In each of our past three quarterly market updates, we have highlighted our belief that “presidents have little power to move the economy” (Q2 2016) and that “that macroeconomic forces have a greater impact on the tone of markets than the president” (Q3 2016).
Today, the New York Times echoes this sentiment in a timely article entitled “Presidents Have Less Power Over the Economy Than You Might Think.” Please see below for the full article:
Presidential reputations rise or fall with gross domestic product. The state of the economy can determine if presidents are re-elected, and it shapes historical memory of their success or failure.
In the news media, we often use the handover of power as the time forassessing the economic record of the departing president. (I’ve done it myself recently.) Some economists have predicted that the Trump administration could create the next recession or financial crisis. And scholars have studied the relative economic conditions generated by Republicans and Democrats for predictive meaning (Democrats have done better since World War II, they found).
But the reality is that presidents have far less control over the economy than you might imagine. Presidential economic records are highly dependent on the dumb luck of where the nation is in the economic cycle. And the White House has no control over the demographic and technological forces that influence the economy.
Even in areas where the president really does have power to shape the economy — appointing Federal Reserve governors, steering fiscal and regulatory policy, responding to crises and external shocks — the relationship between presidential action and economic outcome is often uncertain and hard to prove. It’s this quirk in how we think that unfairly enhances the reputation of Ronald Reagan and Bill Clinton while unfairly diminishing the presidencies of Jimmy Carter and both George Bushes.
And if you think of the financial markets as the hyperactive cousin of the economy itself, this mental framework can cost you money.
We all have a tendency to think that a president whose policies we disagree with will be bad for the economy and the stock market. But looking at markets in such starkly political terms can lead to bad decisions. Ask a conservative who refused to invest in stocks while they notched a 182 percent gain during the Obama presidency — or a liberal who shorted stocks after Donald J. Trump won in November.
So what tools does a president actually have to shape economic outcomes? Fewer than you might think. Let’s walk through the factors that determine economic results — from those that are more purely luck to those that do reflect a president’s skill at overseeing the economy.
Timing the business cycle
When George H.W. Bush took office in January 1989, the unemployment rate was 5.4 percent and the roaring 1980s expansion was near its peak. When Bill Clinton succeeded him in January 1993, the unemployment rate was 7.3 percent and falling, as the United States was finally shaking off the damage of a recession.
That bit of timing alone — taking office at the trough of the business cycle versus the peak — can help explain much of how we perceive a president. Mr. Bush, of course, was a one-term president, while Mr. Clinton was handily re-elected.
President Obama’s luck on this front was somewhere between those extremes; he took office in the middle of a steep downturn. But some simple math shows just how much the timing of the 2008-9 recession relative to Inauguration Day mattered. Mr. Obama is set to leave office with cumulative job growth of 8.4 percent over his eight years in office.
But if he had taken office 13 months earlier in December 2007, he would have presided over a putrid 3.4 percent growth. If he had taken office in February 2010, when employment hit rock bottom, he would be on track to see blockbuster 14 percent job growth in eight years (assuming 2017 job creation turns out to be equivalent to 2016).
Put simply, when you take office at the bottom of a recession and with unemployment high, you can “achieve” a lot of growth just from the natural healing of the economy. When you take office at the top, there is nowhere to go but down. This may presage bad news for Mr. Trump, given that the jobless rate was a relatively low 4.7 percent in December.
Demographic and economic destiny
Consider one of the big economic forces of the post-World War II economy: women entering the labor force on a mass scale. In 1948, only 33 percent of American women between 25 and 54 worked or sought work. By the time George W. Bush took office in January 2001, that had risen to about 77 percent.
That means that throughout the second half of the 20th century, the economy had a huge tailwind, as millions of women joined the work force and stated contributing to G.D.P. Richard Nixon, Ronald Reagan and Bill Clinton didn’t create that trend; broader social forces did. But the fact that it happened made their economic records look better.
Expand the idea to other elements of demographics: the baby boom generation entering the labor force from the 1960s through the 1980s and now retiring; the large millennial generation coming into the work force. You see that a big part of the economic growth that might take place during a given presidency is determined by forces not under any politician’s control.
