David R. Henderson  

Can U.S. Presidents Much Affect the U.S. Economy?

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One of my favorite newspaper columnists, Steve Chapman of the Chicago Tribune, has written an article titled "Trump's Economic Fraud." It's partly about what the title says it's about but it's mainly about the question I ask in the title above: Can U.S. Presidents Much Affect the U.S. Economy?. His answer is no.

One of Steve's basic points is correct, but he overstates the case.

Here's his basic point that's correct:

The economy is subject to all sorts of unpredictable factors that can overwhelm the most determined efforts of the person in the Oval Office. Growth in China, oil production in Saudi Arabia, Britain's withdrawal from the European Union--any of these can have ripple effects in this country.

Demographic changes here at home also play a role. Unforeseen events--terrorism, natural disasters, war, financial crises--can upend expectations overnight.


Steve also writes:
Presidents, after all, face far more constraints than the Fed. Major policy changes often require legislation, which requires compromise with Congress. They don't control either spending or revenues, which are likewise subject to the approval of lawmakers.

Again, correct.

But that doesn't mean that the U.S. President can't have a big effect on the U.S. economy. What does Steve leave out of the analysis? Regulation. We live in a regulatory state, with hundreds of thousands of regulations and tens of thousands of new regulations (both large ones and tweaks to current ones) annually.

Regulation has a big effect on the economy and a determined president can either increase regulation and make it much more punitive or decrease regulation and make it less punitive. Most regulations, as someone has written (I think it was my Hoover colleague John Cochrane but it might have been someone else), are like a boulder in a strong-flowing river. Throw in one boulder and the river finds ways around it. But throw in a thousand boulders and the river's flow slows considerably.

Let's look at the record. I'll start with Ronald Reagan and then jump to President Obama.

When Ronald Reagan came into office on January 20, 1981, he inherited price controls on oil and gasoline that were originally imposed by Richard Nixon and extended by Gerald Ford. Jimmy Carter, even though he was a regulator at heart, saw some of the damage done by price controls and signed a bill in 1980 that phased out price controls so that they would end in October 1981. The bill, however, gave the president discretion to end the controls earlier. Reagan, who understood the effects of price controls and had spoken out against them during the campaign, used that discretion to end the controls on January 28, 1981, 8 days after getting inaugurated.

An aside on two personal memories.

Memory One: A friend who was a speechwriter for Reagan during the campaign told me that he used some of my work in a speech Reagan gave on oil price controls and, if it had been appropriate, would have put in a line to the effect: "As economist David Henderson has pointed out. . ."

Memory Two: Another friend who was at the Cabinet Council meeting with Reagan in which price controls were discussed--this friend was a staffer on energy in the Office of Management and Budget--told me that Reagan stated words to the effect "Unless someone gives me very good reasons, I'm going to end the controls." The new Secretary of Energy, Jim Edwards, who was a dentist by profession, had already "gone native." He said, "It's not that simple, Mr. President." Reagan replied, "It had better be simple, Jim, because I'm deciding tomorrow."

The result was a semi-boom in U.S. oil production (from 8.6 million barrels per day (mbd) in 1980 to a 1980s peak of 9.0 mbd in 1985) and a body blow to the OPEC cartel. Oil prices fell and that helped the 1983-1984 economic boom.

Score one for my thesis: Presidents can affect the economy through deregulation.

On the other hand, there's Ronald Reagan's formation of a Japanese auto cartel. The Voluntary Export Restraints that the Japanese government agreed to early in Reagan's first year in office restricted the otherwise-growing export of Japanese autos to the United States and caused billions of dollars in consumer surplus loss to American consumers and cost the U.S. economy as a whole about $3 billion.

Now to President Obama. He has has some of the most hostile regulators in recent U.S. history. One regulatory agency can hold up a pipeline, another can cause people to line up at airports (although George W. Bush did most of the damage on that front), another can reset the threshold pay after which employers have to pay overtime and can change the rules for unionization to make it easier for unions to monopolize the supply of labor to particular firms or industries, etc. Those boulders add up.

I noted above that GW Bush is more responsible than Obama for messing up airline travel. But that makes my point. There is nothing legally stopping Obama from deregulating airline security within wide parameters.

Two other criticisms.

Steve writes:

The weak growth under Barack Obama occurred even though he got Congress to approve a big stimulus package.

The "even though" is out of place. To some extent the weak growth was due to the stimulus package. Unemployment insurance extensions, for example, extended unemployment. Steve's hometown economist neighbor Casey Mulligan, of the University of Chicago, has written extensively on this.

Speaking of hometown economist neighbors, Steve writes:

The most important economics book of 2016, by Northwestern University economist Robert Gordon, is The Rise and Fall of American Growth. It makes an exhaustive case that the huge improvements in living standards during the 20th century were a unique phenomenon that can't be repeated.

I beg to differ, and I did so in an extensive review of Gordon's book. He does make an exhaustive case that there were huge improvements in living standards during the 20th century and he makes it well. In my review, I praised that aspect of his book, which is most of the book. But Gordon's claim that such huge improvements were a unique phenomenon amounted mainly to assertion.


