Economics and the Presidency: can one person make a difference?
Okay, so we’re all worried about the economy right now, for obvious reasons. And because it’s a Presidential election year, we’re hearing the usual promises from both candidates about how their administrations will improve it. There’s a lot of discussion about whether Obama or McCain will be better — for the national economy as a whole, or for a particular economic segment of the population.
Not many people, however, seem to be questioning the basic concept that the occupant of the Oval Office can even have a significant impact on the national economy. I’ve long harbored a suspicion that Presidents are taking too much credit for the good times and too much blame for the bad. So I’ve been looking around to see how much leverage professional economists believe the President actually has.
In an essay on exactly this topic from the last Presidential election season, professor Russell Roberts points out “two strange assumptions” implicit in these discussions:
The first is that the President “runs” the economy. The President hardly even runs the government. He certainly cannot direct the fortunes and failures of millions of workers, managers, investors and entrepreneurs.
The second implicit assumption is that the success or failure of the President depends on his ability to “stimulate” the economy, as if the economy were an engine that simply needed a different setting for its carburetor.
Roberts illustrates the silliness of trying to control the national economy with tax cuts and stimulus payments with a parable of a boy dipping water from the deep end of the pool and pouring it into the shallow end. I liked this, because it exactly illustrates my problem with the $600 check I received in the mail this summer.
(On the other hand, spending untold billions of dollars on the Iraq war has always seemed to me a lot like dipping water out of the pool and dumping it out in the middle of the desert. Perhaps I just lack a global perspective?)
On a similar note back in February, economics professor Tyler Cowen wrote in the New York Times that, “The public this year will probably not vote itself into a much better or even much different economic policy… It is already too late to stop an economic downturn.” The reasons are varied, but seem to boil down to two points:
- The globalized economy limits the changes any one country, even a very powerful one, can make on its own.
- Most of our economic policies and strategies are entrenched beyond the ability of our current legislative and political systems to reform them. “Democracy is a blunt instrument,” reminds Cowen. (Ouch.)
Newsweek weighs in with a quote from Thomas E. Mann, senior fellow at the Brookings Institution. “[The President's] influence on the short-term macro economy is generally overestimated by voters.”
- In the short term, it may be a lot easier to do harm than good. Newsweek lists “notable [Presidential] policies that inflicted short-term damage” in the administrations of Jefferson, Grant, and Hoover.
- But most factors that influence the business cycle –”the end of the Cold War, the deflationary influence of an emerging China, the Internet … commodity inflation, a housing bubble and a weak dollar engineered by the Federal Reserve’s promiscuous policies, the demand-driven surge in oil” — would have occurred regardless of which person or party is in power.
On to Time Magazine, which noted that “The bigger issue for voters to wrestle with is … what the next President can do to the economy. Usually it’s not so much. But every once in a while, like when Franklin Delano Roosevelt was elected in 1932 and Reagan in 1980, the effect can be dramatic.” Cowen agrees: “The New Deal brought about a revolution in economic policy â€” but those were special circumstances.”
Are we in ‘special circumstances’ once again? Not yet. Compared with 1932, 2008 is still looking pretty rosy. Could we wind up there eventually — next year, or the year after that? Answer hazy, try again later.
After all this reading, I’ve come away with four points of general agreement:
- There are no short-term solutions. The economy is an ocean liner, not a speedboat; course corrections take time.
- Rearranging resources is never the answer. Government ‘stimulus’ doesn’t work because the resources used to do the stimulating are just water from the other end of the pool.
- A President may subtly set the tone of his administration but in most cases his direct power is limited at best. Congress and the Federal Reserve both have a greater effect on economic policy.
- The most important economic role of the President may be the ability to impact the mood of the citizenry in general. Franklin Roosevelt famously restored public confidence with the first of his “Fireside Chats”, halting the run on deposits that had flattened the entire banking system.
The most troublesome economic data points aren’t necessarily the rising unemployment rate and plunging home prices. Rather, they’re the miserable consumer-confidence numbers, which have hit a 16-year-low, and the high percentage of Americans who believe the nation is on the wrong track.
I could use a little clear, plainspoken communication right about now — what about you?
Presidential Economics: What Leaders Can and Cannot Do about the State of the Economy, The Library of Economics and Liberty
Itâ€™s an Election, Not a Revolution, New York Times
Why the President Can’t Fix the Economy, Newsweek
The New President’s Economy Problem, Time Magazine
(Photo by shazam791.)