Happy Presidents' Day! 2024 is another presidential election year and while it would be nice to sleep in today, I can’t help wonder if presidents truly affect the economy as they say they do. After all, isn’t the state of the economy one of the important considerations for voters when they cast their votes?
A good economy at the time of the election has a positive effect on votes for the incumbent candidate, with GDP growth, employment rates and inflation rates in the forefront of voters’ minds. A poor economy on the other hand, is an ominous sign.
The question though is…do presidents really affect the economy? More specifically, how much influence do they exert on the economy and how much of the economy’s performance is based on just, well, dumb luck?
An incoming president tends to inherit either a strong or weak economy from his predecessor. The state of the economy is determined by several factors such as the the usual ups and downs of the economy or some major economic event like the birth of the internet or the real estate bubble, most of which are outside the complete control of the government or the president.
What does this mean for an incoming president who enters office during or towards the end of recession? This means that these presidents will see more economic growth and more job creation during his term, and the upswing comes from the normal boom and bust cycle of the economy. Think of it this way, if the economy is starts from a really bad place jobs are its lowest levels—there is no way for these variables to go but up. It is just the self-correcting pattern of the economy.
Hence, timing is key…For instance, President Obama took office around 2008 when the economy was in a steep downturn. When he left office after eight years, the cumulative job growth was 8.4% in 2016. But had he started his term in 2007 when the recession was just beginning, the job growth would have been lower. Of course, economic policies were helpful to foster economic growth but so was the economy’s ability to self-correct and heal itself.
So what can the president directly control in terms of the economy? Not much apparently. But the president can help select and nominate the Federal Reserve’s governors, who eventually manage monetary policy. So yes, there is some influence but not directly. The Federal Reserve, after all, was established to maintain independence from any other government influence and their primary task is to lower or raise interest rates to stimulate or cool down the economy. Interestingly, the president seem to take the credit or the blame for the stock market’s performance and not the Federal Reserve.
What about other economic policies like stimulus packages, tax cuts, spending and the like? While the president has more control on fiscal policies such as Obama’s increased taxes on the wealthy and Reagan’s deep tax cuts, Congress equally takes part in the decision-making process. In recent years, as the divide between two sides of the aisle grows bigger, fiscal policies like stimulus packages have been more difficult to get through Congress.
The bottom line is, the incumbent president is hardly responsible for the state of the economy, or at least it’s hard to attribute it economic outcomes to the president. Moreover, there are certain factors that come into play that greatly influence economic outcomes such as oil shocks, wars, even something as unforeseen and unlikely like a pandemic. For the presidents, it really is all about timing, dumb luck and if lady luck decides to smile on them. Maybe if the presidents started naming their dogs “Lucky,” like President Reagan’s dog, then maybe, just maybe, they’ll actually have more luck with the economy and have a “rebark-able” presidency.
The Gist…
A president does not have direct control of the economy, but receives blame or fame depending on the economy’s outcome
Monetary policy such as controlling interest rates and the money supply rests on the Federal Reserve. To a certain extent, a president may influence who can be governor of the Fed but generally, the Federal Reserve remains an independent entity.
The president may have more influence on fiscal policy but without Congress to sign off on these policies, it remains an impasse.
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