Partisans claim economic demigod status for past presidents of their own party, while simultaneously denigrating the opposition party’s presidents for their economic performance. Democrats herald Clinton’s economic gains; Republicans espouse Reagan’s apparently endless economic virtues. Yet both sides likewise discredit the other.
We know, however, that it can’t be both ways. Either presidents have a direct and meaningful impact on the economy of the nation or they don’t. And the economy of this nation is the primary driver of the economies of its individuals. Many Americans don’t have to think back too far to feel the pain of the last economic crunch. But what effect, actually, does the president have on your personal economy?
Build an Emergency Savings Fund With a Money Market Account — Get Started >>
The Market Versus the Economy
The market and the economy are not the same thing. People substitute them for each other to the extent it conveniently supports their point. Consider the performance of the market under this first half of Trump’s first term. While the market was on a tear, Democrats pointed out to everyone that the market is not the same as the economy, while Republicans heralded Trump’s market greatness. Once the market hit the skids, the Democrats began a chorus of ‘told you it wouldn’t last,” while the Republicans began pointing out that the market is not the economy.
The market has a relationship with the economy. But the market is fickle. It is very much driven by perception — at least in the short term.
In the long term, both the economy and the market are driven by growth. Let’s look at the 1990s — the Clinton years — through a growth lens. The ’90s stand out as the decade of the internet boom. During this period, a technologic wave swept the business landscape. The internet altered the speed at which business could be conducted. And time is money.
And the internet reduced geographic constraints. You could easily do business that would have been difficult before. There was a plethora of efficiencies and opportunities. Businesses were on a productivity and growth high. This drove both the economy and the markets. But you don’t always have that type of external influence on growth.
Congress has a huge effect on the economy. Congress (sometimes) passes the budget under which our government operates and appropriates the necessary funds (also sometimes!). And Congress makes the laws. Every federal law is an output of Congress. It should be readily apparent that they don’t do so at the direct behest of the President.
But that’s a lot of power. The purse strings of the country are as much or more in the hands of Congress as they are the president. The president has very limited ability to spend money without Congress. In an ideal situation, there’s some level of cooperation and things function fairly smoothly. Ideal situations don’t seem to come around that often anymore.
Start Managing Your Finances— Download This Personal Finance App >>
The president’s role has some specifics, such as proposing a budget. And the president has veto power to limit Congress’s wilder urges. But the president’s real power is one of influence. This is a situation of leadership. While managers assure that what’s supposed to get done gets done, leaders get people to accomplish more than they would have if left to their own devices. The president’s ability to sway Congress is both a function of Congress’s willingness to go along with the president’s agenda and the president’s ability to move them to act on his or her agenda.
Regulation falls more directly under the president’s control. They're made by executive departments and various agencies. The president has a lot more power to effect change here — but it can also be more easily undone by the next president if he doesn’t like what the previous one did.
Regulations affect a myriad of things, but overregulation is generally seen by business as shackles on economic growth.
Regulations that place increased restrictions or increased costs on business do so at the cost of economic growth. Some are very necessary, others not so much. A lot of that depends on which side of the aisle you stand on. But this perception is extremely important.
The Issue of Perception
Markets attempt to price today what happens tomorrow. That’s how you make money: You act today; the stock, or other asset, moves in price tomorrow (or some other future time). If you’re right about the direction, and the magnitude of change is sufficient, then you profit. If you’re wrong, you either don’t profit or you lose. This is why perception is so incredibly important. And powerful.
Build and Personalize Your Investing Portfolio — Get Your Stock Advisor Offer >>
For instance, if you believe the markets will be moving upward, you will act differently than if you believe they will not be moving up. If you believe Congress will be passing onerous laws, then you won't think the market will move up — at least not as much, as it would in their absence. If you think the president will have burdensome regulations placed on your industry, you won't be optimistic about where the market’s headed. But if you believe the president will remove burdensome regulation, you’ll have a rosier outlook.
Some of it is what actually happens. Often, by the time it happens, it's already priced in.
The perception changed the price of the asset; the action only confirms or denies the accuracy of the perception.
