Presidents and the Economy

While early opinion polls show a number of possible Democratic candidates beating Donald Trump in the 2020 election, economic models of presidential elections are telling a different story. Some of the most reputable economic models show Trump winning reelection handily on the strength of strong economic fundamentals. Barring an unlikely recession, Trump will undoubtedly make his management of the economy the centerpiece of his reelection campaign.

Most voters seem to think that economic conditions are determined by presidential policies and attribute the strength or weakness of the economy to who’s in the White House. Indeed, questions about management of the economy are staples of political opinion polls. Economists, in contrast, see presidential policies as having relatively little effect on cyclical economic conditions, although they are more prone to believing that sound economic policies can have long-term effects that may manifest long after a president has left office.

Yet, it would be too sweeping to argue that presidents have no short-term economic influence. The effects of tax and budget policies can sometimes have short-term effects (as well as long-term effects that may be hidden from voters), and some regulatory policies may as well. But the biggest economic influence presidents can have usually comes at times of crisis, when the road forks and the consequences of wise or foolish decisions may be fateful. Franklin Roosevelt’s management of the 1930s economic crisis comes immediately to mind. Abraham Lincoln, too, should get more credit for his management of the economic stresses of the Civil War and for his tax and banking innovations. As I will argue, Barack Obama also belongs in that small club of great economic presidents for his handling of the financial crisis and the deep recession he inherited.

Some presidents deserve more criticism for their handling of the economy–Andrew Jackson, for instance–but that is a bit too remote from current concerns. This post will focus on how our past three presidents have affected economic performance, and on how the public ultimately perceived their stewardship.

George W. Bush

The younger Bush inherited from Bill Clinton a federal budget surplus and a minor recession, and he used the latter to justify eliminating the former. That is, he campaigned on and fully intended to give large tax cuts to the wealthy under the already-discredited Supply Side doctrine, but when it became evident that the economy was slipping into recession early in his presidency, he repositioned his tax cuts as counter-cyclical fiscal stimulus. That rationale was enough to give 12 Democratic senators cover to vote for the bill, which passed 58-33 in an evenly divided senate.

The 2001 recession proved to be mild, with two negative quarters suppressing annual GDP growth to 1.0 percent. Of course, the 9/11 terrorist attacks also gave the economy an unprecedented jolt. It may surprise those who have not looked at the quarterly data, however, that the recession was essentially over by the time of the attacks and the economy grew in the following quarter.

Tepid growth in 2002 provided additional (if not entirely sincere) justification for a second round of Bush tax cuts in 2003. Thereafter, the economy grew fairly rapidly, averaging 3.3 percent, from 2003 through 2006. The Bush tax cuts probably contributed a modest fiscal stimulus during those years, though there is little evidence that any supply-side magic played a role. Then, of course, it blew up in 2007-2008, perhaps one of the few times in American history when the economic chickens came home to roost within the tenure of one presidential administration.

As reckless as some believe the Bush tax cuts were from a fiscal viewpoint, the really controversial policies during those years were pursued by the Fed. That was the period, especially after 9/11, when Alan Greenspan’s Fed kept interest rates extraordinarily low and ignored the growing bubbles in the stock and housing markets. Thus, much of the credit for the Bush expansion, and blame for the subsequent crash, is arguably due to the Fed, not the president. I am more forgiving of the Fed’s policies during that period than many, but its performance will surely be debated by macroeconomists and historians for decades.

The distinguishing feature of presidential economic policy during the Bush years was the ballooning of the federal deficit. Clinton had produced a surplus of $86 billion in FY2000, and much of the presidential election debate that year focused on what do with expected future surpluses. In fairness, the small ($32 billion) deficit of Bush’s first year in office was mostly due to the recession and 9/11, but the swelling deficits thereafter were all Bush’s. The deficit grew to $317 billion in FY2002 and to $538 billion in FY2003, and even that flood of red ink didn’t discourage the Bush Administration from pushing its second round of tax cuts. For the period 2003 to 2007 the federal deficit averaged 3.7 percent of GDP and federal debt held by the public more than doubled.

