From White House to Wallet

An interesting supposition about the President's influence on the economy.  This is just a summary. 

It is worth reading the full article.   plk

From White House to Wallet

By JEFF MADRICK

Published: September 30, 2004
http://query.nytimes.com/mem/tnt.html?tntget=2004/09/30/business/30scene.html&tntemail1

 

Summary:

FANTASY has caught on in this presidential election season.

We are told that presidents do not matter much to the course of the economy.

But a brief tour of history starkly suggests the opposite.

In fact, every president at least since John F. Kennedy significantly influenced the course of the economy, even in the short run.

How did this improbable idea of presidential impotence catch on with economists and political analysts?

Most likely the main reason is that fiscal policy - more government spending or lower taxes - is widely thought to be less powerful than monetary policy.

The president has some control over fiscal policy but not over monetary policy, which is the province of the Federal Reserve and its chairman.

And even if fiscal policy were as potent as once thought, it is usually untimely because presidential proposals take so long to wend their way through Congress.

History, however, provides case study after case study to undermine this new conventional wisdom, even if one concedes the dominating influence of monetary policy.

First, there were the Kennedy-Johnson tax cuts, passed in 1964, which had a strong stimulative effect on the economy, leading to the fastest growth rates of any decade after World War II, including the 1990's.

The Federal Reserve under William McChesney Martin accommodated the fiscal stimulus by expanding the money supply and keeping interest rates down.

But President Kennedy and President Lyndon B. Johnson took the policy initiatives.

When Mr. Johnson, against the wishes of his economic advisers, failed to raise taxes in the late 1960's to pay for the escalating Vietnam War, the economy overheated, and economists of all political stripes agree that the age of high inflation then began.

In the late summer of 1971, President Richard M. Nixon, trying to shake off the vestiges of recession, strongly stimulated the economy through fiscal policies to ensure that he faced the 1972 election with a low unemployment rate.

He also, of course, simultaneously adopted wage and price controls to stop the inflation that his stimulus might cause, leading to damaging imbalances later in the decade.

His friend Arthur Burns, chairman of the Federal Reserve, also stepped on the monetary gas in 1972.

Mr. Burns's policies may have been necessary and even more potent than fiscal policy, but it was the president who took the lead.

The economy strengthened, as did underlying inflationary pressures.

Presidents Gerald R. Ford and Jimmy Carter both adopted stimulative fiscal policies in the 1970's, again with the help of the Fed's accommodation.

And again, it was the presidents who largely called the shots, for better or worse.

Many argue that the Federal Reserve's accommodation of presidential fiscal policies changed with the appointment of the strongly independent Paul A. Volcker by Mr. Carter in 1979.

But presidential decisions were as critical as ever.

Consider the radically large tax cuts engineered by President Ronald Reagan in 1981.

This time the Federal Reserve did not accommodate the president, but pushed interest rates to damaging heights in an attempt, misguided or not, to suppress the inflationary impact of Mr. Reagan's stimulative policies.

Without those tax cuts, monetary policy would not have been as extreme, and the worst recession of any period after World War II might have been far less severe.

Moreover, the nation would not now be encumbered by a level of debt that was thought unimaginable when Mr. Reagan took office.

President George H. W. Bush and President Bill Clinton also mattered, though on balance arguably for the better.

Their tax increases ultimately calmed the bond market and enabled the Fed under Alan Greenspan to reduce interest rates.

By the late 1990's, at last, the economy grew at the rapid rates of the 1960's.

On the one hand, President Bush himself, sounding quite Keynesian, is arguing that his tax cuts have brought the nation out of recession.

In fact, more economists now agree that fiscal policies can indeed be potent.

In a paper delivered at a conference in Paris last week in honor of John Kenneth Galbraith, Philip Arestis of Cambridge University argued that evidence supports the usefulness of both fiscal and monetary policies, especially when they are put in place in tandem.

The monetary fund research, for example, suggests that arguments about how larger deficits necessarily crowd out private borrowing do not generally hold up.

William Dickens, an economist at the Brookings Institution, argues that the tax cuts were backloaded.

Thus, they unsettled business decision makers and financial markets in the near term in anticipation of huge future budget deficits, while many of the tax-cut benefits did not kick in until later.

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Summarized by Copernic Summarizer