June 20, 2016
Bryce Covert had a column in the NYT this morning arguing that the performance of the economy in a president’s term is largely out of their control. There is considerable truth to this. Business cycles have a dynamic that is largely outside of the president’s control. President Reagan was fortunate in having a severe recession in the first year of his administration. Memories being what they are, voters blamed the recession on Reagan’s predecessor, while giving Reagan credit for the robust recovery which was largely inevitable.
Similarly, world events can have enormous impact in ways that are largely outside of the president’s control. Jimmy Carter had the bad fortune to be sitting in the White House when the Iranian revolution took 6 million barrels a day of oil production off world markets, more than quadrupling oil prices.
But it is possible to take the powerless president story too far. First, as the piece notes, the president appoints members of the Federal Reserve Board. The next president will come into office with two vacancies on the seven person Board of Governors. In addition, the will have the opportunity to pick a new Fed chair (or reappoint Janet Yellen) in their first year in office. The Fed can have an enormous near-term influence on the economy. At the moment, if it were to raise rates, as many policy types advocate (including some at the Fed), it would slow growth and reduce job creation.
The second point is that both President Clinton and Bush II sat on expanding asset bubbles, stock in the case of Clinton and housing in the case of Bush II. While these bubbles grew, they had a positive impact on the economy raising incomes and boosting growth. However the collapse of the bubbles was inevitable and devastating in both cases. Clinton had the good fortune to leave office before the impact of the collapse on the economy was fully realized. Bush II was less lucky.
There are two items worth filling in here. First, the impact of the collapse of the stock bubble was actually severe from a labor market perspective, which is what matters to anyone without a Ph.D. in economics and/or lots of money in the stock market. The economy didn’t regain the jobs lost in the downturn until January of 2005, at the time the longest stretch without positive job growth since the Great Depression.
The other item is that presidents can do something about bubbles, partly through regulation, but most directly by talking about them. The argument here is that by warning of the risks of bubbles and documenting it with data, an administration can change behavior in the market. (Would you by a home if you were shown compelling evidence that it was likely to fall in price by 30 percent in the not distant future?)
It is conventional to deride the idea that governments or central banks can influence bubbles by providing information. This derision is cute but beyond contempt. The cost of both bubbles runs into many trillion of dollars. The cost of providing information is cheap. The low millions would provide a large amount. There is no excuse for not trying to prevent such horrible disasters.
There are other ways in which presidents can have a near term impact on the economy. For example, presidents can use their power in international negotiations to try to get other countries to raise the value of their currency, thereby reducing the U.S. trade deficit. Unfortunately, President Obama has placed a higher priority on pushing patent protection overseas for U.S. drug companies to enhance their profits.
Presidents can also encourage various job promotion practices at the state level, even if they don’t have congressional funding for ambitious federal programs. For example, presidents can highlight the success of work sharing in the 26 states that have this option as part of their state unemployment insurance program (workers are compensated for reduced work hours instead of just being laid off altogether).
In short, while there is much about the economy that is beyond the president’s control, it is wrong to imagine that they are just a little helpless president watching the world turn. Presidents have real power.
Comments