Economic cycles transcend presidencies

One of the great misconceptions is that the president controls the economic conditions during his presidency. Article I, Section 8 of the Constitution grants Congress the right to levy taxes borrow money, and pay the government’s bills. As recent events have demonstrated, when Congress fails to authorize spending, we experience a shutdown of governmental agencies.

Much of our economic policy is determined by the Federal Reserve Board. The Feds determine the size of our money supply and interest rates.

Increasingly, we are part of a global economy that constrains our ability to control our own destiny.

In spite of this, the sitting President gets blamed when economic times are tough and is quick to take credit for good times.

Presidents can influence Congress to take action affecting the long term economy. However, moving the US economy is like turning an aircraft carrier — it doesn’t turn on a dime. Thus, presidents tend to have more long term economic impact.

Consider the economic policy changes that were enacted while President Reagan was in office. The Fed held interest rates high, a bipartisan Congress approved massive spending increases financed by a 49 percent increase in national debt and passed tax reform legislation that allowed market forces to more efficiently allocate financial resources.

The disruption from these changes caused the savings and loan crisis, a decline in real estate values and a fairly strong recession. Unfortunately for George H. W. Bush, this happened on his watch. Even after a resounding Gulf War victory, he was not re-elected.

The economic disruption waned and we experienced a significant economic boom in the late 1990s. Of course, President Clinton was more than happy to take credit for the economic boom that occurred during his tenure — even though his predecessors were principally responsible for promoting the economic resurgence.

As President Clinton left office, the economic boom was in its final stages. The Democrats immediately said, “When a Bush is in office the economy suffers.” In the first months of George W. Bush’s presidency, his vice president made the rounds on the talk shows saying that the Bush Administration inherited a recession that was a normal part of the economic cycle.

What actually happened during both the Clinton and Bush administrations was a restructuring of our financial system. Glass Stegall, a law enacted in the 1930’s to reign in Wall Street, was repealed in 1996. Other changes were made that boosted the economy in the short term.

It took ten years for the collateral consequences of those changes to manifest themselves. We all recall what happened then — we experienced the most extreme economic meltdown since the Great Depression. While the American public blamed George W. Bush for that, actions undertaken during the Clinton presidency also contributed to the malaise.

Irrespective of whether John McCain or Barack Obama was elected in 2008, the 44th president’s hands were tied. There was no quick fix for the global economic calamity at hand. Just as the Great Depression lasted a decade, so did the adversity resulting from the Great Recession.

A huge fiscal stimulus was needed to bring our economy back from the dying. Such stimuli are expensive. Most industrialized nations reacted just as we did — they incurred an enormous amount of debt to finance economic incentives to rebuild their economies. Incurring massive debt was seen globally as a preferred alternative to repeating the 1930s.

There was a global overcapacity to produce goods and services, so high cost economies around the world stagnated. GDP growth in these nations, including in America, was near zero.

When governments engage in mega issuances of debt, they need two things to bail them out — economic growth and inflation. We’ve seen neither. In fact we have seen just the opposite — a stagnant economy coupled with deflationary fears. (I am writing another column discussing our national debt.)

Central banks of most countries, including the Fed, kept interest rates low which propelled global stock markets. Ask any investment manager. They will tell you that investing in equities was the only way to get a decent return on investment over the past decade. The presidents (Obama and Trump) had little to do with this global bull market. Today it seems like we might be in a bubble. If so, President Trump should not get the blame when there is a market correction.

It is true that, when Barack Obama was president, our national debt grew by 68 percent and our GDP grew by a paltry percentage. It is easy to blame him for this. But in reality he inherited a lousy economy, two expensive wars and an inability to solve the economic situation unilaterally.

I have disagreed with many of the actions undertaken by the Obama Administration, but I doubt that the economy would have fared much differently under a McCain Administration. After all, economic cycles transcend presidencies.