The difference is that some laws or regulations have a direct impact on business costs or have other direct economic effects. But they generally have an outsized perceptive effect. The perceptive effect both acts before the change and may be greater in magnitude. People assume the worst. Business people aren’t immune to this.
Effects Beyond Perception
The government, contrary to popular belief, actually does some things. And they change some things. Some of these have outsized effects on both the economy and the markets. Regulation, and deregulation, we’ve already touched on.
We need to go one step further in that not all regulation hurts business or is perceived as doing so. In some cases, regulation may help. Rarely perhaps, but it’s conceivable nonetheless. Or it may be neutral. But it doesn’t always spell doom and gloom or cause negative reactions in the market or the economy.
Beyond regulation, the two other biggest factors coming out of Washington are debt and taxes. Debt places an incredible drain on our economy. Business tends to laugh it off. It’s simply not a problem in this reporting cycle. But it is a major expense. It consumes our tax revenue and prevents us from allocating those dollars elsewhere.
Get the Most out of Your Refund — File a Free Federal Tax Return >>
In the longer term, a president who allows dramatic increases in our national debt is hurting future growth and future economic progress. But they aren’t punished in the short term, so they continue to do it. Perpetuating the status quo is easier than fighting it.
Taxes and tax policy have very real effects on the economy. Here the impact tends to be more based on reality than perception. Changes just don’t happen at such a rate as to drive a lot of perceptive behavior. But high taxes inhibit growth.
There’s a simple way to see how this works. Businesses make long-term decisions on plant, equipment, and projects. The deciding factors — the point at which they go ahead with a project or not — are based on net returns. It’s harder for projects to meet performance hurdles in a high-tax environment. Investing in a project just may not be worth the risk when taxes are eating a lot of the gains.
All presidents operate initially in an economy that they inherit. Clearly, some inherit better economies than others.
Neither Reagan nor Obama walked into an easy situation. They both faced strong economic headwinds. Very different, yet very challenging situations.
Much as Clinton didn’t cause the internet boom, Reagan didn’t cause the debacle he inherited, and Obama didn’t create the housing bubble and crash. But you have to work with the hand you’re dealt. Historians will place blame or credit based upon performance within the context of the situation.
Get Homeowner’s Insurance From a Top Provider — Free Quote Here >>
Trade is a big issue. Free and fair trade promotes economic growth. Hopefully we will get some reasonable agreement with China. Some of the other recent agreements should prove beneficial going forward.
Social change is also a big factor. Women entering the workforce and becoming a major part of the U.S. economic engine drove growth and productivity across the last half-century or so. No president can honestly claim that result. And they shouldn’t.
The Bottom Line on Presidents and the Economy
Presidents don’t have economic buttons they can push to help or hinder the economy. But they do have great tools at their disposal. They create, through words and deeds, an environment and perception of a direction that drives business and personal spending decisions — and that’s the economy. They can’t (generally) change things overnight. But they do create a perception of expansion and hope, or they create something less.
Systems theory — that a system works in an environment and the environment works on the system — is certainly relevant here. Presidents inherit an economy in the context of a world economy, and that’s where they have to start. Some have advantages that others don’t.
Many impacts of a president’s influence carry past their presidency. Certainly, their legacy of debt, taxation, and regulation will outlive their four or eight years.
Considering that presidents begin with a starting point that's not of their choosing, and that they are limited more to influence than to control, it would appear that a president can influence direction to a greater extent than they can change absolutes.
A president influences the environment in which the economy operates. Not everything is within his control. But a president who can create a belief in a future of hope and prosperity will have a greater positive economic effect than a president who can’t compel people to believe such a vision.
Build an Emergency Savings Fund With a Money Market Account — Get Started >>
We act on what we perceive to be true. We won’t all believe the same things, and that’s okay. But the more people whom a president convinces to believe, the greater the president’s impact.
The economy will grow within an environment that is conducive to growth. The president doesn’t really control the economy, but the president can have a huge impact on its environment. And our nation’s economy, similarly, is the environment in which your personal economy operates. An environment that is built on the perceptions of a president.