Threading the Fiscal Needle

PALO ALTO – Elections often turn on the state of the economy, especially in hard times. When growth and jobs are down, voters throw out incumbents – whether Spanish leftists, French rightists, or Dutch centrists. The United States is no exception. Three years into the Great Depression, Herbert Hoover was trounced by Franklin Delano Roosevelt. In 1980, following a severe bout of stagflation, Ronald Reagan routed Jimmy Carter.

At the same time, economic performance depends to a considerable extent on economic policy. The Great Depression was intensified by poor monetary policy, tax hikes, and protectionist trade policies. Likewise, loose US monetary policy in the middle of the last decade helped to set the stage for the Great Recession by contributing significantly to an explosion of leverage and fueling the housing bubble that burst in 2007-2008.