The Nation’s CapitalHow much does any United States president affect the economy?
By: Ranajoy Ray-Chaudhuri Monday, October 26, 2020 10:34 AM
Illustration by David Plunkert
Perspectives is a feature of Muhlenberg Magazine. This article originally ran in the Summer 2020 issue.
Two economic indicators—the unemployment rate and the stock market—made headlines during the first three years of Donald Trump’s presidency: The former fell to a 50-year low and the latter broke records to ascend to dizzying heights before the 11-year bull run ended on March 11. Presidencies are inextricably intertwined with economic performance in the minds of the public. While perceptions play a role in business optimism and consumer confidence, how much can any president take credit when the economy prospers? Or, how much can the public blame any president when it falters? Fiscal and monetary policies are the primary ways to influence the economy.
Fiscal policy involves changing government spending or the tax structure. Government spending and revenue plans are laid out in the federal budget, a process initiated when the president submits a proposal to Congress with help from the Office of Management and Budget (OMB). However, the budget resolutions later passed by the House and the Senate are different from this submission. The nonpartisan Congressional Budget Office (CBO) was created in 1974 to limit the influence of the OMB on the budget process; the CBO conducts independent technical analysis of the economy, and Congress relies on it while formulating its budget proposals.
What, then, is the role of the president in this process? The House and Senate budget committees propose their own resolutions based on the president’s budget, and the president’s priorities for federal programs can shape the conversation in the chambers. The president can also veto the finalized appropriations bill; while Congress can override the veto with a two-thirds vote in both chambers, the difficulty of that makes it more inclined to negotiate with the president. If the bill is not signed before the start of the fiscal year and the president refuses to sign a continuing resolution to fund federal agencies, the government shuts down. This has happened during four of the last five administrations. A shutdown is powerful leverage for the Oval Office, though it comes at a terrible cost. For example, the dispute between Trump and Congress over border-wall funding and the resulting 35-day shutdown, the longest in history, shuttered nine federal agencies. Businesses could not obtain required permits and certifications, private companies could not go public and loans were held up. The CBO estimated that the shutdown decreased federal spending by around $3 billion, lowering the growth rate by 0.2 percent in the last quarter of 2018 and 0.4 percent in the first quarter of 2019.
Monetary policy refers to changing money supply to influence interest rates, which is usually done through the purchase and sale of Treasury bonds by the trading desk of the Federal Reserve Bank of New York. Roughly half of American households have credit card debt and homeownership is the primary way to build wealth in this country, so interest rates have wide-ranging consequences. Research shows that central bank independence and transparency are essential for effective monetary policy. If the government called the shots, then the pressure to print money and keep interest rates low would be significant. These dangers are well-documented; for instance, under Robert Mugabe’s administration, Zimbabwe printed banknotes that were Z$100 trillion in face value but still not enough to cover a bus fare.
The Federal Reserve is headed by a seven-member Board of Governors. The U.S. president nominates board members and a chair and two vice chairs from among them, but the nominees must be confirmed by the Senate. The governors serve one 14-year term, with term expirations staggered so that presidents appoint only two governors during a single term in office. However, most governors leave to pursue other opportunities, and the median duration of serving on the board is just over five years. Trump has already filled three positions on the board, including two vice chairs, and there are two more vacancies he could fill. Once confirmed, governors cannot be removed except “for cause.”
Trump also replaced Janet Yellen with Jerome Powell as the Fed chair. While they share similar views on monetary policy, Powell’s different approach to financial regulations made him an attractive choice for a president who ran on a platform of deregulation. Their relationship has been less rosy since Powell’s confirmation as he and Trump do not see eye-to-eye on interest rates. While the central bank continues to steer clear of politics, public criticism from the president makes it difficult to lower the interest rate when needed while also appearing independent.
While there are multiple checks and balances on the executive branch when it comes to the economy, executive orders and presidential proclamations can have significant economic impacts. Examples include Trump’s downsizing of two national monuments in Utah and opening the land to mining and cattle grazing and withdrawing from the Trans-Pacific Partnership. Tariffs affect both consumers and producers through their impact on supply and prices, and Trump has used them as the primary tool in the trade war with China. Barack Obama used executive orders to increase federal employment of veterans, individuals with disabilities and recent graduates; accelerate broadband infrastructure deployment; and establish a minimum wage and paid sick leave for federal contractors. Before him, George W. Bush used them to directly negotiate trade deals bypassing Congress, expedite energy projects and promote regulatory reform and financial literacy.
Simply being in the White House brings enormous visibility as the media picks up on the president’s remarks. Trump is the first president to use social media in a significant way to mobilize supporters and share his thoughts and decisions, and his tweets opposing coronavirus-induced lockdowns spurred demonstrations from those who wished to see the economy reopen quickly as well as action from some governors. However, the COVID-19 crisis also illustrates the limits of presidential power, when stocks slide and the president acknowledges that not much can be done except wait and “the market will take care of itself.”
Ranajoy Ray-Chaudhuri is an assistant professor of economics at Muhlenberg.