Does the President Really Influence the Economy?

Presidents come and go (in democratic countries), but they often leave their mark. They mark the country politically, economically, and even culturally. The president of each country is considered to be the most influential person in the country, and the president of the U.S. is considered to be the most influential person in the world.

In most countries, the economic state of the country is likely to decide the winner of the elections. We all remember Bill Clinton’s saying “it’s the economy, stupid“, in his winning campaign against sitting President George H. W. Bush. The last U.S. elections results can also be attributed to the economic status of swing states (states that fluctuate between Republicans and Democrats), as they suffer from higher unemployment rates than the rest of the country.

The combination of the concept of the president as the strongest person in a country together with the importance of economic conditions during elections makes it almost impossible to argue that a president’s effect on economic conditions is less than anticipated by the general public.

But does the president really affect the economy? It’s time to examine this question.

Economic Cycles

The economy has a tendency to undergo cycles of growth and recession. In times of growth, the GDP is higher, people consume more, the unemployment rate is low, and prices are usually rising. During a recession, the GDP growth decelerates, unemployment rates are higher, and sometimes there is a shortage of credit.

When elections occur during good economic times, either the president or his party’s successor is elected. When times are more grayish, people tend to blame the president and his government, and change is a bit more likely. Economic problems do not have to be nationwide. The American economy was doing well in 2016 on average, which includes major growth in some sectors, such as technology and finance, but also includes sectors that have become less important in the last few decades, such as coal mining, and have left some regions of the U.S. with no jobs and a poor local economy.

Nobody would be shocked to know that the state of the economy may determine the next president, but it’s worth understanding if the president does indeed affect the economy, and if an economic downturn can be avoided based on a president’s decisions. In short, who is stronger—the president or the cycle?

Economic policy

Economic policy can be divided into monetary policy and fiscal policy.

Monetary policy is the process of controlling the supply of money in the market and ensuring that inflation (an increase in prices) is stable by using such measures as the interest rate and the availability of credit.

Monetary policy is typically implemented by a central bank and not by the government. The government can decide who will be in charge of monetary policy; for example, in the U.S., the president appoints the Fed Chairman whose actions have to be coordinated to some extent with those of the government. The Chairman is nominated by the president, who can influence his decisions and incentivize them in one way or another, but overall the president’s ability to affect monetary policy is highly limited.

Monetary decisions are usually made among a board of economists and are usually designed and aligned by economic theory. In other words, when inflation is spiking, the Chairman would increase the interest rate even if the president does not want to hurt the credit supply (and thus growth) in the economy.

The one policy that a president can affect, though, is fiscal policy, which is associated with control of government revenues and expenditures. Revenues are controlled through taxes and other government income, while expenditures include government spending on goods and services, such as health, education, welfare, and security.

The president can hypothetically influence fiscal policy, but we have to ask what is the real impact of fiscal policy on the economy, and how much can the president affect fiscal policy.

Fiscal Policy

Democrats and Republicans seem to be divided on many economic issues, but essentially they share the same views on most economic dilemmas. Most American politicians favor capitalism, low taxes, and a minimal welfare system. Some, such as Bernie Sanders, favor a more liberal welfare system. Some libertarians are against any government involvement, but most members of the House of Representatives argue about nuances of policy rather than real differences.

Donald Trump entered the oval office with very ambitious aspirations for economic change. Six months later, however, none of these is even close to being fulfilled, as his plans have been sabotaged by Democrats, Republicans, other countries, and even his own family. When Barack Obama became president, he had even greater hopes about the economy, and while he was somewhat successful, his actions had only minimal effect on the economy.

Presidential power is mostly geopolitical. Presidents can drag the country into a war, and they can initiate alliances with other countries or create conflicts. Their real influence on the economy, though, is almost nonexistent.

Regarding whether or not elections affect investments, the answer is probably not according to the following article in Money magazine “How The Election Will Really Affect Your Investments.”

As you can see, the S&P 500 Index rose during most years in the last century no matter who was the driver. In this period, there were eight Republican and seven Democratic presidents.

Can Fiscal Policy Prevent Recession?

Times of a downturn in the stock market were mostly affected by financial downturns. The last years of a bearish market were in 2008. Was President Bush responsible for the loss? Probably not. The subprime crisis was the cause. This bubble has evolved without any connection to the president act and was mostly fueled by monetary policy. Before that, 2000–2002 were bearish. The Dot-Com bubble was the cause then. This bubble has started in the first years of the Internet, when many companies were valued in an astronomic value without generating any revenues nor profits. That’s obviously not related to Clinton performance in office, nor Bush’s afterwards.

Most financial downturns were inevitable and just part of a healthy (or unhealthy) economy that goes through cycles and into recession once in a while. Fiscal policy definitely has a bearing in terms of avoiding recessions but not as much as monetary policy.

Economists are divided in their fiscal suggestions for treating a crisis, with some in favor of a cut in spending to live with the projected loss of revenues (less taxation), while others (such as Keynesian economists) favor a spending to incentivize the economy, and enable the general public the resources that the private sector lacks. Monetary policy is a lot simpler. When inflation is projected to decrease and a shortage in credit exists in the market, most economists usually agree about what needs to be done.

Another twist to the picture is that presidents sometimes enter office when the economy is bad, and then it improves as the cycle continues, but it would have happened anyway even if the former president had stayed in the office.

Bottom Line

The president is a very powerful and influential person, but his ability to dramatically change something as big and diverse as the U.S. economy is very limited. The president is in charge of fiscal policy, but fiscal policy is hard to change and has a path of its own. The economy usually goes through cycles of upturns and downturns, which are unchanged by any economic policy and can only be moderated by it.

 

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