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, Democrat 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 1808 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 a 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.
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