RateWatch #419 – Presidents and the Economy
August 7, 2004 by Dick Lepre
dicklepre@rpm-mortgage.com
What's Happening
Showing once again that it has powers like Spiderman, Friday's BLS Employment Situation Report has cast its web on equities and benefited Treasuries (lower rates). The report shows 32,000 new jobs in July and a revision downward in the June number to +78,000 (from 112,000). Also caught in the web are Mr. Bush's reelection hopes. Despite the fact that the President has little to do with job creation guess who is going to get the blame?
The report shows declines in retail and financial services and gains is construction and manufacturing and is, consequently, anomalous to the long term trends of the labor market.
In the bigger picture it seems that economic recovery is slowing. We are not likely to have another recession absent a 9/11-like event but 3.0% GPD growth and 32,000 jobs are "blah" and people don't like "blah." The unemployment rate may have gone down but it is the number
of people working (i.e. paychecks) that drives the economy. The reason job production is so low is that we have excess capacity. Excess capacity and higher productivity are deterrents to job creation.
The chance of a Fed hike next week may have been diminished but is still more likely than not. The words of the Fed next week are going to be highly parsed and diagramed.
Note that this jobs report sends a clear signal that the life of the present bear market for Treasuries - whichis now 12 months old - will not be extended beyond the customary 12-15 months. Treasuries will turn bullish before year-end. This will happen even if the Fed is in a cycle of increasing rates.
Next week, I will try to deal with why job creation is so low but find more interesting the issue that folks think that the President has much to do with job creation.
This was written earlier this week before the jobs report was issued.
Presidents and the Economy
It seems that there are only two issues in the present Presidential campaign: Iraq and the economy. This implies that most voters seem to subscribe to the thesis that the president has a significant impact on the economy.
To a large extent this belief has persisted for many years. I believe that it was heightened by the Clinton years in the White House. He made the economy the primary focus of his 1992 campaign and the economy did very well during his two terms so it seems natural to believe that he had something significant to do with it.
First, let's try to go back over some of the administrations of the 20th century to quantify what actually happened.
Presidents and the U.S. Economy During the 20th Century In 1913, during the Wilson administration, the Federal Reserve was created. Financial panic and depressions had
been regular occurrences before this.
Unfortunately, during its first decades, the Federal Reserve did not know what it was doing. In 1923 Coolidge became president and was dedicated to the concept of laissez-faire which is French for "butting out." In 1924 the stock market became popular and started a spectacular rise. It was like the dot-com thing but on a larger scale. People traded up equities with little rational basis. From May 1928 to September 1929, the average prices of stocks rose 40 percent. This was despite the fact that many of what we would now regard as economic indicators were flashing red.
In August 1929 a recession began. For the next two months GDP fell at an annualized rate of 20%.
The stock market crash started on October 24. The Fed lowered the Fed funds rate from 6% to 4% and added to the money supply during the first few months but then did little more until 1932. It essentially stood on the sidelines trusting that the markets were undergoing a normal correction process. The Great Depression got worse until 1933. GNP fell 31%, unemployment was almost 24%, equities lost 82% of their value or about $1.2 trillion in today's dollars, the money supply was reduced by 31%, there were over 10,000 bank failures.
FDR was elected in 1932. He took some drastic actions: he declared a "banking holiday" to stop the run on banks and he increased taxes dramatically. Roosevelt understood that government spending would spur on the economy but unfortunately refused the Keynesian notion that deficit spending was needed. Another recession occurred in 1937-1938.
Starting in 1939 the U.S. economy boomed as the world went to war. The U.S. came out of World War II as the world's only intact economic super-power. Economic growth in the 1950's was sedate.
Interestingly, the next big event that stimulated the economy was the Vietnam War. But a tax cut during the Johnson administration coupled with war spending led to inflation which was inherited by Nixon. The Ford and Carter years are regarded as an economic disaster area but the fact is that 10,000,000 new jobs came into being during Carter's term. This had little to do with Carter and everything to do with demographics. The Ford and Carter administrations had very high inflation. One of the contributory things was the Arab Oil Embargo of 1973.
The tide may have shifted when Carter appointed Volker to be Fed Chairman but few realized it at the time. Reagan ran on a "misery index" platform and unseated Carter. It was not until Reagan's second term that economic recovery, under Volker's leadership, started to have a dramatic effect. To a significant extent Reagan rolled-back the high income tax rates adopted
during the FDR years.