As irresponsible as the Bush tax cuts may have been–and the second round was rammed through while the Administration was also initiating two wars in the Middle East–it’s not clear that the deficits did a lot of harm. The long-run effects of a high debt/GDP ratio remain a controversial issue among economists, and there is little evidence that there was a short-run “crowding out” of private investment during the Bush years. In fact, beginning in 2003 the Fed tried to cool the stock and housing markets by raising short-term interest rates but long-term rates remained stubbornly insensitive to the hikes. Professor Ben Bernanke was even talking of a world-wide savings glut that was keeping rates low and asset markets frothing.

As the Bush Administration was piling up public debt, there was a parallel surge of private borrowing, especially mortgage debt, that led to the housing market bubble and it’s eventual bursting. Was there a connection? Conventional theory would say the opposite, insofar as excessive government borrowing is alleged to “crowd out” private borrowing through higher interest rates. But was there some deeper linkage between the concurrent explosions of public and private debt? Some economists suspect so. Janet Yellen, for example, suggested that excessive government borrowing, seeming without consequence, may have created a culture of high debt and high consumption spending in the private sector. I don’t find that argument particularly compelling.

I do think, however, that Bush’s fiscal policies contributed to the private debt explosion in two other ways. First, the Administration’s disregard of lagging wage growth and a declining labor share of national income forced many households to maintain their lifestyles with more leverage–more credit card debt, more mortgage debt, and more student loans. Also, providing the investor class huge tax windfalls added to the savings glut that already existed and pushed investors into ever riskier investment vehicles, such as collateralized debt obligations (CDOs). So, by exacerbating income inequality they also fueled a debt-speculation cycle.

The Bush Administration’s more serious culpability was its regulatory negligence, which led directly to the explosion of subprime lending and eventually to the housing market’s implosion and the financial crisis. Community activists and consumer financial watchdogs were frantically warning about predatory lending in the years leading up to the crisis; the Administration was dismissive of such fears and blocked state actions intended to curtail dangerous lending practices. There were also many other signs of financial industry excess that the Administration ignored. The Bush Administration’s negligence of risky banking practices was not due to mere inattention, but to a much deeper ideological belief that markets are always wiser than the governments that will try to regulate them.

Eventually the debt and real estate bubbles popped and we got the deepest recession in 80 years, a recession that did immeasurable damage to many millions of Americans. The Administration redeemed itself slightly in its waning days by suspending its free-market, anti-regulation ideology, ignoring the howls of protest by the laissez-faire think tanks and editorial pages, and allowing Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke to work out pragmatic interventions to stem the crisis. The Administration pushed through the TARP bank bail-out legislation with mostly Democratic support and even wrangled some of it to use to stabilize the auto industry.

In the end, the economic disaster President Bush left the country was very much of his own making. Ironically, though, his regressive, budget-swelling tax cuts probably played only a minor role, while the real source of the crisis, an arrogant disdain for the regulatory responsibilities of modern government, remains central to the ideology of the party he once led.

Barack Obama

No President since Franklin Roosevelt took office amid such an economic crisis as did Barack Obama. Real GDP shriveled at an 8.4 percent pace in Bush’s last quarter and at a 4.4 percent rate in the quarter Obama took office. Moreover, the world’s financial system was still in an extremely precarious circumstance, with only a thin, shaky confidence separating it from complete collapse. It’s my contention that Obama was immediately faced with a number of fateful decisions and he made nearly all of them correctly.

The first order of business was implementing a Keynesian counter-cyclical fiscal stimulus, which Obama made clear was a priority in his first post-election press conference. Thirty years before, that might have been seen as a no-brainer, but in the decades before the crisis the “new classical economics” had become so entrenched in the discipline and in conservative thought that Obama’s stimulus was actually controversial. Ultimately, the American Recovery and Reinvestment Act (ARRA) was passed without a single Republican vote in the house, an epic display of political cynicism which voters rewarded with resounding approval in the 2010 mid-term elections.

In the end the ARRA stimulus totaled $797 billion. Knowledgeable economist like Paul Krugman and Brad de Long persuasively argued that it was too small, but it was still pretty bold for a new president who couldn’t bet all his political capital on a single of the dice. And the subsequent Republican drumbeat that it was a “failed stimulus” is just nonsense; reputable non-partisan economists agree that it was instrumental in ending the recession by the summer of 2009.

