Presidents have little effect on the economy.
That isn’t me speaking, that’s every professional economist who’s ever remarked on the subject. At best, they can influence things like federal spending, tax policy and trade policy. That’s about it. So why did the USA enjoy an economic boom in the 90’s under Bill Clinton and a recession under George Bush?
In the 1980’s a revolution swept through American business. The following were a few key changes.
1. Heavy investment in information technology: Cheap, powerful computers and the software applications written for them were applied to every aspect of business. From computer controlled five-axis milling machines to desktop email, computers revolutionized the American business place. I saw it. I experienced it.
2. A wholely new committment to the production of quality products: It was driven mainly by competition from quality obsessed Japanese firms. By 1980, “American Made” had become synonymous with poor quality. Japanese companies were eating their American counterparts alive. American companies either had to change or die. And change they did.
3. The demise of the power of labor unions: Already dying as a result of their own greed and misguided work rules, competition from harder working, lower paid labor from overseas put the long overdue final nails in the coffin of the AFL-CIO and the like. Those unionized companies that reformed and adjusted to the new realities survived. Those that didn’t died.
4. Management reform:
A) Risk averse middle managers were ruthlessly trimmed from company bureaucracies. Decision making, long pushed upward by managers in an effort to avoid responsibility, was pushed downward instead; to the lowest possible level at which the decision could be made. It was a minor revolution.
B) The ‘team’ concept, an idea that pre-dated but was lost in the industrial revolution, re-emerged. A new appreciation for the results gained from combining the knowledge of the experienced crafts-people with other multidisciplined professionals. They were given both decision making power and responsibility. They got amazing results.
5. A new entrepreneurism: Many, many people risked their homes and life savings to start small businesses. Small businesses are the biggest source of jobs and economic growth. They are also often the source of innovative ideas.
All of the above factors put in place by American business people and entrepreneurs (not politicians) between 1980 and 1990 bore their incredibley bountiful harvest in the 1990’s. It boomed like it hadn’t for 50 years. Bill Clinton inherited that economy. He had nothing to do with building it.
As for the recession that followed, it was coming anyway. The American economy has been on a 10 year ‘business cycle’ since the 1920s. The boom had played itself out. We’re were going to have a recession whether Bush or Gore was president. Blaming either one for it is absurd.
Which brings me, finally, to my point. Presidents, by constitutional design, are America’s face to the world. Their powers and responsibilities are mainly in the area of foreign policy. So the real question in a presidential election is not the economy, it’s foreign policy.
What are the foreign policy questions facing us?
* The war on terror, for one. To wage it or not. And if to wage it, how? Where? At what cost? What is effective and what is not? What is an immediate necessity and what is the long term strategy?
* Trade policy. Do you support free trade? If not, what are the options? Tariffs? Closed borders?
* Immigration policy. How many immigrants are enough? What should be the requirements?
* International relations. Are Bush and his diplomatic team doing a good job? Should we care?
* International institutions. Is the UN a viable institution? If so, why? If not, how should it be changed? Can it be changed or should it be replaced? Is the International Monetary Fund (IMF) doing a good job? Should its policies be reformed?
These are questions for and about the presidency. It’s a pity the media doesn’t explore them.
Foreign policy has little perceived direct impact on the life of the average American and, absent a threatening enemy, it is a fool’s errand to try to convince them otherwise. Peo0ple vote first with fear, then greed. That is why as soon as the cold war was won, the Democrats were brought back for reasons of economics alone. That Gore lost in 2000 shows how dreadful a candidate he was. Now the Republicans have fear working for them again.
Presidents do have some influence on the economy. See the discussion on FDR in the post below. Truman & Ike, with punchbowl controller Martin kept the economy in the doldrums (with 5 recessions) through the late 40’s and 50’s. JFK’s tax cut, LBJ’s guns & butter, Nixon’s wage & price controls, Carter’s Blumberg inflation, Reagan’s tax cut; President’s have had an impact. The one I wonder about is Clinton’s tax increase. Was it good for the economy or was the economy that strong?
