In June 1984, when Ronald Reagan's re-election ads first crowed that it was "morning in America," inflation was at 4.6 percent, unemployment at 7.5 percent. The Dow was at 1,100, interest on a 30-year mortgage was 13.5 percent, and the White House was projecting a budget deficit of $174 billion. In the summer of 1997, inflation stands at 2.3 percent, unemployment at 4.8 percent. The Dow hovers just under 8,000, interest on a 30-year mortgage is 7.5 percent, and the administration projects a deficit of $37 billion. If that was morning, this must be high noon.
In other respects, too, the country is in better economic shape now than during the Reagan years. While the '80s recovery brought a rise in social problems such as homelessness and welfare, the '90s boom has been accompanied by a decline in those same ills. Recent hints of an increase in real incomes suggest that affluence may be more widely shared this time around. Faced with such brilliant economic performance, Republicans tend to be as eager to deny any credit to the incumbent president as they were to give him all the credit in the 1980s. Democrats display the opposite inconsistency.
Serious economists tend to agree with the current Republican line that presidents have less impact on the economy than most people think. Presidents can screw things up--as Richard Nixon did when he implemented wage and price controls in 1971, or as Jimmy Carter did when he failed to focus on the problem of surging inflation in 1978. But when it comes to producing the general conditions of prosperity, presidents have little power. The government's main economic lever, the money supply, is the province of the autonomous Federal Reserve Board. As Paul Krugman points out, gross domestic product growth has been remarkably consistent over the past couple of decades, at about 2.3 percent a year, despite dramatic reversals in economic policy.
Nonetheless, presidential policy does affect the health of the economy. Though the Fed is supposed to be insulated from politics, it is not completely immune. A four-year term alternating with the presidential-election cycle means that a one-term president gets a Fed chairman of his choosing for just under 50 percent of his presidency, while a two-term president has his own appointee in control nearly 75 percent of the time. A successful chairman reflects well on the president who picked him. Carter, for instance, deserves considerable credit for choosing Paul Volcker in 1979. Since Volcker was committed to taming inflation even at the cost of putting the economy into a recession just before the 1980 election, Carter was committing honorable suicide by picking him.
Furthermore, presidents can make it harder or easier for the Fed to do its job through fiscal policy--taxes, spending, and deficits. Presidents also steer trade and dollar policy, but have a less tangible impact on business and consumer confidence. It may be ridiculous that our presidential elections are virtual referenda on the state of the economy when so much is out of a president's hands. But if voters ignored the condition of the economy in choosing their president, they would be even less realistic.
S o, with all those cautions in mind, I ask again: Who deserves credit? In a recent column in the Washington Post, James K. Glassman argues that Reagan should get it. Reagan's tax cuts, Glassman contends, fueled the current gush of tax revenues as well as a flourishing entrepreneurial culture. This is pretty far-fetched. Taking into account both tax cuts and tax increases, Reagan didn't reduce the overall tax burden during his presidency. Supply-side dogma notwithstanding, what has boosted tax revenues beyond expectations in the last couple of years are the last two tax increases, in 1990 and 1993. (And in fact, the economy has reacted better to increases than to cuts. See "The Best Policy.") Reagan's large spending increases for defense and the growth in entitlements without higher taxes created a budget deficit that inarguably hurt the economy. Government borrowing left less capital for private investment, which meant that growth was lower and entrepreneurs were worse off than otherwise--for which we're paying the price today. The credit Reagan deserves for today's good times is limited to his sometimes equivocal support for free trade, and his reappointment of Volcker in 1983. (Under pressure from free-lunch Republicans, he declined to reappoint Volcker again in 1987, but chose Alan Greenspan, who's been just as good, though under less challenging circumstances.)
Robert Reischauer of the Brookings Institution makes a more interesting nomination: George Bush. Though to conservatives his name is still synonymous with betrayal, Bush is a minor hero for exactly the reason that Reagan purists consider him a major traitor. By raising taxes significantly, the budget deal Bush signed in 1991 challenged the expansion of the deficit for the first time in a decade. The deal's spending caps and pay-as-you-go rules also brought discipline to domestic spending. The same year Bush fell on his sword by breaking his "read my lips" pledge, he impaled himself again by reappointing Greenspan as chairman of the Federal Reserve. Like Volcker, Greenspan was a fierce enemy of inflation who wouldn't prime the pump before an election to help the incumbent (though that didn't stop the Bushies from prodding Greenspan to loosen up).
Bill Clinton deserves as much credit as Bush, and arguably more. He, too, rehired Greenspan, and has had more respect for Greenspan's independence than Bush did. Reluctantly, but less reluctantly than Bush, Clinton focused on the need for deficit reduction. His 1993 economic plan, which passed with zero Republican votes, included a tax increase that was smaller in real terms than the one Bush agreed to in 1990, but was equally significant as a harbinger of changed direction. His 1993 economic program directly benefited the economy, bringing down interest rates and boosting the stock market to record highs. Like the 1990 deal, it was also a genuine act of self-sacrifice on the president's part. Raising taxes probably cost Clinton a Democratic Congress in the 1994 election and might easily have cost him re-election in 1996.
With prodding from the Gingrich Congress (which also deserves some credit), Clinton has remained faithful to the cause of deficit reduction. He has also aided the economy in less obvious ways. His Treasury secretary, Robert Rubin, has been a tremendously reassuring figure to Wall Street. With Rubin's help, Clinton managed to forestall a Mexican financial collapse in 1995, which posed an underappreciated threat to the U.S. economy's recovery, then in its fifth year. Like Reagan and Bush, Clinton has supported the extension of free trade. Unlike Reagan or Bush, he was in a position to deliver NAFTA and GATT by getting enough Democrats in Congress to go along--though one might argue that the benefits of free trade are primarily long-term, and don't have much to do with our current opulence.
The economy could be still better. Real wages continue to grow slowly. To increase wages significantly without inflation would require a return to pre-1973 levels of real growth, which hasn't happened. Just the same, the American economy is the healthiest it's been in a quarter-century. And for his contributions to it, the incumbent deserves at least two cheers.