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http://www.businessweek.com/articles/2014-10-27/politicians-really-cant-create-jobs

Global Economics

Politicians Really Can't Create Jobs


Americans head into the midterm elections on Nov. 4 with two perennial issues as their top concerns: jobs and the economy. In this respect, the U.S. is pretty much like everyone else in the world. In country after country, jobs and the economy regularly come out ahead in polls asking voters to rank the important issues. What’s frustrating, however, is that politicians appear to have remarkably little control over what actually happens to unemployment and the economy. All of which means public disenchantment with Washington is likely to run through the next session of Congress—and doubtless the one after that.

The latest Gallup polls suggest that Americans continue to rank the economy as the “most important problem facing this country today,” with unemployment third (after general dissatisfaction with government). The same is true across much of the world. In the European Union, unemployment is first with the economy second as the most important issues facing member countries, according to surveys (PDF). The 2011 Latinobarometro poll of Argentina and Mexico found that unemployment was the second most commonly cited problem in the two countries (after crime). The Afrobarometer survey across 33 African countries between 2011 and 2013 found that unemployment was ranked as the top problem that governments should address, with poverty second and the economy third.

The continued and ubiquitous concern with pocketbook issues is regularly reflected (PDF) in actual election results—high employment and high growth favor the incumbent. Few politicians anywhere intentionally do things to considerably slow economic growth or lower employment. Self-interest and selfless concern for constituents both point in the same direction. And yet the last few years amply demonstrate their efforts to promote growth and jobs often fail, sometimes miserably.

When it comes to economic policy, leaders (should) all know a little bit better now to avoid really silly policies like dramatically cutting budgets in a recession or overmanipulating exchange rates, but the link between faster gross domestic product growth and most policy choices remains tenuous. Ricardo Hausmann, Lant Pritchett, and Dani Rodrik of Harvard University studied sustained economic growth accelerations around the world since the 1950s and suggest that only about 14 percent were associated with policy liberalization, for example (leaving 86 percent of high growth periods that aren’t).

It’s not just that the link between growth and particular policies is weak—so is the link between growth and politicians as a whole, whatever their ideological persuasion. Bill Easterly and Steven Pennings of New York University looked for (PDF) evidence of the impact of national leaders on growth since 1960. Their findings suggest that, if national leaders matter anywhere, it’s in autocracies rather than in democracies like the U.S. and Europe. But even in autocratic regimes it’s hard to pinpoint the influence of individual leaders on economic growth—good or bad. Some leaders were in charge during periods of high growth and some during periods of low growth, but no more often than you would expect if random chance rather than leadership quality was driving the results. Across 50 years and 100 countries, they suggest, 2 percent of the variation in growth rates might be explained by political leaders—with 98 percent accounted for by other factors.

So if politicians can’t influence employment rates, what does? In the short term, economist Arthur Okun’s law—output down, unemployment up—has held true across countries ever since he formulated it in 1962. A recent reanalysis by International Monetary Fund economists suggests that in the U.S., a 1 percent drop in output from its long-run potential leads to about a half-percent increase in the unemployment rate—and that relationship explains about four-fifths of the variation in the country’s unemployment rate over time.

The extent to which growth affects job creation varies across countries. Unemployment in countries like Japan is relatively insensitive to GDP shocks, while countries like Spain are especially sensitive. But the factors behind high and low unemployment rates across countries are hard to untangle, according to the IMF researchers—it isn’t simply a matter of some countries having laws that make firing workers more difficult, for example. Growth may be the most powerful lever we have to increase employment, but that just brings us back to the problem that politicians are bad at changing growth rates.

There are many different things our government really knows how to change—things like tax rates, health-care coverage, greenhouse gas regulations, the ease of getting a work visa, or the chance that evolution will appear in school textbooks. Voters should go to the polls to pick representatives whom they trust on such issues. But if jobs and the economy are what the electorate is really concerned about, there’s a very good chance they’re going to come away dissatisfied, whatever happens on Nov. 4.

Kenny is a senior fellow at the Center for Global Development and author of The Upside of Down: Why the Rise of the Rest is Great for the West.

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