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Credit for economic performance: Leads and lags

"Time causes a divergence between action and result."

 

Developments in this country and in the United States since the 2016 presidential elections, and recent statements made by the winners of those elections—Rodrigo Duterte and Donald Tump—have occasioned renewed interest in an element of business-cycle theory known as leads and lags. President Duterte has been heard to say repeatedly that his administration’s policies and actions are responsible for the Philippine economy’s robust growth during the last 30 months. On the other side of the Pacific Ocean, Trump has been claiming that the US economy’s current strong performance is attributable to the economic measures, including a hefty corporate income tax cut, taken by his administration.

What are leads and lags ad how do they figure in the raging debate over which administration—the present or preceding one—deserves credit for the comparatively good times that the Philippine and American economies are experiencing? Are the historically high GDP growth rates being posted by the Philippine economy entirely attributable to the performance of Mr. Duterte’s economic managers, or is the present administration merely reaping the fruits of seeds that were planted by the economic managers of his immediate predecessor, Benigno Aquino III? And, on the other side of the world, does the Republican administration of Donald Trump deserve full credit for the present strong performance—around 3 percent GDP growth—of the world’s No. 1 economy, or has Mr. Trump, in the words last week of Democratic presidential candidate Joe Biden, “merely inherited a strong economy, like everything else that he has?”

Business cycle theory in economics accords great importance to the concept of leads and lags because of the simple and obvious fact that almost everything that is done at one moment cannot produce results in the next moment. This is the lag: Time causes a divergence between action and result. On the other hand, this action same divergence causes the taking of leading action in order to ensure the production of results as designated points in the future; thus, if the desire is to have a subway line by 2025 and the construction period for that facility is six years, the project proponent must make a leading decision and break ground for the subway line in 2019. The leads and lags concept applies as much as to the individual decisions as to government decisions.

If heads of state are elected or decide to stay in office for life—like China’s Xi Jinping or Egypt’s Mohammed El-Sisi, the leads and lags concept will be of far less significance because the chances are that a project or decision taken today will become operational during the head of state’s stay in office. But where terms of office are limited by law, the economic seeds planted during one administration very likely will, because of project gestation periods become harvestable during the succeeding administration.

Back to Mr. Duterte and Mr. Trump. Can the Duterte administration claim most of the credit for the above-6-percent GDP growth rates of the last 30 months? I don’t think so. Objectively, the Aquino administration did a creditable job of managing the Philippine economy, especially in the fiscal arena. The good results of that spilled over to the administration that came into office on July 1 2016. The administration that comes into office on July 1, 2022 likewise will benefit from the lagged effects of the Duterte administration’s economy-strengthening policies and actions. This is how things go.

As for the US economy, I tend to agree with Joe Biden. The Trump administration is benefitting from the good economic deeds of Barack Obama and Joe Biden during their eight-year (2009-2017) stay at the top of the US government.

A final note of caution. On the basis of the same concept, an administration’s unsound economic actions and policies will be experienced, on a lagged basis, by the succeeding administration.

Topics: Rodrigo Duterte , Donald Trump , Economy , Philippines , United States
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