Presidential Blame & Credit

Jim McTeague of Barron’s asked a question that led to an even more interesting question. It started as the usual Presidential Election and the stock markets related inquiry — Is President Obama a positive or negative for stock and bond markets? — as I thought about the question, it devolved into something entirely else.

I had several thoughts that unintentionally skirted the question, but stimulated a deeper discussion:

1) Do Presidents get too much blame and/or credit for the Economy?

Generally speaking, this tends to be true. We focus lots of energy at the top, but the broader economy is part of a massive set of forces, much of which is typically beyond the White House’s ability to deal with.History shows that some Presidents have had major impacts, but that seems to be the exception, not the rule.

2) Why do some Presidents significantly impact the economy positively?

It appears that a combination of two factors: Luck, and the proper response to existing circumstances. That is what separates the great economies from the middling ones. Look at the circumstances that met FDR, Clinton and Reagan. Big challenges, appropriate responses.

Take RR is a good example: He had the luck to come into office in year 14 of a 16 year Bear Market; he also had Paul Volcker as Fed Chief who forced a wrenching recession early in his term. But Reagan’s response to those circumstances — significant tax cuts and Federal spending, followed by gradual tax increases, helped add up to a booming economy.

3) Why do some Presidents seem to do such a bad job for the economy?

Similar answer: Luck, and an inappropriate response. Hoover, Carter, and Bush 2 are examples.  Hoover came into office 8 months before the 1929 crash; Carter took over after the malaise of Vietnam war and Watergate; Bush 2 came into office a year into the dotcoms implosion and at the start of a recession.

Note that the response by each was a failure: Bush for example, started a costly unnecessary war in Iraq, cut taxes, blew up the deficit, and added tot he ongoing financial deregulations. Given an opportunity to instill Capitalistic discipline on Banks, he went all socialist on them instead.

Ultimately, the right combination seems to be Luck + the right response. Most Presidents seem to lack one or the other (or both).

4) Can we predict how well any Presidents economic policies will play out?

Here is the kicker: All of the above is meaningless, for we have little ability to forecast how ANY president will do economically. The economic performance of both Reagan and Carter surprised most forecasters. Expectations for Clinton was that he would fail, cause a recession, explode the deficit — the opposite happened. And Bush seems to have defied even his worst critics — to the downside.

All told, we are not very good at forecasting these things.