Sunday, July 1, 2018

A primer on presidents and the economy

This is going somewhere.  This post serves a couple of purposes.  First, I'll be doing something on the topic of "we're all fucked" for July 4, and it will be useful to talk about the state of the economy, which is currently doing quite well.  I think it will also be useful to have something as a reference point here for what presidents can and cannot do to influence the economy.  Americans generally overemphasize presidential influence on the economy, and presidential elections turn largely, although not entirely on the state of the economy.  (It is also rare for more than two elections in a row to be won by one party, regardless of the economy).  So, what can presidents do, and what can't they do to the economy, broadly speaking?  This is sort of a refresher course in basic economics and basic policy-making.

1.  Monetary policy.  In terms of policy influence on the state of the economy, this is the big one.  Monetary policy refers to influencing the money supply, changing interest rates, and that kind of thing.  Mostly, the latter.  The Federal Reserve Board manages interest rates in order to try to keep the economy running at the "NAIRU," which is when everything is awesome because we all wear badass jackets.  I'm told that my fashion sense sucks, though.  Non-accelerating inflationary rate of unemployment.  NAIRU is based on the premise that there is a tradeoff between unemployment and inflation.  Remember the "Phillips curve?"  You can't get low unemployment and low inflation at the same time, according to that model, so the Fed is supposed to find a nice balance.  That balance is the NAIRU.  What's the NAIRU?  Um... Uh...  Raise or lower interest rates until inflation stabilizes at around 2%.  That's basically what they do, in practical terms.  When unemployment is high and inflation is low, they lower interest rates.  When inflation is high and unemployment is low, they raise rates.  When both are high?  It's the 1970s!  Get back in your time machine and come back to civilization, where nobody wears Nehru jackets anymore outside of India.  Right now, inflation is right around target, and unemployment is low, so the Fed is slowly inching up interest rates in order to give themselves room to lower rates whenever the next recession hits.

What does a president have to do with any of this?  The president appoints members of the Fed.  Appoint sane, normal economists, and sane, normal policy is set.  That should be a low bar, but hey, we almost had John Taylor on the Fed, so count your blessings.  (Or, if you were hoping for a recession to get Trump out of office, sorry...).  Translation:  the most important economic policy-making happens mostly outside the president's control, unless the president does something staggeringly stupid.  This is kind of the point of how we have things set up.  We want things insulated such that no one person can crash everything.  That would be bad.  The Fed gives a lot of power to a few people, and so far, we've gotten actual, serious economists there.  Not just contrarians looking to run nation-level experiments, but people trying to keep things stable.  The president has been, as he should be, out of the loop.  That's the point.

2.  Fiscal policy.  This would be setting levels of taxation and spending.  How much influence does a president, in general, have here?  Remember that Congress writes the legislation.  Presidential influence will depend entirely on the specific relationship between Congress and a given president.  A legislatively activist president who makes demands that are heeded will be influential, but the problem is that making those demands requires a credible threat to veto appropriations or tax bills that don't comport with the president's demands, and that's hard.  From a macroeconomic perspective, though, here's the thing.  How much will the difference between congressional budgets and presidential budgets affect the state of the economy?  That will vary based on the distinctions between specific political and economic circumstances.  In most circumstances, the macroeconomic effects of the difference between a presidential and congressional budget will be minor.  Not always, though.  Look, "expansionary austerity" is bullshit.  Tax cuts help a contracting economy in the exact same way that increased spending does.  "Multiplier effects" vary based on who gets the money.  If you want to maximize the efficiency of "stimulus," (which includes both tax cuts and spending) give the money to whomever has the highest "marginal propensity to consume."  It's basic math, and tax cuts work on the same basic principle as spending increases.  Or, you can reduce the deficit in a contracting economy and make everything worse like a fuckin' idiot who doesn't remember the lessons of the Great Depression.  There is a flip side to this, because there are no free lunches.  Deficits and debt have costs.  When the government borrows money, that pushes up interest rates, and when the economy is doing well, that needs to be paid down in order to avoid the risk of pushing up the interest rates on private borrowing and crowing out private investment, which can slow down the economy.  Fiscal policy matters.

Mostly, though, this stuff matters at times of either crisis or peak.  At a crisis, stimulus.  At a peak, deficit reduction.  How much does a president affect the economy?  It depends on how much the president successfully pushes Congress toward or away from those policies.  That is contingent on a legislatively activist president, who is successful, and whose successes are relevant in macroeconomic terms.  That's a lot of contingencies.  That means the president has more influence on the economy through fiscal policy than monetary policy, but only in limited ways and in limited circumstances.

