[Pen-l] why the new Prez may not be able to help the economy

["Jim Devine" <jdevine03@xxxxxxxxx>]

Presidential Impotence
Why Obama or McCain won't be able to cure the ailing economy.

By Daniel Gross

SLATE / Posted Saturday, June 28, 2008, at 7:06 AM ET

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, Democratic 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 1807 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 the Depression, Herbert
Hoover adopted a hands-off approach that exiled his party from the
White House for a generation.

[Hoover did try to make people more optimistic, while he argued that
businesses shouldn't cut wages. It was only late in his term that he
switched to the "hands-off" approach, after his initial tack failed.]

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.

[It's not just "maturation." Under the Bretton Woods fixed
exchange-rate system, the Fed had to mostly ignore domestic events and
focus on defending the dollar. The end of BW empowered the Fed and
weakened the government, as far as macropolicy is concerned.]

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.

This isn't to say that the identity of the president in 2009 won't
matter. Presidents tend to have the most success enacting new policies
in the first year in office (the tax cuts of Reagan and Bush II, the
budget and NAFTA for Clinton). And Tom Gallagher, head of policy
research at ISI Group, notes that the next president will appoint a
Federal Reserve chairman early in his term. But—and this is the first
but—the macroeconomic impacts of early-term policies are often evident
only after several years. Harvard economist Benjamin Friedman notes
that Nixon's imposition of wage and price controls in August 1971
helped smooth his re-election in 1972. "But these controls became a
substitute for serious anti-inflationary policy, and were the
beginning of a set of policies that led to really severe inflation."

So here's some straight talk about change we can believe in. Most of
the promises that Obama and McCain are making about the economy will
founder on the shoals of a Congress unwilling to be a rubber stamp,
organized industry opposition, unanticipated events, budget realities,
and changes in the macroeconomic climate.

We shouldn't discount entirely the next president's powers. The most
troublesome economic data points aren't necessarily the rising
unemployment rate and plunging home prices. Rather, they're the
miserable consumer-confidence numbers, which have hit a 16-year-low,
and the high percentage of Americans who believe the nation is on the
wrong track. When consumers, whose collective actions constitute more
than two-thirds of U.S. economic activity, are in the dumps, they're
less likely to spend, invest, and take risks.

But—and this is the second but—history has shown that presidents do
have the ability to affect the short-term national mood about the
economy. Think about the [exaggerated] juxtaposition of Hoover's cool
response and Franklin Delano Roosevelt's exhortations to fear nothing
but fear itself. George H.W. Bush's "Message: I care" didn't have a
prayer in connecting with the anxieties of middle-class Americans when
confronted with a sweet-talking Arkansas governor who oozed empathy.

Presidents can function as mood enhancers only when the rhetoric is
backed by action. "Whatever beneficial effects FDR or Reagan had on
the economy had more to do with their policies than with their
pleasant demeanors," says Richard Scylla, a historian at New York
University. [What about his brother Charybdis?]  FDR's inspiring
speeches and fireside chats in 1933 were accompanied by a profusion of
policy experiments, many of which worked. And without the stimulus
provided by the Reagan tax cuts, the "Morning in America" theme of the
Gipper's 1984 re-election campaign would have fallen as flat as Gerald
Ford's 1974 exhortations to "Whip Inflation Now."

[All of this ignores the possibility that Obama could launch major
public investment in infrastructure and "green" technology, while
deciding that only the "current account" of the government's budget
needs to be balanced. I don't know how much hope we should attach to
that possibility.]
-- 
Jim Devine / "Segui il tuo corso, e lascia dir le genti." (Go your own
way and let people talk.) -- Karl, paraphrasing Dante.
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