In 1991 the George H. Bush administration suffered a mild recession and got blamed for it. Clinton expertly emphasized that the issue ("its the economy, stupid") was the economy and looked great. During the Clinton administration GDP growth averaged 3.5% per year, inflation was tame and unemployment low. The interesting thing about the Clinton presidency is that the economy was starting to expand as he took office and starting to contract before he left office.
So the question is this: what effect does the president have on the economy?
I believe that the answer is: almost none.
The economy is affected by businesses, consumers, bankers and the Federal Reserve. The economy, unfortunately, seems to have natural business cycles. To a significant extent, the President (along with the rest of us) is a slave to these cycles.
The federal government does have the ability to affect these cycles but the President has little
access to that ability. The only truly powerful individual in the United States, in regard to the economy, is the Chairman of the Federal Reserve. He can control the money supply, regulate rates, create a recession (by removing dollars), allow inflation, or abate inflation. Greenspan has been an expert at doing this merely by threat. He can say "irrational exuberance" one evening and
have the Dow drop 140 points in the first 30 minutes the next morning. The Fed Chairman's actions can be put into effect almost immediately. He does not have to go through the crap that the President and Congress have to go through to get something done. He answers only to the votes of members of the FOMC regarding rate policy and can do pretty much what he damn well pleases with regard to the money supply.
In fact, the Fed Chairman may indeed be as powerful as he is because the media and the public perpetrate the myth that the President is responsible for the economy. With attention diverted to the President the Fed Chairman can actually do his job.
Jobs
The President does not create or eliminate jobs (except for those who work for the Federal government). Bill Clinton did not create 20,000,000 jobs. If you want to credit the folks who created jobs during the Clinton years select some names from this list: Bill Gates, Steve Case, Andy Grove, Jeff Bezios, Vint Cerf and Sam Walton.
George W. Bush did not destroy 3,000,000 jobs any more than he created 1,200,000 jobs in the first six months of this year. To some extent his tax cuts may have helped but jobs creation would
likely have been nearly the same without the tax cuts.
To some extent both FDR and Reagan may have helped the economy by adopting positive attitudes at times when the country's spirits and economy were in the dumps. On the other hand, those recoveries may have been inevitable.
I think that Clinton deserves credit for doing nothing - and I do not mean that sarcastically.
He let the economy "do its thing" and that worked out just fine.
There are some things that the President does that affect the economy. He starts the budget process but, in fact, it is Congress that, to a great extent, has the say over the budget. There is
a much larger staff in the Congressional Budget Office than the White House has for this task. The President can affect foreign policy, trade, and industry regulations through agencies controlled by the executive branch.
Congress and the President do have control over fiscal policy which means taxes and spending but very little (less than 10%) is really discretionary. I think that at the time of the George W. Bush tax cuts the nation's economic health and general well-being may have better been served if the government kept taxes where they were and engaged in numericaly equivalent deficit spending as a stimulus. The problem, I think, is that it is essentially impossible to get the members of Congress to come to consensus as to what is really good for the nation and Bush had no such spending plan
mapped for them.
The only real fiscal policy differences between the present two candidates probably consists in their views of what the income tax tables should look like. In reality, it is unlikely that the choice of
one of those tables will have any significant effect on the economy.
If you want to be hardcore political and really believe that Bush lost 3,000,000 jobs please explain how he did this almost immediately (in the first year) and then turned things around in 2004. If you want to blame the job loss in the first year of this Bush administration on Clinton feel free to do so, but this is also false. The jobs loss was due to three things: the dot-com bust, the telecom bust and 9/11 which seriously impacted airlines and the hospitality industry. Add in some significant
corporate collapses: WorldCom, Global Crossing, Enron, Kmart.
Looking clearly at the telecom bust one can see how business cycles come into being and play out. Opportunity knocks, business builds, jobs get created, supply exceeds demand,
business contracts, jobs are lost. It's that simple.
In addition, consider that the effects of recession are, in general, global rather than national. If heads of state are responsible how is it that they all simultaneously become idiots or geniuses?
Instead we make believe that the President is responsible. I suppose this achieves two things:
1) It sells some media advertising time and
2) it lets Greenspan do whatever the heck he wants.
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