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.

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Green Resolution

The “Green New Deal” resolution introduced last week by Representative Alexandria Ocasio-Cortez (D-NY) and Senator Edward Markey (D-MA) was a good idea. The Democrats needed to reestablish climate action as a governmental concern and inject it into the 2020 election. With her high visibility, appeal to young voters, and ability to get under the skin of conservatives, AOC could have been an ideal messenger. Like a football team throwing a bomb to its flashy rookie receiver on the first down of the first game, if executed successfully it could have rattled defenses throughout the season. Unfortunately, the pass was dropped and the Dems might now find themselves wishing they had called a more conventional play.

Sticking with the football analogy just a bit, Nancy Pelosi’s Democrats have been steadily grinding out the yardage but run the risk of being sucked into playing Trump’s game. Since possession of the House shifted to the Democrats, the political agenda and news has been entirely dominated by Trump’s boorish calls for his idiotic wall and his reckless government shutdown. Yes, Pelosi has outmaneuvered him at every step, but the Dems are not going to take back the Senate and White House in 2020 just by playing good defense. Meanwhile, their investigative committees have tread cautiously, partly for fear of interfering with the secretive Mueller investigation and partly for fear of appearing mere hecklers. With each passing week the presidential primary roster expands and, especially if Bernie Sanders enters the race, the risk grows that Medicare-for-All crowds out all other progressive issues. So the idea of AOC streaking down the sideline for a big gain on climate change made some sense.

One reason the play didn’t work as planned was that it wasn’t actually planned. Pelosi was forced to distance herself from it and did so in terms that were a little too dismissive for my taste. But who knows what really went on? Pelosi claimed that she hadn’t even seen the resolution before AOC’s press conference. If true, that’s a serious discourtesy. How is the Speaker supposed to support a resolution she hasn’t seen or apparently had any input into?

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Transparency in Trumpland

A little juxaposition of news items reveals how the Trump administration views transparency in government.

First comes Scott Pruitt’s announcement that EPA will seek to implement a regulation that will require all EPA rulemaking to be based only on scientific evidence for which the underlying data is publicly available. That will prevent the EPA from formulating regulations based on medical data that is confidential.

According to Pruitt, “The science that we use is going to be transparent, it’s going to be reproducible.” Junk science purveyor and member of Trump’s transition team Stephen J. Milloy added, “This will really open up EPA science to public scrutiny.”

Meanwhile, over at the American Bankers Association conference, Mick Mulvaney, interim director of the Consumer Financial Protection Bureau, announced that the CFPB would cut public access to the bureau’s database of consumer complaints.  Mulvaney explained: “I don’t see anything in here that says I have to run a Yelp for financial services sponsored by the federal government.”

Evidently, transparency is good when it hinders regulations to protect the public health, but bad when it helps to protect consumers.

Making Deficits Great Again

After 2010, when Republicans gained control of the House of Representatives and later the Senate, the U.S. essentially pursued a policy of fiscal austerity.  President Obama sought to roll back the Bush-era tax cuts for wealthy households and was partially successful during the “fiscal cliff” standoff at the end of 2012. Meanwhile, the Republican Congress steadfastly refused to allow Obama to stimulate the economy with federal spending.  As a result, total federal budget outlays (including Social Security) grew at only a 1.9% annual rate from 2010 to 2016, far slower than the 6.5% annual rate of increase during the Bush years.

That American-style austerity was an under-appreciated contributor to the slow recovery from the Great Recession. However, the budget deficits of the U.S. government fell in both absolute dollars and as a percentage of GDP during most of Obama’s tenure, in 2014 and 2015 even reaching a level that produced stability in the ratio of overall debt to GDP. There was some slippage in the deficit at the end of Obama’s tenure, primarily because of a lapse in the economic growth rate in 2016. Responsible fiscal management would have suggested an attempt by Obama’s successor to get the deficit back to parity with the rate of economic growth, which would have required shaving it by about one-third, or by $250 billion.

Of course, after the Republicans held on to both houses of Congress in 2016 and unexpectedly found themselves with a Republican President to work with, there was no reasonable prospect that stabilization of the debt-to-GDP ratio would be made a policy priority. It is undeniable that cutting taxes, regardless of the fiscal implications, is the core policy goal of the modern Republican Party. Two intertwined factors are behind that inversion of Republican political philosophy. First is the widespread acceptance among conservatives of the “starve the beast” strategy for reducing the size of government.  The second was the creation of a much more cohesive, purposeful and sophisticated political apparatus by conservative mega-donors to the Republican Party, who out of ideological conviction and personal self-interest orchestrate anti-tax pressure and insist that their  elected dependents deliver. The two previous times Republicans took over the White House (Reagan and George W. Bush) they immediately enacted huge tax cuts and the deficits swelled. There was never any chance that, in the unlikely event Trump was actually elected, this time would be any different.

So the tax reductions Senate Majority Leader Mitch McConnell and House Speaker Paul Ryan engineered in December were entirely out of the Republican playbook and should have been fully priced in to any economist’s or investor’s forecasts.  If there was anything surprising about the tax changes, it was the gratuitous and vindictive targeting of voters in high-cost, coastal Democratic strongholds (by imposing new limits on the mortgage tax deduction and the state and local tax deduction), an unprecedented use of the federal tax code to punish political opponents.

The McConnell-Ryan tax cuts will raise the cumulative federal deficit by $1.268 trillion over 10 years, according to Tax Policy Center estimates.  That represents a 14.8% increase over the CBO’s June 2017 baseline estimates. 

Then in early February things took an unexpected turn. Instead of pressing for more spending stringency, a smiley McConnell suddenly agreed to a two-year budget deal with Democratic Senate leader Chuck Schumer that called for large increases in both defense and non-defense discretionary spending. The deal, subsequently approved by Congress and signed by the President, is expected to add another $419 billion to the cumulative deficits through 2027.

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