected official seeking another term or a candidate seeking a first term.

Of course, no legislative, presidential, gubernatorial or mayoral candidate can expect to last the entire campaign without being asked about how to address the economy. If inflation is too high, he or she may be asked how to address it. The same can be said about job creation and business development. Unfortunately, the two issues remain at opposite, countervailing sides of an economy, as is the case with supply and demand. For the candidate, to acknowledge and explain this fact to uninitiated voters, while necessary, is extremely difficult to articulate and even harder to factor into a proposal that will generate support.

This paper analyzes the two issues of employment and inflation as they relate to the both the economy and the electoral political environment. In doing so, the reader gleans the risks and potential benefits of extensive economic analysis to a candidate's election or reelection.

Employment & the Economy

On September 11, 2001, the terrorist attacks on New York City and Washington, DC caused massive damage not only to the American psyche but to the economy as well. Most analysts, however, believe that the American economy was beginning to slide significantly prior to September of that year, and the attacks accelerated a near collapse. For four years, the United States struggled with economic introversion and job layoffs. Across the country, state budgets initiated painful cuts in order to offset a lack of tax revenues caused by increased unemployment and corporate shutdowns. Clearly, the boom times of the mid- to late-1990s had come to an end.

The recession of 2001-2004 is now recent history, but the American economy did not simply bounce back to form. The best assessment experts can offer is one of cautious optimism. Even the slightest evidence of turnaround is taken with a grain of salt by the casual observer. In early 2007, revelations of sloughing housing sales, exacerbated by a sudden spike in foreclosures, led citizens and leaders alike to believe that the forecast may not be promising. Consumer confidence became tentative at best and the rising cost of oil only added to latent anxieties.

Making matters worse is a trend that suggests that job growth is slowing. Although 2007 unemployment rates generally held fast compared to 2006 (Bureau of Labor Statistics, 2007), reports of periodic job losses have sent politicians into active mode. Occasional reports of job losses have ignited fears of a return to the stagnation of 2001-2004, and legislators scrambled to put into place safeguards to protect incomes and jobs. One US Senator has proposed increasing the eligibility rates, benefits and duration of Unemployment Insurance (UI), a system paid into by the employers themselves (Schiller, 2007). An increase in the benefits and the number of beneficiaries means that more money must be paid into the fund by employers, who are likely to curtail expansion if they are forced to pay more for UI. Put simply, the call to action based not on a definable trend but on latent fears of a return to a recession has set off reactionary policy responses that may do more harm to the economy than good.

Still, there does appear to be a trend leaning toward an economic slowdown, and in light of an ongoing mortgage crisis and a significant number of families with high credit debt, should a recession return, it appears the American citizens would be harshly impacted. Thus, the 2008 presidential election, which seemed to focus primarily on the continuing military campaign in Iraq, seems to have returned to economic issues that will likely be a litmus test for the candidates' ability to respond to a potential fiscal crisis. Many observers believe the response of any candidate, Republican or Democrat, must be to introduce some sort of economic stimulus in order to revitalize the private sector and thereby pump up jobs and wages. By getting people back to work, experts believe, the current housing and credit crisis can be offset and the economy can avoid its second recession in less than a decade ("Crisis as opportunity," 2007).

There are not many issues to which both parties in the American political system can agree on a solution. In order to ensure that families have food on their tables, businesses thrive and governments can afford to pay for their budget programs, it is clear that a strong workforce is central to economic strength.

Sitting on the Fence

The downfall for campaigning candidates who stress that the creation of jobs is the single-most important part of stimulating a lagging economy lies in the fact that employment is part of only one-half of the tenuous accord between supply and demand. The real challenge, one away from which most prominent candidates tend to shy, is the establishment of equilibrium.

In a macro-economy, a supplier can be defined as the producer of goods and services — manufacturers, corporations and even the government falls under this umbrella. On the demand side are the consumers, using their incomes to purchase from the supplier. The two may be on opposite sides of the macro-economy, but they are linked nonetheless. Suppliers are, after all, also employers, and consumers depend on the prosperity of the employer for their very livelihood.

This symbiosis is also defined in times of crisis. When unemployment levels are high, fewer consumers are able to afford the goods and services provided by the supply side. Unless the price, which is the central meeting point at which supply and demand connect (and, therefore, equilibrium is established), is lowered, manufacturers may be adversely impacted. When many people are employed and, summarily, wages increase, prices increase, which can take away from consumers.

In an election year, candidates tend to speak to voters with respect for both business and the consumer. Rhetorical speeches call for bringing more jobs to a certain region or bolstering business. The unpleasant fact that exists is that favoring supply or demand may make for campaign fodder among constituents, but addressing both at the same time (in essence, pursuing equilibrium) in a campaign proposal presents a challenge few wish to meet. As one economist correctly stated more than 30 years ago, "the macroeconomic management of an economy is on the whole decisive for the solution of the major problems which currently exist . . ." (Rutten, 1977). Having discussed employment, this paper next takes a look at another of the unforeseen problems with a candidate appealing to one side of a macro-economy while, seemingly, disregarding the other: Inflation.

