Contrary to what millions of us think, and what politicians would like us to think, U.S. presidents have little influence over our economy and very little direct control.
Yet the assumption is that, as the chief justice takes the Bible back from under the hand of a new president, this new chief executive magically gains enormous power, lasting until someone else takes the oath four or eight years later.
Philosophers view this false assumption as “post hoc, ergo propter hoc” — the error of assuming that because one thing preceded another, the first caused the second.
For example, Ed Lotterman became a minor Minneapolis Fed economist just as the U.S. emerged from a recession that was crucial to the 1992 election, then incomes and employment grew strongly, then, months after he left the Fed in 1999, the country slipped back into recession. And the next decade involved the worst financial crisis since the Great Depression. Clearly, Lotterman is a great economist with enormous national influence, right?
The second more-important consideration is that the U.S. Constitution gives presidents few economic powers. In it, control of taxing and spending rest with Congress, with a special responsibility for the House. The president cannot raise nor lower taxes without congressional action, nor can he order or deny spending. Nothing in our fundamental document forbids a president from proposing bills to Congress, but these really can “die on arrival.” Nor was there any “budget” until the late 1800s, and no executive branch agency preparing one until 1921.
All a president constitutionally can do is receive passed bills from Congress and either sign or veto them. Period. Full stop. Oh, wait, that’s as long as Congress acts to retain its powers.
Similarly, the Constitution says nothing about a central bank or government control over money and interest rates. Congress passed the Federal Reserve Act in 1913. President Woodrow Wilson signed it. What we have is entirely legal. And in 1935’s deep reforms, the central bank deliberately was insulated from political control by any branch of government.
Members of its board of governors must be appointed. Here presidents have the initiative. They can nominate Fed governors, but these must be confirmed by Senate vote.
Some Fed appointments can be momentous, leading to strong economic outcomes. President Richard Nixon appointed Arthur Burns, a distinguished economist, to head the Fed. Burns presided over the worst peacetime inflation in U.S. history. He also clearly timed policy changes to benefit Republicans in the 1972, 1974 and 1976 elections.
President Jimmy Carter named G. William Miller, clearly the worst Fed Chair ever, to replace Burns. Carter’s administration recognized its mistake. Some 17 months later, Carter coaxed Miller to head the U.S. Treasury and named Paul Volcker, the greatest Fed Chair ever, to take over. That was one case where a president’s actions had momentous effects leading to the end of a decade of high inflation. But, after the Senate’s ratification of these appointments, neither a president nor Congress can then control Fed actions.
All economists recognize an enormous problem with attributing outcomes to presidents. Changes in economic policy take a long time before they affect output, prices, earnings or employment. But these “lags” don’t have fixed incubation times.
Major changes in fiscal policy — taxing and spending — usually cannot be implemented until the next fiscal year. That is nine months after inauguration. Then more months pass before tax and spending changes really take hold, and longer still before their effects are shown.
Monetary policy historically has even longer and more variable lags, from six to 18 months. Changing the “monetary base” is not like precise movement of a surgery robot. It is more like jabbing at mushy gas pedals and brakes without knowing if you are on glare ice or dry pavement. If economic events and research in the 1970s and 1980s taught anything, it was that talk of “fine tuning” an economy was dangerous.
“What?,” people will exclaim. “Stock markets react to rate changes in minutes or even seconds. They even move in anticipation of changes. And, if the Fed raises rates and I go to my bank for a loan the next week, I will have to pay more for a business loan.”
Yes, stock markets gyrate on real news and on rumors; interest rates fluctuate with policy. That is far, however, from changes in the number of people working or sales of stores or prices for hogs or wage rates for construction workers. And, while interest rates themselves change quickly, measures of the economy take more time.
Yet most people view economic conditions subjectively, based on their biases. The joke that a recession is when your neighbor gets laid off, but a depression is when you do, has validity. Moreover, both Republicans and Democrats tend to see the economy rosily when the their party has the White House, while the opposition party can only see decay and call for change.
Some partisans do look up and quote sundry numerical indicators. Understand that these are tricky. Objective statistics can just as easily lie as tell the truth. What about lags? Do you use numbers from inauguration to inauguration? Fiscal year start to fiscal year end? Something else? When Barack Obama swore his oath, in 2009, the economy was still slowing. Six months later, the economy was at rock bottom, but heading up overall. Calculating from June 2009 gives him better numbers than from January.
The same is true for the Carter-Reagan transition relative to the recession caused by the Volcker-induced campaign to crush inflation. One gets very different results with relatively small changes to the assumed dates of when economic “control” is assumed.
One can even play games with choice of indicator. Carter had lower average unemployment rates than Reagan, and better numbers in growth of people with jobs. However, in job growth, there is a big difference between “civilian employment” and “non-farm payrolls.” The ratio of the national debt to output fell continuously from the Korean War to the Reagan administration. But most of this was because T-bonds’ face value did not rise while inflation drove nominal GDP higher. The debt itself did not fall.
There are myriad other reasons why presidential influence is overstated — and overrated. Yes, voters often do vote with their pocketbooks, which means most voters will ignore what is really happening with the economy.
St. Paul economist and writer Edward Lotterman can be reached at firstname.lastname@example.org.