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CATEGORIES: Regulation




COMMENTS (11 to date)
Kevin Erdmann writes:

Along the same vein, this has been true in housing, especially since the GSEs went into conservatorship. Under pressure in 2008, and after conservatorship, underwriting became very tight, and mortgage originations very top heavy. After conservatorship in Sept. 2008, high priced housing markets started to stabilize, but low priced housing, which by then, had nearly completely been shut out of mortgage markets, actually had their worst losses after that. Discretionary regulatory leniency when the GSEs weren't really even private any more, anyway, would have saved trillions in home equity and prevented millions of foreclosures.

Bush postures toward the GSEs also probably led to some of the shift toward private securitizations when they went after the GSEs for accounting issues in 2004. One irony of the period is that when the former GSE CEO's were making restitution in 2007 to funds that would support suffering homeowners, as penance for their misdeeds: their supposed misdeeds were "managing earnings" in the years leading up to the boom, which included overstating their loss reserves. Today, Elizabeth Warren is asking why the CEOs who were at the GSEs in 2007 aren't being prosecuted for understating their loss reserves.

ThaomasH writes:

I think you overlook the ease with which a protectionist candidate could increase import restrictions.

Khodge writes:

I recently read or saw a video of some guy in a crowd yelling out to Pres. Obama thanking him for lower gas prices. Even Pres. Obama seemed stunned by this praise. I would think, if anything, he would have preferred higher prices, as a way of limiting consumers' transportation options.

Showing that a president has little ability to affect the economy is obviously different from convincing people (esp. journalists) of that fact.

I initially thought that the president's ability was mostly limited to making the economy worse but your Reagan example was a good counter example.

David R. Henderson writes:

@ThaomasH,
I think you overlook the ease with which a protectionist candidate could increase import restrictions.
I’m not sure how, given my example of Reagan going protectionist against Japan.
@Khodge,
I initially thought that the president's ability was mostly limited to making the economy worse but your Reagan example was a good counter example.
Thanks. Another good one is Carter appointing Fred Kahn as chairman of the CAB.

James Hanley writes:

As an addition, while Congress can statutorily overrule regulations, passing legislation is difficult, with multiple veto points. So absent public outrage, a president's regulations tend to stick.

Also, a dentist as Secretary of Energy? That's almost like putting a horse mogul in charge of FEMA. The Senate should be more aggressive in checking a president's appointments.

Brad D writes:

My conservative friends are quick to overlook the inconvenient truth that Republican administrations share the same penchant for regulation as do Democrats.

David R. Henderson writes:

@James Hanley,
Also, a dentist as Secretary of Energy? That's almost like putting a horse mogul in charge of FEMA.
Actually, that was his professional background, but he had previously been a governor of South Carolina.

Steve Chapman writes:

David, I think we agree for the most part. But I think you misunderstood the point of my column. It was not that presidents can't affect the economy very much, but that they can't control it very well -- in the sense of getting it to do what they want. Bad policies can be very potent in producing effects they don't want. But that's not what I was addressing.

As for the effects of regulation under Obama, I'd like to see good data on the costs and benefits. Regulations usually produce both, and when the latter are greater, they can enhance productivity and boost prosperity.

I don't endorse Gordon's conclusions -- as I noted in my column -- but I don't know of any book that have stirred more debate among economists this year, and he has to be taken seriously.

David R. Henderson writes:

@Steve Chapman,
But I think you misunderstood the point of my column. It was not that presidents can't affect the economy very much, but that they can't control it very well -- in the sense of getting it to do what they want.
That’s true.
Bad policies can be very potent in producing effects they don't want.
True. And it’s symmetric. If bad policies can be potent, then ending those same policies can be potent also.
Regulations usually produce both [costs and benefits], and when the latter are greater, they can enhance productivity and boost prosperity.
True. And given that a huge percent of regulations don’t deal with serious market failures but instead get in the way of exchange, the costs are typically greater than the benefits. The minimum wage is a good example.

Gamal Atallah writes:

You disregard the fact that the U.S. economy performs much better under democratic presidents:

http://www.salon.com/2015/12/28/these_5_charts_prove_that_the_economy_does_better_under_democratic_presidents/

http://politicsthatwork.com/blog/which-party-is-better-for-the-economy.php

Thomas Sewell writes:

Gamal,

From your own Salon article, re: #1
"the authors want to chalk these results up to luck"

Also, there is no attempt to control for which party controls Congress.. i.e. situations where a GOP controlled congress put the spending brakes on a Dem. President, example: Clinton

If you look at party control of congress, it's much more significant.

re: #2
Inequality is almost an opposite measure for prosperity. More prosperity is generally associated with higher inequality, not lower.

re: #3, again, need to look at party control of Congress

re: #4, back to inequality rather than talking about an improved economy

re: #4, again, look at control of Congress and you see a much different picture.

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