The Down-Side of Low Unemployment — Inflation

One of the primary reasons political candidates focus on unemployment without much visible attention to inflation is the sheer clarity with which unemployment impacts the economy. After all, the unemployed lose income. Therefore, as an aggregate, the unemployed destabilize and reduce demand. Furthermore, those who are out of work also lose the ability to contribute tax dollars into government coffers, which means that states and the federal government lose revenues for their budgets. Adding fuel to the fire is the fact that, although they are not contributing much in tax dollars during their unemployment, this sector of the population is drawing from the government in the form of social services, unemployment insurance, health care and other means of support. With such immediate and broad ramifications, it comes as no surprise that political candidates emphasize jobs.

Inflation, however, has less of a clear impact due in part to its relative nebulousness as an issue. Inflation is defined as the increase in the amount of currency in circulation. As more and more consumers are able to spend money, prices increase while the purchasing power of money decreases ("What is inflation?," 2007). If the increase in circulating monies is anticipated, the value of the money in question can be effectively accounted for and recalculated. However, if a shock to the economy occurs, and inflation is unanticipated, analyzing and predicting monetary value based on price becomes far more problematic, as a lack of predictability means that regulators must implement index rigidities. Investments and savings may also be impacted, meaning that the effects of unexpected inflation will be felt by the entire economy (Keech, 1980).

With the conflicts in Iraq and Afghanistan, increased attention to the issue of global warming and the housing crisis taking center stage in the 2008 presidential election, voter sensitivities are indeed high. The economy is consistently a salient campaign issue for either side of the aisle, but the extent to which voters appreciate the intricacies of the economy is limited. Inflation is one such issue. Still, it is important to take stock of this concern, as forecasters are warning of its impact on the nation's economy in the coming year.

The fact that so many Americans have excessive credit debt seems to be the epicenter of what could become a recession. Inability to pay mortgages adds to the conundrum. If banks and other lending institutions are unable to recoup debt, the Federal Reserve has indicated its willingness to do what it takes to keep credit flowing, including cutting interest rates, should this problem persist. However, if the Fed does go ahead with its proposal (particularly in light of the fact that the alternative — a tremendous appropriation from Congress to bail out the credit market — is extremely unlikely), such an action would likely weaken an already anemic dollar, leading to inflation. This situation will in turn drive up long-term interest rates, and businesses, grasping for ways to prevent falling victim to economic malaise, will be less likely to afford business loans. Recession is a buzz-word that few wish to utter after 2001-2004 stagnation, but it remains a very real possibility (Kiplinger, 2007).

Without a doubt, each of the 2008 presidential candidates have dedicated time in their campaigns to voice concern over the plight of the US economy. Many, however, are focusing on jobs and tax cuts (or increases), while hardly any candidate is stumping out of concern for the rate of inflation. It is possible, given the fact that many economists are reluctantly suggesting that recession is in the country's near future, that attentions will turn to the costs associated with fiscally rectifying the issues facing credit and housing lending institutions.

Conclusion

Individuals like John Snow have little future as elected officials. Political candidates must act in response to voter sentiments (sometimes in sound bites of only a few seconds), whereas John Snow was tasked with understanding virtually every aspect of the economy. The difference is that candidates for political office must be able to articulate the issues, where Snow was expected to take into account the details of the economy. Few candidates for Congress can piece together a clear summary of the impacts of inflation and unemployment on the economy in such a way that the full connections are made.

The two issues outlined in this paper provide evidence of this fact. In an election season, candidates are expected to speak with clarity not only to the issues but to the people about such issues. The difference here is that often, the policy (or proposed policy) response to an issue is reactionary. Candidates have a full docket before them, and they must pick up on such issues as demanded by the voting population. They may find that pursuing less visible issues may prove detrimental to their campaign in a time when falling behind competitors in polls is not an option. The most obvious issues are likely to get a hearing by candidates in an election, in part due to the connectivity such a reaction creates between the candidates and voters and in part due to the fact that there are proven solutions to the problems at hand.

It is for this reason that unemployment and jobs remain a critical issue for candidates for elected office. They introduce proposals based on the feedback of the voters, and the plight of American workers (particularly those of the middle class) is central to the generation of this feedback. Workers are taxpayers, they are family members, they are voters and they are constituents. Their status foments sympathy — without work, they cannot pay their bills, lack health care and must rely on government assistance. Their absence from work is also quantifiable in terms of tax revenues entering the government's coffers — in times of economic recession and stagnation, budgets tend to reel due to the lack of individual and corporate tax revenues on which they would rely in times of economic progress.