The Obama Administration also faced the problem of how to stabilize the financial markets and prevent the collapse of more strategic financial firms, especially the large banks. The Administration, wisely in my view, allowed the Fed-Treasury planning for troubled asset purchases to proceed (with Tim Geithner now as Treasury Secretary rather than as the President of the FRBNY). The initial recapitalization of large banks using TARP money was designed under the previous administration but Obama stuck with it. Nevertheless, throughout 2009 fears that the big banks (and many small ones) would collapse persisted, and pressure to nationalize troubled banks mounted. Even Alan Greenspan suggested publicly that large banks might have to be nationalized. However, Obama resisted that pressure, and I believe, thereby avoided a political firestorm, an unpredictable reaction by the financial markets, and a protracted period of uncertainty as a debate about how and when to re-privatize the banks raged.

The Treasury, with the Fed’s cooperation, then implemented an under-appreciated step that proved critical. They conducted “stress tests” of bank resiliency under probable and dire scenarios. Both the Treasury and the Fed were convinced that the tests had to be rigorous and transparent in order to be convincing to financial markets. Some, including reportedly Larry Summers, feared that they would show such weakness that nationalization would become inevitable. But low-and-behold, the tests indicated that the banks should stabilize with plausible infusions of new private or public capital. Nationalization proved not to be necessary and the financial markets calmed. Ben Bernanke, in his memoirs, calls the stress tests a “turning point” in the financial crisis.

Early in Obama’s presidency he also had to decide what to do about the failing auto industry. Bush had provided $17.9 billion in loans to General Motors, its finance subsidiary (GMAC), and to Chrysler. (Ford spurned federal assistance). However, the automakers were still sinking and Obama had to decide whether to double-down on Bush’s bailout. He did, recruiting Steven Rattner to head a Treasury Department task force that ultimately provided another $64 billion of assistance while steering the companies through managed bankruptcies and restructuring. Various estimates were made then and since about the job impacts of an uncontrolled collapse of the two auto firms; my hunch is that the effects would have been on the dire side of the estimates. In the end, the auto companies revived surprisingly quickly and the taxpayers recovered about $71 billion of the $81 billion of loans and other bailout funds.

The two signature legislative achievements of the Obama presidency, the Affordable Care Act and the Dodd-Frank financial reform act, were both attacked as “job killers” by Republicans and other free-market purists. Those charges never had much intellectual substance to them and the empirical evidence debunks them. Overall, the private sector added almost 10 million jobs during Obama’s years in office.

It is fair to criticize an administration, especially in times of crisis, for things they fail to do as well as for what they do do. One of the most common criticisms of Obama’s handling of the financial crisis is that he didn’t do enough to help struggling homeowners; he bailed out Wall Street but not Main Street. The Administration was in fact slow to address the problem of “under-water” homeowners who were current on their mortgage payments but couldn’t refinance to lower interest rates because their home values had sunk below the value of their mortgages. Those homeowners had done nothing financially irresponsible; they were simply victims of circumstances that no one had foreseen. Eventually, the Administration created the HARP program to help them refinance into lower-cost mortgages as millions of above-water homeowners were then doing. The program was a modest success. However, I also think the Administration was wise to tread carefully on forcing banks to write-down mortgages or otherwise provide direct bailouts to homeowners. There was, in fact, a lot of irresponsible borrowing during the housing bubble years, by households as well as by investment banks. Direct bailouts to some homeowners would have created very real fairness issues, of the kind that I believe can be very corrosive to the foundations of the social contract. Moreover, many critics don’t acknowledge how much the government was already doing to prop up the housing market, by, for example, bailing out and taking over Fannie Mae and Freddie Mac, while the Fed was buying $billions (eventually $trillions) of mortgage-backed securities. Those market supports helped the housing market to continue to function and eventually recover, indirectly helping millions of homeowners.