Demographics played a part also. Boomers moved out of being a youthful burden on society in the 60’s and 70’s into their productive 30’s to 50’s during the decades of the 80’s and 90’s. And they had plenty of money to invest in 401(k)s.
In addition to the IT revolution and exacerbating the boom and bust was Y2K which forced lots of new IT investment to replace non-Y2K compliant software before the millenium. Getting the productivity benefit out of this software is probably part of the explanation for the “jobless recovery”.
The best argument against democracy is a five-minute conversation with the average voter. -Winston Churchill
The president and the government at large can AFFECT the economy (usually following the principle of unintended consequences), they cannot CONTROL the economy.
If even a small number of voters and politicians understood this one fact elections would be enormously different.
Like the good small-l libertarian I am, I assume that people behave pretty much rationally most of the time, including optimization of effort and information gathering. What applies generally to economic and personal decisions also applies to voting behavior. Specifically, people (1) know their individual vote doesn’t count for much, (2) hence (except for hobbyists a/k/a “good citizens” like us who like this stuff) they do not devote much time or effort to making deeply informed voting decisions, but rather either (3a) apply simplifying rules of thumb which generally reflect their interests and beliefs (“Republicans are crooks, fascists, warmongers”, “Democrats are a bunch of liberal pansies who always raise taxes”) and/or (3b) make gross assessments of “how the country/state/city” is doing and on that basis make a decision whether to vote out the incumbent or not.
So, I don’t agree with DSpears that if only every “got it” the world would be a much different place.
Andy, permit me a more lengthy quote which better captures Churchill’s attitude toward democracy:
I tend to agree with Spears and Heddleson more than with Hiteshew. Presidents can make large long-run differences in economic performance. Anyway, at some level it becomes impossible to disentangle political and economic outcomes. The home mortgage interest deduction has economic consequences, but it also has immense political consequences. As one political operative once told me, as if stating a law of nature “renters are Ds”, i.e. people who rent their homes are Democrats, those who own are Republicans. The political framework in which economic activity takes place is pretty well fixed in America, but it is not immutable, Presidents can influence expectations by acting in which can change or upset the basic framework. It matters who is president.
All that said, I agree with Michael that the Presidents primary role is in dealing with foreing affairs, and I agree that is where the scrutiny should be primarily focused if one is being thoughtful about it, and that the focus usually is not there.
Presidents can influence expectations by acting in ways which can change or upset the basic framework.
That’s an interesting, and when I think about it, valid point Lex. Perception affects actions.
Of course, the predominant media – if such a thing can be said to exist, and I think it can – also has widespread effect on how a given issue or condition is perceived. I think it’s clear many media outlets consider it their mission to see that certain issues are perceived in a certain way.
However, your overarching point is that a president can affect the framework in which economic activity takes place. True. Assuming, of course, he can rally the congress to his cause. So his/her basic outlook on economics is important. I agree.
I remember a conversation I had with a coworker in the 1999-2000 timeframe. He remarked that he wished Bill Clinton could run for president again since the economy had done so well under him.
“I don’t care who he screws or how often, I don’t give a damn how many foreigners are killing each other, all that matters to me, really, is that the economy is doing great. He can be president forever, as far as I’m concerned, as long as he keeps this economy going.”
I remember wondering at the time what he’d think if he knew that Bill Clinton didn’t have the slightest thing to do with that economy. He was a senior manager. Highly educated (in theory).
So yes, long term economic framework issues are within a presidents purvue. Whether or not we’re currently experiencing a boom or a recession is not.
I appreciate your pointing that out, by the way. Good point. I missed it completely.
The whole “basic framework” business can be critical, and it is always worth looking for in history, to draw the right lessons. Capitalism is composed of insitutions. Human greed can lead to highway robbery, or it can lead to the mass production of valuable goods. Cultural factors matter, and institutional (legal and political) factors matter a lot.
