How much impact can a president have on the economy?

No wonder presidential candidates’ economic policies get so much attention during the campaign. Quite a bit of evidence shows that the state of the economy -- especially what’s happening with inflation, growth and employment -- has a large impact on voters. 

When the economy is doing well near the election, it boosts the vote for the incumbent party. Conversely, when the economy is doing poorly during the run-up to the election, voters shun the incumbent party. 

But that doesn’t really answer the more important question: How much influence does the president actually have over the economy? 

The stock answer is that presidents get too much credit when the economy does well and too much blame when it slumps. The boom-and-bust cycles that are inherent in capitalist economies depend on forces that are independent of any president’s actions. It’s mostly luck that determines how the economy is doing when it’s time to elect a president.

However, it’s not right to conclude presidents don’t matter for the economy. 

During normal times when mild fluctuations ripple around the economy, the task of keeping things on a stable growth path depends mainly on the actions of the Federal Reserve. The chair of the Fed, who’s chosen by the president, has a large impact on how monetary policy is conducted. In addition, members of the board of governors (which includes the chair), who are also appointed by the president, have a majority of the 12 votes on the monetary policy committee. So if they’re unified, they can set the policy agenda.

The system was set up so that no president can appoint more than the chair plus two members of the seven-member board during an eight-year term, but that requires board members to serve their full 14-year appointments. In recent years, board members have resigned far before the end of their terms, and both President Barack Obama and George W. Bush have been able to appoint all of the board members. 

However, during Obama’s tenure, Congress refused to hold hearings on his appointees, or voted against them, leaving the board short-handed, but it still has a large enough block of votes to shape policy. 

When the economy is experiencing normal, mild fluctuations, the Fed’s policy actions probably wouldn’t vary much across Republican- and Democrat-appointed Fed chairs and board members, though it could still matter at the margin. 

But during abnormal times -- large economic downturns like in 2007 when the Great Recession hit -- the Fed’s composition could make a large difference. 

If, for example, the chair is a Republican appointee and the board comprised like-minded members, it’s very likely that interest rates would have already gone up more than the small rate hike we have had so far. In addition, the degree of quantitative easing would have been far less (or at least largely reversed by now), the shape of financial market regulation in light of the financial crisis would have been different and many of the other creative responses to the crisis that funneled liquidity to struggling sectors of financial markets would have differed as well.

The combination of some or all of these factors could have resulted in a much different trajectory for the recovery and affected the country’s vulnerability to financial crises in the future. 

During a severe crisis, the president also has a large impact on fiscal policy, an essential component of the response to deep recessions. During normal times, monetary policy is powerful enough to offset fluctuations in the economy on its own. But as the Great Recession showed, during a deep downturn monetary policy alone isn’t enough to turn the economy around. Help from fiscal policy -- the combination of tax and spending initiatives --- is needed.

The president alone can’t determine fiscal policy. That requires the cooperation of Congress, and given that the current one is GOP-controlled, this has prevented the types of response that Democrats would prefer to implement. 

Even the stimulus package that Obama did manage to get passed would have looked much different under a Republican president and Republican-controlled Congress. Republicans aren’t the deficit hawks they proclaim to be, and in the past they haven’t hesitated to use recessions as an excuse to implement their tax-cuts-for-the-wealthy agenda. 

Thus, in a deep recession when Democrats are able to set the agenda, fiscal policy is likely to involve spending initiatives such as rebuilding infrastructure or enhancing social insurance programs. When Republicans are in control, tax cuts for the wealthy are the likely outcome. 

And when the president and Congress are at odds, as they are now, very little is likely to get done at all. The stimulus package the country did get at the beginning of the Obama administration was far too small, didn’t last long enough and, to appease Congress, was tilted more toward tax cuts than Democrats would have preferred.

My reading of the evidence is that government spending has a much larger impact on the economy than tax cuts for the wealthy. So the party of the president along with the party that controls Congress can have a large influence on the depth of the recession and the time it takes to recover from it. 

Finally, the president also plays a role in determining how GDP is divided between various income classes and how much protection workers have against lost income when they lose their jobs. Tax cuts for the wealthy and spending cuts to social insurance that Republicans advocate will tend to redistribute income toward the wealthy and reduce the protection workers have, while Democratic policies -- tax increases on the wealthy and more generous social insurance -- would do the opposite.

When the executive and congressional branches of government are controlled by the same party, policy is likely to move in one direction, and when the branches are from different parties, the threat of a presidential veto tends to preserve the status quo. In addition, the president can shape the policies of agencies such as the Federal Trade Commission that determine the regulatory environment and the tolerance level for monopoly power of firms. 

Elections do matter for the economy, especially during deep downturns. Who is elected in November could make a big difference in how the economy performs, how income is divided up and how much protection the working class has over the next four years and beyond.