Once the Republicans took control of the House in 2011, and then the Senate in 2015, the economic policy of the Obama Administration settled into trench warfare with Republicans over federal spending, taxes, and debt limits. Although the recession had ended, years of slow, fragile economic growth had many prominent economists talking of “secular stagnation.” Obama tried repeatedly to package additional stimulatory spending in a way Republicans would accept, but to little avail. The economic policies of the country turned from Keynesian counter-cyclical fiscal stimulus to European-style austerity. The president made some tactical mistakes (offering Medicare and Social Security cuts in pursuit of a “grand bargain”), and scored some small victories (allowing some of the Bush tax cuts to expire), but none had a significant impact on broader economic conditions. The hangover from the recession and financial crisis, combined with the political impasse between the president and congress, essentially set a trajectory of slow, steady growth for the last five years of the Obama presidency.

It became conservative religion that Obama was a fiscally irresponsible president who allowed the federal debt to mushroom. That argument can only be made using the most surface facts of the economic record. Federal debt did in fact grow by about $7 trillion during his years in office, but the majority of that was directly due to the recession he inherited and the necessary measures he took to end it. His last four budgets produced deficits averaging 3.1 percent of GDP, only a little above where you would ideally want to be, and decidedly better than Bush’s 3.7 percent over his first six (non-recessionary) budgets.

Critics on the left, conversely, blamed Obama for embracing austerity and neo-liberal budget hawkishness. Indeed, only two months after taking office, with the economy still in free-fall, he pledged to cut the deficit in half by the end of his first term. That caused many Keynesians to cringe. He actually did meet that pledge, although a charitable view (from a Keynesian viewpoint) is that he ultimately realized that the economy needed additional stimulus and got what he could from the Republican House.

The partisan deadlock over fiscal policy during Obama’s last six years seemed to please neither liberals who wanted faster growth nor conservatives who wanted less spending. Yet, in retrospect that deadlock may have put the economy on a slow but sustainable growth track that allowed the recession’s wounds to slowly heal, while producing few serious imbalances that would stop it from becoming the longest economic expansion in the nation’s history. In any case, had Obama not made the decisions he did early in his presidency, recent economic history would likely have been far different, and likely far worse.

Donald Trump

It is difficult to quantitatively measure a president’s stewardship of the economy because, among other reasons, it’s difficult to measure where the influence of the previous president ends (if ever) and the new one begins. As economists well know, macroeconomic policy often operates with long lags; it sometimes takes six months to a year for changes in monetary or fiscal policy to show up in economic data. It would be misleading and unfair, then, to blame the recession that occurred during George Bush’s first year on his policies, just as it would be to hold Barack Obama responsible for the recession he inherited. One quick-and-dirty way to get around this measurement problem is to ignore the first year of a president’s economic record, but to hold them responsible for the performance of the economy in the first year of their successor. That method is not always satisfactory either because, for example, Obama’s first year was filled with great peril and momentous decisions. It is easy to imagine a 2009 under President John McCain in which the recession deepened rather than ended.

If we just take the eight years of Obama’s presidency, 2009-2016, we find that the U.S. economy grew at an average annual rate of 1.5 percent. If, following the method suggested above, we exclude the recessionary year 2009 but include 2017, we get a growth rate of 2.1 percent. If don’t credit Obama for 2017, we still get 2.1 percent. Various other ways of calculating the Obama growth rate yield approximately the same answer: 2.1 percent.

In 2017, President Trump’s first year in office, real GDP grew by 2.3 percent. Essentially right in line with the Obama growth path, and since Trump implemented no major economic policies during his first year, it is reasonable to consider 2017 the economy’s final Obama year.

Things changed in 2018. The Republican House and Senate passed the Tax Cut and Jobs Act (TCJA) of 2017 late in the year, and Trump signed it into law on December 22. The bill slashed the corporate tax rate, reduced personal income taxes across the board but especially on high-income filers, imposed a cap on state and local income tax deductions, and made a number of other changes to tax law, the distributional effects of which are still difficult to determine. The Congressional Budget Office estimated that the TCJA would increase the federal budget deficit by about $1.9 trillion over the ensuing decade. The President played a negligible role in the passage of the tax bill, vacillating in his support in typical Trumpian fashion, but in the end he signed it and thus it became the centerpiece of his economic policy.