Jean Edward Smith’s biography of Grant makes all this very clear, to pick one relatively little known example. Grant insisted on hard money, and brought on a recession when we went off the inflationary war finance. This hurt in the short term, but created a predictable monetary framework once we came out of the recession. Also, he mediated disputes between the USA and Britain, and signed a treaty which resolved all open issues between the two countries. This eliminated a lot of animosity between the countries, and ended uncertainty and war scares which prevented investment, and restored a climate of confidence. This diplomatic success in turn allowed the massive influx of British investment capital which we saw in the late 19th Century. British capital and a non-inflationary monetary regime were the solid foundations of the spectacular growth of the post-Civil War era.
Without President Grant, it would have been a very different world.
That’s a very interesting premise, that Presidents primarily effect foreign affairs. In some distant past it appears to have largely been correct.
But ye gods, the Federal budget is over 20% of the US GDP, and although Congress passes the budget, who spends it?
Why, the Executive branch bureaucracy!
So Congress passes bills to “do something” about a perceived problem, allocates money that the Executive branch spends, according to Regulations that it has written. And the Congress-critters can claim “look, I got a good compromise, look what the other side was asking…and it’s the bureaucracy which flubbed the implementation!”
That ass covering formula is a large part of how we ended up where we are. My god if Congress actually wrote the substantial bits of Regulation that actually determine winners and losers under a policy, they might actually be called to account by the voters! Much better to have a showy joust on CSPAN (or rather, boring one, wouldn’t want too many viewers!), declare victory, and spend that war chest on next terms campaign.
Michael,
I think you should re-examine your assumptions about the (quite minor) recession in 2001 and it’s relationship to the Bush Administration.
In the first place, the economic cycles relation to fed and executive policy is on a 1-2 quarter time lag, so it’s unclear how Bush’s policies are to blame for a downturn in the cycle that began prior to his assumption of the Presidency. Greenspan is on record worrying (and warning) of a 15% bubble as early as 1997, which makes it difficult to sympathise with investors who disregarded what I personally considered ‘common sense’ advice (a la companies that don’t make money are questionable candidates for public offerings… “I’ll gladly pay you next Tuesday for a hamburger today!”, yet Blimpy never seemed to get around to next Tuesday). The 2001 recession, if I recall correctly, began in a quarter that Clinton was still the President.
Secondly, while the Bushies certainly deserve some portion of the responsibility for the 9/11 intel failure that set off a chain of events which contributed to depressing the economic cycle (and required a reassessment of our military budget), I personally watched smoke pouring out of the WTC in 1993 after that terrorist attack and have a hard time taking Democratic attempts to shirk responsibility for their lack of foresight off onto Bush. The New Democrats have an unfortunate habit of drafting policies that a) front load benefits for their own political advantage; b) shift the burdens towards the end of a ten year schedule when they know they are unlikely to be in office; c) rarely if ever take into account the realities of beltway and Congressional politics (i.e. make promises they know either the Courts or Congress will block). And most importantly, being a Democrat today seems to mean never having to admit that one’s ideologically driven policy failures were ill conceived or poorly executed (as was the literal case with Osama bin Laden). As far as the 9/11 attacks effected the economy this is important. It’s also important in that Hillary Clinton’s Senate aspirations certainly precluded any policies alienating Wall Street bankers who were and are the largest financial supporters of the Democratic Party (source: opensecrets.org)… this meant that a serious infection that was clear as early as 1997 was left to fester because the bubble was a cash cow for NYC and northern California (both Democratic bastions). Just because the festing financial boil popped during Bush’s tenure doesn’t mean his administration is to blame for the US catching the dose in the first place (I think we all know which President was the expert in STD’s).
I’d suggest that the Bush adminstration has been forced since the beginning to play defence… to focus not on it’s own A list priorities but rather to address a succession of poor or irresponsible policies that originated in either the first Bush administration or the Clinton years. Even Bush’s tax cut should be considered in relation to his fathers irresponsible spending and the nature of Clintons early tax hike. Frankly, Bush has had the initiative neither on foreign policy nor domestic policy as a rule, and in fairness should be given credit for his administrations accomplishments in damage control rather than slamed for not scoring more “defensive touchdowns”.
(by the way… the capital gains tax cut is where rich people made money, not on a couple point cut on the top income rate.)
