Can the Guy in the White House Save or Wreck the Economy?

At this year's State of the Union Address Barack Obama, after years of being a punching bag, took glee in taking credit for a reviving economy.

Note:  I began drafting this piece for Presidents Day, but it got bumped for the more timely obituary for poet Philip Levine and then for Mardi Gras.  No matter, the question remains relevant.

Presidents Day, a gift of Congress to avoid having two expensive legal holidays days apart—Washington’s and Lincoln’s Birthdays—came around the other day.  The current holiday rolls the original two worthies in with all of the rest of the guys who sat in the White House for common homage.  There is a kind of grand leveling to the holiday—William Henry Harrison, Franklin Pierce, Millard Fillmore, and James Buchannan equally honored with the guys who got carved into Mount Rushmore.  Sort of like the little Participation Trophies given to every member of the Little League regardless of winning or losing or playing ability.

Such equality, of course, sets some people’s teeth on edge.  To hell with “honoring the office”, they want to examine and approve each one’s personal record.  And in today’s hyper polarized political atmosphere some Democrats choke on honoring Richard Nixon, Ronald Regan, and especially George Bush the Younger.  A lot of Republicans get apoplectic thinking about Franklin Roosevelt—a very old grudge—Jimmy Carter, Bill Clinton, and most especially the current occupant Barack Obama.

One reason, although certainly not the only one, for this mutual contempt, is the very different economic and social philosophies, within the confines of a capitalist system, of the two parties these Presidents represent.  Each claims that the policies they advance will work wonders to grow the economy and that those of the other party are one way paths to ruin. 

Presidents, quite naturally, like to take credit when things are humming along or improving or blame the last guy if times are bad.  At this year’s State of the Union Address President Obama crowed about a sharply improved economy—and took credit for it.  The question is how much can a President actually impact economic performance for good or ill?

Did Obama save the economy?

First, on the face of it, the President could point to impressive numbers.  He came into office coincidental with the most disastrous economic collapse since the Great Depression.  Recovery was long, slow, and painful—much more drawn out than the typical year and a half to two years to bounce back from most recessions of the last 70 years.  But things seem to have finally dramatically turned the corner.  By most traditional markers—Gross Domestic Product, stock market prices, employment, balance of trade, and the deficit—we are not only fully recovered from our losses but booming. 

Yet unique among post-World War II recoveries, the financial health of many Americans has not recovered along with the general economy.  While employment is up, many people were driven out of the work force during the lean years and have either never returned or been able to find only part time work or jobs well below their previous earnings.  Wages have remained not only stagnant but by some measures actually fallen over these years.  A large chunk of people may have fallen permanently out of the middle class.  Meanwhile much discussed income inequality grows as the very wealthiest harvest ever greater percentages of the national earnings.

How much of this can be credited or blamed on the President?  Some, not as much as he claims or his enemies believe.  He was limited by a divided Congress on what he could do.  First, he allowed the controversial and reviled bail-out of the failing big banks initiated by President Bush to continue.  It was a sloppy, wasteful program that shoveled money to the very people and institutions blamed for the collapse.  So much so that billions still seem to be unaccounted for.  But despite these flaws, it may indeed be true that the bail-out prevented an even more catastrophic general economic collapse.

Previous Democratic Presidents would have employed significant economic stimulation to get the economy moving again, a cornerstone of the Keynesian economics model that the party has internalized since the Depression.  But a rising bi-partisan consensus now held that deficit reduction was more important than stimulus.  After the House of Representatives went over the Republicans in 2010 and Democrats clung desperately to a one vote margin in the Senate, a major stimulus package was out of the question. 

Obama only got two, relatively small sized  programs through before that door shut—an auto industry bail-out authorized by Bush that Obama got to administer along with his own Cash for Clunkers program that boosted desperately needed auto sales, and a relatively modest public works program funding mostly already approved shovel ready road and infrastructure projects.  These proved to be little more than temporary slaves, although the auto bailout did save two of the Big Three manufactures and was eventually repaid in full with a profit to the Treasury something that the bank bailout has never accomplished.   It wasn’t until last year when his controversial Health Care plan finally kicked in that another program turned out to stimulate economic growth.

