Presidents and the Economy

I need a break from writing about the mortgage mess so...

With this being an election year I have tried to not discuss politics at all but I would like to discuss the economy and suggest that political rhetoric serves little purpose regarding the economy.

Politicians find out what concerns folks and then suggest that they have solutions regarding those concerns. One thing folks are concerned about is the economy so it is natural that Presidential candidates address that issue.

The problem is that the President of the United States has virtually no significant effect on the economy. The only person who is part of the Federal apparatus who can significantly affect the economy is the Chairman of the Federal Reserve. The fact is that the President is affected by the economy to a vastly greater extent that the economy is affected by him.

Presidents do not create significant numbers of jobs. Jobs are created by a coming together of businesses, labor and capital. We have a gigantic system in place which does this. Folks see opportunities for profit and create and expand businesses and create jobs in the process. This also has the annoying effect of creating business cycles which go with those opportunities. It works like this: opportunity knocks, people see a situation where a product or service can be provided at a profit, business expands, jobs are created, at some point supply exceeds demand and a downturn occurs. This is what happened in the dot-com thing and this is what is happening in the present housing cycle.

To be fair there are marginal cases when political intervention does effect the economy. Tax cuts spur short-term economic growth. The recent stimulus package will provide some economic growth. But these are aberrations not the normative methods for job creation.

In short, when any of the Presidential candidates describe how they will create jobs pay no attention to them. They cannot create jobs and their ability to help business and workers create jobs is rather limited.

All that said, this has to be one of the strangest Presidential elections I have witnessed. There are three people still contending and they are all fairly liberal so the conservative agenda is not exactly having a good year. At present this is all about Obama. It is amazing that someone with so little political experience can be doing so well. It is not merely about Obama-mania or his being a sort of cult hero. The stark political fact is that he has made all the right moves while the experienced Clinton machine has made all the wrong moves.

He certainly has engaged the youth of American and that is a good thing. Getting young people involved in politics and interested in finding out what the government does is good. It is too easy to dismiss young folks saying that they are so inexperienced that it is easy for them to be swayed by someone such as Obama merely because of his speaking ability and his appeal to the liberal notions common to youth. There is more here than that. This guy really has engaged people. Folks feel a lot closer to him than they do the other candidates and certainly closer than they do to anyone who has been President in a long time. That by no means certifies that he will be nominated or elected but this is one darn interesting election.

In my view one effect of the potential nomination or election of Obama would be the perception that foreigners would have of what the U.S. is and what opportunities exist here. This is a guy with one black parent, one white parent and a Muslim name. Foreigners will conclude 1) that this is really a land of opportunity where a guy with mixed race and a Muslim name can get elected 2) we are totally insane and this is just a sort of extension of American Idol or 3) both 1) and 2) are true.

In no way do I suggest that we tailor our vote to what pleases foreigners. That makes little sense.

No matter what - whoever is elected will have little effect on the economy.

Comments

[Dick Lepre]

This was sent to me by someone whom I have been email buds with for many years. He sent this before I made the blog posting:

The notion that fiscal policy under control of the President does not have an impact on the economy is not true. It is true that "rapid turnarounds" are best accomplished by the Federal Reserve. However, it stretches credulity (in my opinion) to think that the U.S. economy would not be in a very different situation under a different president. For one thing, if fiscal policy had been left where it was in 2000 our federal deficit would be much, much smaller. This impacts not only the funds available for current expenditure (to which I shall return) but the quantity of debt issued which in turn impacts the value of the dollar. I dare say we've been over-producing debt instruments and that this is one of the causes of the weak dollar. It may well be that the housing crisis would have occurred anyhow. But if it had occurred in the context of less U.S. debt and a higher dollar, we would be in a better place to contemplate low interest rates without the threat of inflation caused by higher import prices.

A more solvent U.S. government could also undertake more ambitious rescue operations. One of the current logjams in liquidity markets is the fact that the bond insurance agencies are bankrupt and it is therefore very difficult to find a credible insurer for bundles of student loans or even municipal bonds. A solvent government might, for example, either loan or provide funds for a restructuring of insurance agencies. It is not clear that the Fed can do this.

Responsible fiscal policy does make a difference, but the difference that it makes is felt more on the 5 to 10 year period than the 9 to 15 month time horizon usually assigned to Fed actions. It really doesn't matter what one's views are about various government programs: so long as they are there, they should be funded; if they are terminated, then taxes can be lowered or the funds used for sometehing else.

I note that we are fighting a war but the government hasn't even seen fit to mount a bond drive to make sure that the funding obligation of the war related debt comes from American citizens.