I think you should re-examine your assumptions about the (quite minor) recession in 2001 and it’s relationship to the Bush Administration.
Alex, Where did I argue that the recession was Bush’s fault? I argued exactly the opposite.
(I) have a hard time taking Democratic attempts to shirk responsibility for their lack of foresight off onto Bush.
I agree completely, although I think there’s plenty of blame to go around for firewalls on communication between the CIA and the FBI. It was an understandable attempt to limit the all-seeing, all-knowing, “Big Brother” aspects of the government. Unfortunately, it was fatally misguided.
Even Bush’s tax cut should be considered in relation to his fathers irresponsible spending…
His FATHER’S irresponsible spending?? How about GWB’s irresponsible spending? If I’ve got a serious gripe about the Bush administration, and I’ve got a few, it’s here. They spend money like drunken sailors. Whatever happened to fiscal conservatism? Is that out of fashion these days? Take a look at the national debt. According to the US Treasury, tnterest expense on the debt is approaching $320 billion/year and climbing!
Michael,
Your link wasn’t to the Treasury…
http://www.ustreas.gov/topics/accounting-and-budget/index.html
And here’s the link to calculate the Treasury’s debt growth during Bush’s admin in order to compare it to the Clinton admin (type in the dates each)
http://www.publicdebt.treas.gov/cgi-bin/cgiwrap/~www/opdpnhis.cgi
Here’s the Commerce Dept’s economic indicator linkfarm
http://www.economicindicators.gov/
Here’s the Congressional Budget Office
http://www.cbo.gov/
Here’s the CBO report on the projected economic outlook for 2005-2014. (First chapter deals with federal debt…)
http://www.cbo.gov/showdoc.cfm?index=4985&sequence=0
If we’re going to have a serious discussion about economics and politics, we should use primary sources and agencies when possible. It’s easy to get caught up in election year rhetoric, and to thus lose perspective. Another poster pointed to the GOP’s use of fear tactics, and while I don’t disagree per say, I think it’s important to note that neither Party has a monopoly in that area.
I apologise if I misunderstood your claim, and didn’t mean to criticise other than the association of market and or economic performance with a given administration as ‘boom’ and ‘deficit’.
“In the first place, the economic cycles relation to fed and executive policy is on a 1-2 quarter time lag, so it’s unclear how Bush’s policies are to blame for a downturn in the cycle that began prior to his assumption of the Presidency. ”
I think one or two quarters is the absolute minimum time lag between action and result. It is generally accepted that the Fed policy lag is anywhere from 6 months to 2 years, and fiscal policy can have a similar lag, especially from the time it is passed to the time when it actually is implemented. One exception was Bill Clinton’s retro-active tax increase in 1993. That had immediate (bad) effect because it didn’t allow any changes in behavior to mitigate it’s effects.
I partially blame Bush for spending money like a drunken sailor (especially on non-defense related items which are considerable) but this is a trend that started from the first inkling of a budget “surplus” back in ’97. Government spending has been on a straight line up from that day forward. But at the time of the 2001 recession, no action Bush had taken had had any wffect whatsoever on the economy. None at all.
How about purposely (or accidentally) inverting the yield curve (a classic sign of recession) by shifting the governments borrowing into short term vs. long term issues? There’s a policy action that had lasting effect.
How about purposely (or accidentally) inverting the yield curve (a classic sign of recession) by shifting the governments borrowing into short term vs. long term issues? There’s a policy action that had lasting effect.
That was a good example of pols getting away with something because most journalists were too ignorant/lazy to ask basic questions like, “WTF?”
I am hardly a wiz at economics and the market but it makes swense that a president usually copntrols his party and between them they drive an economic vision. Bush et al wanted major tax breaks for the wealthy. Now this may or may not be a good thing–you decide–but it certainly drove the American economy in a direction that the president wanted.
Just thought I’d point out, the day after we complained about the national debt on this blog, Alan Greenspan came out in agreement with us.
When the Chicago Boyz talk, the fed listens!
Here’s the text of the statement from Greenspan:
http://www.federalreserve.gov/boarddocs/speeches/2004/200405062/default.htm