{UAH} WHY PRESIDENTS SHOULDN'T GET CREDIT OR BLAME FOR THE ECONOMY

Opinion: Why presidents shouldn’t get credit or blame for the economy

By Rex Nutting

Why neither Hillary Clinton nor Donald Trump can turn this economy around on a dime

Every presidential campaign is fought, to some extent, over the recent performance of the economy. Voters who are generally satisfied with the economy tend to return the incumbent party to the White House, while voters who feel victimized by the economy tend to support the opposition party.

The state of the economy doesn’t determine every election, of course, but it plays a large enough role that some economists and political scientists have invented election prediction models based largely on economic factors.

This year, Democrat Hillary Clinton and Republican Donald Trump will be arguing about much more than the economy, but the economy could be the determinative factor.

Whether she likes it or not, Clinton is running, in part, on Barack Obama’s economic record, including strong job growth (14 million more since 2010), and the improvement in household finances due to the rebound in the stock market and in home values. She says she will “fight for us” by continuing most of his center-left policies (except for a few items, like rejecting the Trans-Pacific Partnership trade deal he negotiated).

Trump, of course, says the economy isn’t working at all. The economy is barely growing, and inequality has increased. Millions still haven’t found work, and many feel like things are getting worse for them and for their children. He would tear up the trade deals, build a wall to keep out the immigrants, and make America great again (whatever that means).

Clearly, the economy matters in the election of a president. The question that’s rarely answered is whether the president matters in the performance of the economy. Does a president really have much control over the economy? Should the president get the credit when it’s good, or take the blame when it’s bad?

The answer is: No, generally not.

Except during extreme events such as the Great Depression or the Great Recession, the president doesn’t have much influence on the performance of the economy in the medium term (defined here as four years).

Given the checks and balances in our federal republic and capitalistic economy, the president simply isn’t powerful enough to alter the course of the American economy except at the margins.

Let’s think for a moment about what determines economic growth. In the short run, the economy is constrained by how much money people, businesses and government agencies are willing to spend (known as effective demand) and by the existing stock of things such as factories, offices, stores, roads, computers, workers, human capital, financial capital, institutions, markets, resources, and technology (known as the supply-side of the economy).

The president doesn’t control any of these variables.

In a slowdown, it’s the demand side that comes up short. We have the capacity to supply lots of goods and services (and keep people employed), but demand is weak. In this kind of emergency, the government can temporarily stimulate more demand by lowering interest rates, or by cutting taxes, or by increasing government spending. All of these measures effectively increase incomes and get spending going again so people can go back to work.

Lowering interest rates is the most common response to weak demand, but that’s the province of the Federal Reserve, not the White House. Most presidents have refrained — at least in public — from putting pressure on the Fed to lower rates.

Fiscal stimulus is another matter, but it’s not something the president can do on his or her own. The president needs Congress to change tax or spending policies, and that approval is not automatic. Presidents George H.W. Bush and Bill Clinton both wanted a fiscal stimulus during the 1991 recession and the ensuing “jobless recovery,” but Congress said no.

Presidents George W. Bush and Barack Obama were able to get Congress to go along with their requests for fiscal stimulus, but Obama’s 2009 stimulus plan was smaller than his advisers wanted, primarily because they thought Congress wouldn’t approve a penny more. Obama managed to extend some tax cuts as the recovery lagged, but he couldn’t stop Congress from imposing fiscal restraint on the economy with its austerity budget policies.

Arguably, the supply side of the economy is where a president can really leave a mark, like Dwight Eisenhower did with highways, and JFK and LBJ did with technology and civil rights, and Jimmy Carter, Ronald Reagan, and Bill Clinton did with deregulation.

Or, to put it another way, our chief economic problem now is to increase the economy’s potential growth rate, which is determined by productivity and demographics.

The problem is, our political parties can’t agree on the costs and benefits of governmental policies that would most effectively increase productivity.

Nothing on the supply side works quickly. It’s nearly impossible to design policies that will clearly pay off before the next election, so there’s a great incentive to do things that make special interests feel good in the short run, like cutting taxes or subsidizing green energy.

To increase productivity, Democrats tend to favor capital investments, such as building and repairing the infrastructure, investing in a skilled and healthy workforce, or putting public money into research and development.

This is the path — supported once upon a time by both Democrats and Republicans — that built the interstate highways and the airports, that ensured America had the most productive workers in the world, and that invented the technologies that won the Cold War, put a man on the moon, and transformed our lives and our economy.

Republicans, on the other hand, tend to believe government should get out of the way. Their favored policies are cutting taxes and cutting regulations, even though there’s no evidence that tax rates have much impact on the economy’s growth potential, and there’s a lot of evidence that smart regulations can make our country safe from toxic food, drugs, air, water, and mortgages.

There is one more way that a president can have an impact on the economy: By being optimistic about America and its future. It’s hard to judge how important Franklin D. Roosevelt’s “nothing-to-fear” attitude was in the 1930s, but we do know the 1929 recession ended as soon as he took office (even if the Depression itself lasted another seven years).

Our most optimistic recent presidents — Kennedy, Reagan, Bill Clinton, and Barack Obama — each presided over a long period of growth that began near the start of their time in office. Maybe these leaders were able to excite the “animal spirits” of the American people to achieve great things.

Neither Hillary Clinton nor Donald Trump seem to be particularly optimistic, and neither has much hope at this point of pushing through any major supply-side policies that will actually increase our growth rate.

Fortunately, the fate of the economy doesn’t depend much on who’s sitting in the White House.

 

EM

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