The congressional architects of the TCJA barely bothered to justify the bill with supply-side rhetoric. They were in full control of both houses of congress and the White House and apparently did not feel the need to deeply disguise their motives. A telling moment came when Rep. Chris Collins (R-NY) explained to a reporter: “My donors are basically saying, ‘Get it done or don’t ever call me again.'”

On the spending side, the Republican congress ignored the president’s budget proposals to an almost comical degree, reaching a two-year budget deal with Democrats that kept federal spending growth on its existing trajectory, meaning that the TCJA cuts were financed entirely with deficits. Whatever its distributional consequences, the TCJA represented a rare if not unprecedented fiscal stimulus in the advanced stages of an economic expansion. My own calculations of its economic effect correspond fairly closely with those Paul Krugman presented in a NYT post. That is, a fiscal stimulus of that size would normally be expected to increase the rate of GDP growth by 1.0 to 1.5 percentage points in its first year of implementation. Discounting somewhat because the TCJA came when resources were not slack, when the Fed would push monetary policy in the other direction, and because it was mistargeted towards the wealthy, it might have been expected to produce no more than a 1 percent increase in GDP growth.

Real GDP in 2018 grew by 2.9 percent, about 0.6 percentage points above the prior year and about 0.8 points above the long-term Obama trend. Thus, the “bang-for-the-buck” of the TCJA was at the lower end of Krugman’s (and my own!) expectations. The economy grew at a 3.1 percent annual rate in the first quarter of 2019, raising the possibility that the effects of the TCJA were still building, but 2Q19 growth looks like it will be much lower. Overall, looked at purely as economic stimulus, the TCJA was moderately disappointing. I have no doubt that if the Republican House had been willing to approve a further $1.9 trillion stimulus back in, say, 2011, the Obama Administration could have devised a more potent one.

Another prominent component of Trump’s economic policy is his “trade wars.” A true rebalancing of the United States’ economic relationship with China could have a beneficial effect on the American economy (I thought that was what the TPP was about, but that’s another story) but it is highly unlikely that Trump will achieve that given his approach. China will not cave to American pressure, and in any case so far little has changed. Moreover, Trump’s re-negotiation of the NAFTA was minimal and congress hasn’t even approved it yet. In sum, Trump’s trade policies haven’t provided any boost to the U.S. economy, but neither have they seriously harmed it. Here again, I agree with Krugman that the media sometimes exaggerates the downside effects of Trump’s trade theatrics, at least for the near term.

The third of Trump’s economic policy initiatives is to roll back environmental and other regulations on business in order to unleash the powers of corporate capital. From replacing Obama’s Clean Power Plan to scaling back regulations on toxic chemicals to relaxing wetlands protections to reducing enforcement of worker safety rules, the Administration has begun a broad assault on the regulatory state. There are numerous problems with this strategy. One is whether environmental and other regulations really constrain growth as much as conventional wisdom holds (it’s a question of level versus rate of change). Another is whether the tradeoff between dollars of GDP output and dollars of environmental degradation is actually favorable if a true accounting were made. In any case, it takes a long time to dismantle the legal and regulatory structure of the economy and few of the Trump initiatives have yet had an impact on corporate practices. Moreover, after allowing for the fiscal stimulus provided by the TCJA, there has been no surplus growth surge that can be attributed to the deregulation push.

Overall, what we’re left with in the Trump presidency so far is a large, mal-targeted fiscal stimulus that produced an increase in GDP growth roughly in line with mid-range projections. The long-run effects of the tax cuts, trade wars and environmental deregulation will take longer to manifest and will probably be for another president to enjoy or repair.

The Economy and Presidential Popularity

Two further questions arise from this analysis. First: Do voters notice good or bad economic policies? Second, do a president’s economic policies affect their popularity and electability?

Public approval of how a president is handling the economy is more high correlated with general economic conditions at the time than with economic policy decisions, even very public ones, a president is making. (Gallup provides very interesting historical approval tables that include economic approval.) The correlation is not tight, however, and there appears to be significant cross-correlation with perceptions of a president’s performance in other aspects of his job.