The solutions to the issue of jobs and unemployment are as visible as the problems themselves. Getting individuals back to work requires a two-fold approach — enabling individuals to get the training and education they need to obtain new employment, and investing in economic development programs to foster business growth. Naturally, each of these actions are anything but simple, particularly in light of budget limitations; for candidates in an election year, they provide a basic framework in which candidates can create a policy proposal response.

Of course, as the truism suggests, the devil is in the details. By espousing and spurring job growth, leaders (and would-be leaders as well) are inadvertently adding to the second issue on which this paper has focuses. Inflation is in a basic sense innocuous — it is a necessary evil in economics, a part of the process of fiscal growth. This essay has identified inflation in such a way, suggesting that its most undesirable incarnation is manifest when it is not expected. Economists and market experts are always on the lookout for conditions that give rise to inflation, such as changes in capital assets, credit markets, interest rates or even business growth. If monitored carefully and therefore accounted for, inflation simply acts as a fluctuation around which leaders can continue to formulate economic policy.

A shock to the system, however, transforms inflation into a dangerous element in the economy. This paper has discussed many such unanticipated developments. One shock is the recent US housing crisis, in which subprime mortgages have created a large percentage of homeowners who are unable to pay their debts and entered (or are entering) foreclosure. Credit debt is also playing the role of spoiler, with so many households unable to adjust to rising interest rates as the cost of living in this country continues to increase. Even the aforementioned attempts to develop the workforce and expand business opportunities across the country can have an unanticipated impact on the economy by triggering inflation — increasing the number of people who are being paid salaries means that more people will be spending money. If large numbers of people suddenly enter a workforce unprepared to account for them, the chances that inflation will be an unpleasant side-effect increase.

The problem that exists regarding this latter issue is the comparable nebulousness of inflation. Few constituents or prospective voters contact a candidate or incumbent to express their concerns about the risk of inflation. However, they would likely complain after inflation has already become a reality. Similarly, candidates for political office are unlikely to present to voters concerns that, over time, inflation could occur, due in large part to the fact that inflation's ugliest manifestation occurs when it arrives unannounced.

The issues of jobs and inflation are indeed critical for the coming presidential election, as they have been in campaign years past. While in-depth solutions, whether they are policy-based responses or proposals, have not yet been presented in 2008, an important fact gives immediacy to both issues. The deep concerns expressed by economists and a bipartisan field of the candidates that a recession could loom on the horizon in 2008 do signal a perceived need for comprehensive and educated safeguarding against spikes in unemployment and inflation. It is not often that, in an election year, all the candidates can agree on such a point.

Terms & Concepts

Equilibrium: Balance at which aggregate supply and aggregate demand within an economy meet.

Inflation: Decrease in the value of a currency caused by an increase in the circulation of available monies.

Macro-economy: Economic system comprising aggregate supply and aggregate demand.

Recession: Period of decline in economic activity.

Revenue: Government income collected through taxation and other assessments and used for public expenses.

Bibliography

Crisis as opportunity. (2007). Nation, 285(18), 3. Retrieved January 3, 2008, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=27503885&site=ehost-live

John W. Snow quotes. (2007). Brainyquote.com. Retrieved January 3, 2008, from http://www.brainyquote.com/quotes/authors/j/john%5fw%5fsnow.html.

Keech, W. R. (1980, May). Elections and macroeconomic policy optimization. American Journal of Political Science, 24(2), 345. Retrieved January 4, 2008, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=5242912&site=ehost-live

Kiplinger, K. (2007). The Kiplinger letter. Kiplinger Letter, 84(42), 1-4. Retrieved January 6, 2008, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=27165908&site=ehost-live

Rutten, F.W. (1977). Planning to restore long-run macro-economic equilibrium. De Economist, 125(4), 449-464. Retrieved January 4, 2008, from EBSCO Online Database Business Source Complete. http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=21784275&site=ehost-live

Schiller, B. (2007, October 19). Subsidizing unemployment. The Washington Times, A21.

US Department of Labor, Bureau of Labor Statistics. (2007). Current population survey. Retrieved January 3, 2008, from http://www.bls.gov/cps/home.htm

What is inflation? (2007). InflationData.com. Retrieved January 4, 2008, from http://www.inflationdata.com/inflation/Articles/Inflation.asp.

Suggested Reading

Inflation: Hot and getting hotter. (2007, December 17). Business Week Online, 14. Retrieved January 7, 2008, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=27977566&site=ehost-live

Shifting pocketbook politics. (2006). The Economist, 380(8493), 27-28. Retrieved January 7, 2008, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=22208547&site=ehost-live

Sniderman, M. S. (2007, October). Living in a world of contingency. Economic Trends, 2. Retrieved January 7, 2008, from EBSCO Online Database Academic Search Premier. http://search.ebscohost.com/login.aspx?direct=true&db=aph&AN=27534613&site=ehost-live