As the presidential campaign kicks into gear, housing, energy, and rising unemployment have thrust the economy front and center. Whether they are talking about the need to drill off the coast of South Beach (John McCain), or the necessity of confiscating the profits of ExxonMobil (Barack Obama), each candidate is unequivocally promising voters that come Jan. 20, 2009, should he have the high privilege of succeeding George W. Bush, he will instantly reverse the decline of housing prices, bring gasoline prices crashing back to earth, and generally kick the economy back into gear.
If you believe that, I've got some subprime mortgages I'd like to sell you. Does the president really have any effect on the short-term direction and performance of the economy? The answer is no, but with two important "buts."
Over the past 219 years, the U.S. economy has expanded under all types of presidents, Democratic and Republican, activist and somnolent. But there have certainly been some notable policies that inflicted short-term damage, such as Thomas Jefferson's ill-conceived embargo on trade with Britain in 1807 and Ulysses S. Grant's decision to place the United States back on the gold standard, which contributed to a banking panic that in turn led to a recession that lasted for nearly all of Grant's second term. Between 1929 and 1933, as a stock-market crash and credit crunch metastasized into the Depression, Herbert Hoover adopted a hands-off approach that exiled his party from the White House for a generation.
But today, while the president of the United States may be the most powerful person in the world, "his influence on the short-term macro-economy is generally overestimated by voters," says Thomas E. Mann, senior fellow at the Brookings Institution. Partisans might think the economy got off the mat the minute Ronald Reagan was inaugurated in 1981 or when Bill Clinton took the oath in January 1993. But the factors that influence the business cycle are so myriad, powerful, and unpredictable that not even an executive as muscular as California Gov. Arnold Schwarzenegger could bend them to his will. The megatrends that made the 1990s a long summer of economic love—the end of the cold war, the deflationary influence of an emerging China, the Internet—would have happened with or without Rubinomics. And most of the factors now making life miserable—commodity inflation, a housing bubble and a weak dollar engineered by the Federal Reserve's promiscuous policies, the demand-driven surge in oil—would likely have materialized had John Kerry won in 2004 (sorry, MoveOn.org).
The maturation of the Federal Reserve into a powerful, independent agency has further stolen the thunder from the presidency in short-term economic affairs. By cutting interest rates and offering banks access to liquidity, Federal Reserve Chairman Benjamin Bernanke has done more to stimulate the economy in the past year than President Bush or Congress.
There's a third reason the identity of the next president won't matter all that much to the economy in 2009. The past 16 years of experience—not to mention this year's campaign platforms—prove that Democrats and Republicans diverge sharply on fiscal and economic policy. But on some of the big-picture items that matter most to short-term performance, a consensus has emerged over the years. Modern Republicans have learned their lesson from Herbert Hoover and have embraced the necessity for short-term fiscal stimulus when the economy slows. "We're all Keynesians now," as Richard Nixon said. Modern Democrats have also learned their lesson from Hoover, who signed the disastrous Smoot-Hawley Tariff into effect in 1930. Twenty-first-century Democrats generally embrace the utility of free trade, even during economic downturns.
This isn't to say that the identity of the president in 2009 won't matter. Presidents tend to have the most success enacting new policies in the first year in office (the tax cuts of Reagan and Bush II, the budget and NAFTA for Clinton). And Tom Gallagher, head of policy research at ISI Group, notes that the next president will appoint a Federal Reserve chairman early in his term. But—and this is the first but—the macroeconomic impacts of early-term policies are often evident only after several years. Harvard economist Benjamin Friedman notes that Nixon's imposition of wage and price controls in August 1971 helped smooth his re-election in 1972. "But these controls became a substitute for serious anti-inflationary policy, and were the beginning of a set of policies that led to really severe inflation."
So here's some straight talk about change we can believe in. Most of the promises that Obama and McCain are making about the economy will founder on the shoals of a Congress unwilling to be a rubber stamp, organized industry opposition, unanticipated events, budget realities, and changes in the macroeconomic climate.
We shouldn't discount entirely the next president's powers. The most troublesome economic data points aren't necessarily the rising unemployment rate and plunging home prices. Rather, they're the miserable consumer-confidence numbers, which have hit a 16-year-low, and the high percentage of Americans who believe the nation is on the wrong track. When consumers, whose collective actions constitute more than two-thirds of U.S. economic activity, are in the dumps, they're less likely to spend, invest, and take risks.
But—and this is the second but—history has shown that presidents do have the ability to affect the short-term national mood about the economy. Think about the juxtaposition of Hoover's cool response and Franklin Delano Roosevelt's exhortations to fear nothing but fear itself. George H.W. Bush's "Message: I care" didn't have a prayer in connecting with the anxieties of middle-class Americans when confronted with a sweet-talking Arkansas governor who oozed empathy.
Presidents can function as mood enhancers only when the rhetoric is backed by action. "Whatever beneficial effects FDR or Reagan had on the economy had more to do with their policies than with their pleasant demeanors," says Richard Scylla, a historian at New York University. FDR's inspiring speeches and fireside chats in 1933 were accompanied by a profusion of policy experiments, many of which worked. And without the stimulus provided by the Reagan tax cuts, the "Morning in America" theme of the Gipper's 1984 re-election campaign would have fallen as flat as Gerald Ford's 1974 exhortations to "Whip Inflation Now."