3.  Regulatory policy.  A president has more direct influence on regulatory policy than on monetary or fiscal policy, but the macroeconomic effects are far less clear.  Here is where we get into an ideological difference.  "Regulation."  To conservatives, it is all one thing, and all bad.  That's why they speak of "regulation" as a general thing rather than discussion specific regulations.  Presidents can direct executive agencies to adjust their approach to the regulatory process in certain ways, and they can do so in ways that tighten or loosen the regulatory structure.  Does that influence the economy overall?  You're playing at the margins here.  However, let's get a few things straight.  Any regulation increases costs on firms, and that restricts market activity.  The first-order effect is a slower economy.  If you trust the concept of an unregulated market to solve all problems with some misinterpretation of the Coase Theorem, you just don't care.  So, there is an argument that presidents can increase or decrease economic growth by at least some small amount by the extent to which they tighten or loosen the regulatory process.  Not so fast, though!  Have you ever done any international traveling?  To a less-developed country?  Did you, maybe, get a headache or a stomach ache, without having brought your preferred over-the-counter treatments?  If someone told you to walk into the local equivalent of a drug store there to buy some unregulated stuff with the promise that it works, would you do it, or suffer through the headache/stomach ache?  Yeah.  See, that FDA regulation gives you confidence in what you buy, and that can increase economic activity.  Second-order effects matter too and figuring out how to assess the economic impact of regulations is really really hard.  Yes, presidents have influence over this, and yes, it matters, but it isn't what affects the economy overall.  Just because a policy matters doesn't mean it influences the unemployment rate, GDP, etc., and just because it doesn't influence those statistics appreciably doesn't mean it doesn't matter.

4.  Trade policy.  The president can negotiate trade policy, and in limited circumstances, can impose tariffs for national security reasons.  I mean, in theory, a lying dipshit president could impose tariffs on cars and dairy and things, claiming it's about national security when it's really just a stupid, fucking temper tantrum, but a free-trade, anti-tax congressional majority would never stand for that, right?  Oh, right.  Anyway, presidents have some influence over trade policy.  Remember GDP?  Consumption + Government expenditures + Investment - Trade deficit?  Yeah, that thing.  If you run a trade deficit, that lowers GDP, so reduce the trade deficit, and GDP goes up.  That's what Trump's crank economist, Peter Navarro keeps reminding everyone.  Here's the problem.  The president doesn't wave his magic cock and make the deficit go down, and GDP is just a number.  As I reminded you a while back, a "trade deficit" is mathematically equivalent to a "stuff surplus."  So, what does trade policy look like when a mindless mercantilist tries to lower the trade deficit for the sake of lowering it?  If you impose tariffs, those tariffs are taxes, paid by US consumers, or firms purchasing intermediate goods.  Yes, the trade deficit goes down, but when those tariffs are on steel and aluminum, the producers who need those goods raise their prices, reduce production, and consumption of consumer goods goes down.  Mercantilism is stupid and self-defeating.  The process of negotiating trade agreements does fall to the executive branch.  How much does that influence the economy?  Some.  It does help to have a competent person do that.  Competence, of course, requires being a capitalist rather than a mercantilist, and being able to do basic math.

Now, what if a president does something really stupid on trade policy?  What if a president starts a trade war?  That really is the dumbest thing you can do on trade.  How much does that hurt?  It depends.  How fast is the escalation?  On which sectors of the economy do the tariffs go?  On which countries do we impose tariffs, and what patterns of retaliation do we observe?  Nothing happens in the blink of an eye, and there are ways to climb down.  I note, for example, that Trump has declined to "label China a currency manipulator," as he promised during the campaign, and he has softened his threats on technology investments from China.  You can make a depression worse with tariffs, but can you crash a booming economy by starting a trade war?  I've never seen a case of that, but nobody has ever been stupid enough to try.  (Until now...)

5.  Emergency stuff.  I'm adding this as a sort of catch-all because in cases of emergency, weird policies come about.  When the financial sector crashed in 2008, the George W. Bush administration asked Congress for a pile of money for TARP to keep the economy from going from "recession" to "Great Depression."  TARP was a financial institution bailout bill that didn't really fall into any of the previous categories, and in cases of emergency, executives play a different role.  This is arguably when presidents are most important.  They can't control the Fed.  Congress does the real work on fiscal policy (when they bother to do anything).  Regulatory policy, while it matters, doesn't really have much of an effect on the economy overall.  Trade policy... as long as you aren't stupid enough to start a trade war, you aren't going to do much to the economy overall, and even then, it's a slow build (or fall, as the case may be).  When presidents matter most is when there's an emergency.

So there it is, mostly.  There are other, more minor things a president can do to influence the economy, but that's the main stuff.

Yes, I'm going somewhere with this.

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