Not only were Obama’s options limited, Congressional emphasis on deficit reduction meant cuts in discretionary domestic spending which often translated to layoffs at the Federal, state, and local levels as well a ripple effect on suppliers.  The President’s remaining arsenal was reduced to regulatory action and executive orders with limited direct effect on the economy. 

Not to be discounted, however, was his role as a national consoler and cheerleader.  Even symbolic statements and actions by a President can have positive effects on such intangibles as confidence which can move the needle upon occasion.  But almost half of the population was disposed to discount anything this President said.

If the President couldn’t do much, what did affect the economy?

Congressional Republicans can and do argue that their aggressive budget cutting and restraint of new taxes allowed private enterprise to step up to new opportunities and kept spending and investment money in people’s pockets.  If not thwarted by the White House, they argue, deeper savings would have led to real tax reductions which would have stimulated the economy and raised all boats.  It is hard to prove that would have been the case. 

For the first years of the recession little, if any, tax savings that were realized were invested in new domestic economic opportunity.  Instead it went mostly to raising cash reserves and swelling the incomes of a paper thin layer of the economic elite. Republicans also argue that their intransience prevented the President and his party from enacting broader job killing tax and spend programs and stiffening regulations—just the kind of prescription Democrats believe would have accelerated recovery and growth.

In the end the standoff between the branches of government meant that neither had the impact it hoped for.

As is almost always the case, events outside the control of either the President or Congress had greater effects on either retarding recovery or growth or spurring it.  High energy prices crippled the discretionary spending power of both industry and individuals for the first five years after the crash.  Rapidly falling world oil prices over the last year, conversely, have put money back in consumer pockets and have allowed the auto industry, for instance, to take advantage of long pent-up demand and sell cars and trucks in record numbers. 

Wars, revolutions, and terror have disrupted regional and national economies.  A nuclear plant disaster in Japan was a crippling blow to one of the world’s most dominant economies.  Natural disasters disrupt trade or like the epic snowy winter of 2013-14 significantly reduce economic activity just as signs of recovery seemed to be on the horizon.  Second and Third World currency crises send world markets into near panic.

Governments can only react to these things.  They can do it well or poorly, alleviate a crisis or worsen it, but it is mostly a matter of degree.

I am sure this audience liked what it heard from George W. Bush, who was in office during the Great Collapse which Democrats were eager to pin on him.

With few exceptions anything that moves the economy in either direction takes a long gestation period.  Even when an event seems sudden and catastrophic like the 2008 collapse the conditions that made it possible were working for a very long time.  George W. Bush was probably no more personally responsible for the crash than Obama may be for the recovery.  Banking deregulation was a movement going back to the Carter Administration and the expectations that home prices and real estate would continue their decades long upward spiral in value indefinitely was an almost universally held cultural belief. 

Events which caused lasting economic damage—think of the almost national shutdown after 9-11 and the months or years it took the airline and travel industries to recover—were discounted as having long-range effects.  In some ways that, along with a string of hugely destructive Florida and Gulf Coast hurricanes, was what helped pop the rivet and split the seams on the wings of our economic juggernaught.

The decision to enter into an open-ended, multi-front war without seeking to pay for it either by increasing revenues or by significantly reducing other spending, of course, did for our national credit what bad mortgages did to banks.   But the cumulative effects took years and neither party in Congress nor the President was ready to risk unpopularity by addressing it.   These things fester until the body of the country falls gravely ill.

FDR held office long enough to see his help, but WWII pulled us out.

If we are now, as seems to be the case, actually coming around to real recovery, it is because the seeds were planted, were sometimes nurtured, and sometimes simply were lucky to have escaped destruction over the last few years.

Presidents, love ‘em or loathe ‘em can be part of the solutions and part of the problem, but they are only players in a much bigger game.