George W. Bush, for example, took office with a relatively high 53 percent approval rating on his handling of the economy. It’s not clear what he had done to earn that rating at that time (Feb. 1-4, 2001) other than talk about tax cuts. Although the economy slid into a mild recession during his first six months in office, his approval rating remained steady, possibly because Congress approved a small lump sum tax rebate ($300 or $600) as a counter-cyclical down-payment on the deeper tax cuts he was seeking. His approval rating on his handling of taxes rose to 60 percent.

Bush’s approval rating on his handling of the economy then soared to 72 percent after 9/11, and it stayed there for about three months. Most of the economic support after the 9/11 attacks was provided by the Fed, so it is unclear if the public confused the Fed’s actions and the Administration’s, or if Americans just rallied around the president at a time of national tragedy. His approval rating on his handling of foreign affairs, for example, soared from 54 percent in July 2001 to 83 percent in January 2002.

Thereafter, Bush’s approval rating on the economy began a long, steady decline, sinking to an abysmal 17 percent by the end of his term. It is curious, however, that the trend in Bush’s economic approval rating continued to fall during 2004 and 2005, when the economy was growing quickly, housing prices were rising rapidly, and unemployment was falling. It is possible that the public was growing concerned about the credit bubble even as its significance was being minimized by experts, but more likely spillover from other national issues was souring the public on Bush’s economic policies. That was a period when the Iraq war was looking more and more like a quagmire and Bush’s approval on foreign affairs was falling even faster than his approval on the economy. Bush’s approval rating on his handling of the federal deficit remained high while he was pushing the policies that created one, but it eventually caught up with him; his approval on the deficit fell to 32 percent by the end of 2003. Nevertheless, he was reelected with both his overall approval rating and his handling of the economy approval at about 47 percent and falling.

When Obama took office the economy was in a crisis and the public was apparently hopeful with a new hand at the helm. Three weeks after he took office, approval of Obama’s handling of the economy was 59 percent, and it stayed in the mid-50s through the end of May. Perhaps it appeared to the public that the new president was making a series of sensible crisis decisions. Ironically, however, his economic approval rating began to tumble that summer, just as the recession was ending, and continued to erode through August 2011, when it reached a Bush-like 26 percent. The public may have been getting impatient with the slow pace of the recovery (GDP grew 2.5 percent in 2010, 1.6 percent in 2011) or the stubbornly high unemployment rate (it was 9.0 percent in August 2011, down from a high of 10.0 percent two years earlier). It is likely, however, that relentless Republican attacks on his policies, and particularly on the ARRA fiscal stimulus, played an important role in shaking the public’s confidence in his economic stewardship.

Thereafter, approval of his economic management began a slow and erratic climb. In 2012, he won reelection with an overall approval rating of 51 percent and an economy approval rating of 45 percent. It eventually reached 50 percent by the November, 2016 election. As I have argued, the Obama Administration made a number of critical decisions in the darkest days of the financial crisis, then battled Republican austerity policies for the last six years of its tenure. While the Obama economic expansion was slow by historical standards it proved durable. It is a scenario I think most economists would have happily signed up for on January 20, 2009. It took a majority of the public almost eight years to appreciate what had been accomplished.

Trump took office with an approval rating on the economy of 48 percent, lower than either Bush or Obama, but it has since climbed up to the low 50s, an approval rating that neither Bush nor Obama saw except at the very beginning of their presidencies. Since his signature economic policy legislation was the TCJA, and his approval rating on taxes is only 45 percent (February 12-28, 2019), it may be that voters like his bluster on trade or his deregulation initiatives (I believe the constituency in favor of exploiting the environment for temporary gain is larger than many people realize). Or more likely, the public is just crediting him with the favorable economic climate they are currently experiencing.

Aside from signing a tax stimulus his administration played little role in drafting, President Trump has not done much to affect the country’s economic conditions. He has basically ridden the crest of the Obama Expansion. Yet, public approval of his handling of the economy is high and rising, and economic election models suggest he can win reelection on that basis. Democrats should be worried. However, the record of his two predecessors shows that public opinion is malleable, and his economic stewardship can be effectively attacked and tarnished by his general unpopularity. If I were the Democratic presidential candidate in 2020, I would not let him own the economy. I would attack his record on the deficit, his unpopular tax bill, and make the case that he is sacrificing our natural environment for no apparent gain.