Does the President Run the Economy?

What role does the President of the United States play in how well (or poorly) our economy is doing? 

The president has influence over the course of the U.S. economy, but less than is generally supposed and certainly far less than presidents themselves like to claim, especially when the economy is doing well. 

You often hear them saying, for example, "My administration created 20 million new jobs in the last seven years."  Presidents don't create jobs; real people taking risks and investing their own money are the ones who actually do that.  Nonetheless, the federal government is such a huge factor in our economy today that a president who is successful at shaping or shifting the government's policies can certainly have a great deal of impact.

The president can set a tone that is either hostile or friendly to free enterprise.  If he whips up anti-business sentiment or convinces Congress to raise taxes, hike tariffs, pile on more regulations, or otherwise create a hostile environment, the result will be negative for the economy.  People will hold back on starting businesses or investing in expansion, or they will put their money to work in other countries. 

If, on the other hand, the president sets a friendly tone, works to cut taxes and tariffs and eases the burdens of regulation and other government interference, he can benefit the economy by unleashing the creative energies of investors, entrepreneurs and consumers.

In either event, Congress still plays a pivotal role because the president can't unilaterally raise or lower taxes and tariffs.  The Congress ultimately controls the purse strings of the federal government, so whether the government has a balanced budget or not is a congressional prerogative.  A president who wields no clout on Capitol Hill will have less ability to influence the economy than has the Congress.

No matter what the president or the Congress do, however, the Federal Reserve has perhaps the greatest ability to influence the economy.  Even a president who encourages enterprise and a Congress that cuts taxes and tariffs will be thwarted if the Fed is pursuing monetary policy that is harmful--and it can pursue any number of harmful policies, such as being too tight or too loose with money and credit.

Politicians are almost always quick to take credit for the good things that happen even though they've had little to do with them.  On the other hand, they typically run and hide and blame others for the disasters that their policies sometimes create.

As for the generally healthy state of today's economy, I would credit the following:

1. Millions of hard-working Americans who have saved and invested their money and created jobs.

2. A climate of freer international trade, helped along by recent free-trade agreements that have been supported by leaders of both parties.

3. Alan Greenspan at the Fed, for being ever mindful of the need to restrain excessive money and credit growth.

4. Ronald Reagan, for having the wisdom to convince Congress to cut the top marginal income tax rate from 70 percent when he took office to 28 percent when he left.  If the top rate were still 70 percent today, the U.S. economy would be a mere shadow of what it is today. Even the later increases in taxes under Presidents Bush and Clinton still leave the top rate around 43 percent, far below the incentive-crushing rate that prevailed under Jimmy Carter.

The best of all situations is when the president meddles very little in the economy, Congress cuts taxes and tariffs, and the Fed doesn't upset the applecart with wildly inflationary or deflationary monetary policies.

All in all, I think it is fair to say that politicians are a lot better at harming the economy than they are at helping it.  The Hoover and Roosevelt administrations, for example, produced and then prolonged the Great Depression.  Others, such as the Reagan administration, helped the economy by relinquishing or lessening government control and letting the economy find its own strength.