How much do presidents’ policies really affect the economy? The
presidential candidates are in the process of laying out their
proposed economic policies, and even though these policies greatly
differ, each candidate says his or her policies will lead to
greater prosperity and more employment. The fact is that the
president only has limited powers to affect what happens, but he or
she still can make a real difference. Future economic growth will
be influenced by tax rates, government spending, regulatory policy,
and trade policy, all of which require joint action by both
Congress and the president. All branches of government are severely
limited without some cooperation from the other branches, including
the courts, as to what they can accomplish. The Federal Reserve
largely controls the rate of inflation, and is most often
responsible for the country falling into a recession.
Court rulings and tort actions can greatly affect the ability of
business to function properly and create new jobs. There are
uncontrollable variables, such as the weather, earthquakes, wars,
and the trade and growth policies of other countries, which are
outside the control of anything the president or Congress do, but
can greatly affect U.S. economic growth. Once elected, the
presidents and members of Congress often act very differently from
their promises during the campaigns — most often taxing and
spending more than they said they would, and almost always this is
a mistake.
New presidents inherit the tax, spending, trade, and regulatory
policies of their predecessors, and it takes a year or more for
them to put their policies in place. Thus, the accompanying table provides a snapshot of
economic legacies by showing the performance of the economy during
the year that each administration departed. Under Reagan, the
economy improved the most, and under Carter most measures
declined.
When President Carter took over from President Ford, the economy
was growing rapidly after a severe recession, but inflation was
very high. Carter then appointed the hapless G. William Miller as
Fed Chairman, who managed to give us record inflation (13.3 percent
CPI) in 1979. The Carter economic team flailed about, changing
policies every few months, which resulted in a recession in 1980
and set the stage for a major recession in 1982, as the new Fed
Chairman (appointed by Carter near the end of his term) Paul
Volcker ratcheted down monetary growth to wring inflation out of
the economy.
President Reagan, upon taking office, backed Volcker’s “tight”
monetary policies, and recommended massive tax cuts to get the
economy moving. The Democrat-controlled Congress failed to approve
much of Reagan’s proposed spending growth rate reduction, but did
back his military spending increase to about 6 percent of GDP. Once
the Reagan tax cuts were put in place, the economy took off,
resulting in an astounding 7.2 percent growth rate in 1984. Reagan
was criticized for increasing the deficits in his first few years,
but the fact is the nation has always used debt financing to fight
wars. The Cold War was no exception, and his bet paid off.
The first President Bush blew much of the Reagan legacy that was
handed to him by failing to fulfill his campaign promise of the
“flexible freeze” on spending and of “no new taxes.” The Greenspan
Fed also made mistakes and, coupled with Bush’s economic policy
mistakes, caused a mild recession in 1990.
President Clinton capitalized on the Bush economic mistakes —
“it’s the economy, stupid” — even though the economy had been
growing the two years prior to the election. Clinton made the
mistake at first of increasing taxes, even though he had promised
not to, and then reversed course once the Republicans took over
Congress by signing their capital gains tax rate reduction. The new
Republican Congress joined with the weakened Clinton administration
to restrict spending growth, resulting in a substantial drop in
spending as percentage of GDP, most of which was due to a drop in
military spending. The economy did grow rapidly during much of the
Clinton administration, in part, because of his free trade policies
and spending restraint, but the growth in taxes as a percentage of
GDP and new mistakes by the Greenspan Fed put the economy in
recession just as Clinton was leaving office.
The current President Bush correctly reduced tax rates to bring
the economy out of the recession and to restore growth, but until
recent months failed to properly restrain spending growth through
vetos. The result has been a growing economy, but one operating
below potential. His economic legacy will not be fully known for a
couple of years, but if he continues to fight spending growth, the
deficit should be near zero, and growth should pick up next year as
the economy works through the credit mess, which was largely caused
by the Greenspan Fed.
Presidential candidates and their advisers need to remember that
it is the private sector that creates most productivity increases
and real jobs, and hence real economic growth. Economic policies
that reduce tax, regulatory and trade barriers on productive
activity, as well as low inflation, lead to strong economic growth
and good economic legacies.