It’s worth noting that these forces are part of the story behind slow growth during the Obama administration and will — unless something surprising changes — continue in the Trump administration. The labor force has grown an average of 0.4 percent a year during the last eight years, and the Congressional Budget Office projects an average of 0.5 percent a year during the coming four.
By contrast, the labor force grew by an average of 1.2 percent a year during the 1990s, the last period of blockbuster growth.
The president doesn’t set monetary policy
Now we’re getting to areas where the president really does have some control over the economic cycle. Too bad it’s so indirect.
The Federal Reserve raises and lowers interest rates in an effort to prevent recessions and maintain low inflation. The president appoints its seven-member board of governors, including the chair.
The president can select appointees who align in terms of philosophy and instincts, and may select Fed governors who are more competent — or less. But the Fed system is designed to maintain independence from the administration once the appointments are made.
Beyond that, terms are staggered such that a president won’t necessarily get to appoint a majority of Fed leaders, especially right off the bat (Fed governors’ terms are 14 years, though lately few have served that long; the Fed chair has a four-year term).
So when a president appoints Fed officials who are effective stewards of monetary policy, achieving their goals of maximum employment, stable prices and financial stability, it helps a president’s odds of having an impressive economic record. It just isn’t a very direct exertion of power.
For fiscal policy, talk to Congress
This is often what we think of when we talk about a president’s economic policy. The occupants of the Oval Office can steer policy around taxing and spending priorities. But they can’t do it alone.
It’s certainly true that tax and spending policy carries a president’s imprint. President Obama’s election victories enabled him to enact a major fiscal stimulus in 2009 and increase taxes on the wealthy starting in 2013. President Reagan’s election brought a sharp cut in tax rates. Different election results would have made for different fiscal policy.
But Congress has, if anything, greater power than the president over how the government taxes and spends. It’s almost a punch line that when a president issues a proposed budget each winter, congressional opponents call it “dead on arrival.”
And while Mr. Obama had fiscal policy wins, he also met stiff resistance. The spending cuts known as “sequestration” happened because Republicans took control of Congress in 2010.
So to the degree that taxes and spending shape the course of the economy — and there’s no doubt they do — presidents can set direction, but not steer the ship themselves. It is a lesson Mr. Trump will soon learn.
Everything else affects the economy — slowly
There’s a broad range of other areas in which presidential action affects the economic future. Name a field, and the president exerts power over it: health care, energy, technology innovation, financial regulation, labor policies, trade, transportation infrastructure, agricultural policy. The list is endless. Even foreign policy matters; stable geopolitics is generally good for business.
The problem is that all of these big policy areas affect the nation’s economic prospects over the long run. The downsides of regulating banks poorly might show up as a crisis a decade down the road. The benefits of better infrastructure will tend to show up over many years. The payoffs of well-designed education policies come to fruition as young people enter the labor market with better skills years later.
Likewise, from a more conservative vantage point, the cost of environmental restrictions limiting energy production may not show up in the price of fuel for years. Burdensome, outdated regulations tend to show up as a modest drag on business year after year, not as an acute, clear crisis.
For example, the Congressional Budget Office estimated that the Affordable Care Act would reduce the labor supply by 2.3 million because more people would choose not to work. (The thinking being that they were working mainly so they could have employee-sponsored health insurance.) It said this would happen not immediately, but by 2021, a full 11 years after the law was passed and four years after the president who signed it would be out of office.
And that’s a case where independent economists manage to create an estimate of economic consequences. Often these economic impacts are so slow-building, diffuse and subject to partisan interpretation that it’s hard to estimate them with any precision. We all want to assume that it is our preferred policies that make the economy rev more strongly, even if it’s hard to prove definitively.
None of this means that presidents can’t do a lot to make the United States economy more dynamic and productive. It’s just that doing so could take a great while. It’s hard to prove that this or that policy was the source of the good times.
In the short run, all those other factors have a more direct, measurable effect in shaping whether a moment in political history produces an economy we remember fondly.
New York Times
January 17, 2017
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