A President’s Economic Decisions Matter … Eventually

This is In Real Terms, a column analyzing the week in economic news. Comments? Criticisms? Ideas for future columns? Email me, or drop a note in the comments.

When Hillary Clinton said last spring that she would put her husband “in charge of revitalizing the economy,” I argued that Bill Clinton doesn’t deserve much credit for the late-1990s boom. That’s not a knock on the 42nd president in particular. It’s just that presidents, in general, have far less control over the economy than the public often thinks. It is impossible to know for sure, but it is likely that the housing boom and bust would have played out much the same way under President Gore as it did under President Bush, and it’s likely that the recovery would have been just as long (and just as disappointing) under President McCain or President Romney as it has been under President Obama.

But that doesn’t mean presidents have no power over the economy at all, or that their policies are unimportant. Indeed, presidents, along with Congress, can exert profound influence over the economy, for good and ill. It’s just that their true impact is rarely what gets talked about in party conventions or on the campaign trail. True presidential impacts are often invisible — as much about what doesn’t happen as what does — and become clear only years or even decades after they leave office.

“It’s really hard to assign to a president or even more broadly to a political establishment … credit or blame for things,” said Salim Furth, an economist at the conservative Heritage Foundation. “A lot of policies take a long time to take effect.”

There are exceptions. In crises, presidential action can have an immediate and measurable effect. Most economists believe the stimulus package that Obama signed early in his administration helped dampen the effects of the recession; critics on the left argue that a larger or better-designed stimulus could have done more. (Assessments of Obama’s other crisis-era initiatives, such as the auto company bailouts and mortgage-assistance programs, have been more mixed.) And many experts (though not all) believe that the broader set of government actions — by both Obama and Bush, as well as the Federal Reserve — helped avert a full-blown depression. (Obama’s 2008 opponent, John McCain, fought the administration’s stimulus package in the Senate, but not because he objected to the idea of a stimulus — he wanted the bill to rely more heavily on tax cuts rather than spending. Many observers suspect that, had McCain become president, he would have proposed a bill closer to the one Obama passed.)

“The moment when presidents can make a difference is during emergencies like a global financial crisis,” said Stan Veuger, an economist at the American Enterprise Institute, a conservative think tank.

Outside of crises, presidents can’t do much to boost the economy in the short term. But they can hurt it. Furth pointed to President Nixon’s 1971 decision to impose price controls in response to inflation as an example of a policy that had a clear — and immediate — negative effect on the economy, one that took years to fully reverse. Economists on the right and left say there are various decisions — defaulting on the national debt or sharply limiting trade, for example — that could have a similar effect today.

Most of the time, however, presidents affect the economy in more subtle, long-run ways. That can make their impact hard to measure. The decades-long process of opening up global trade has had a clear, positive impact on the U.S. economy, but the impact of any single trade agreement is generally modest. The entry of women into the workforce in the second half of the 20th century was one of the most important drivers of economic growth during those decades, but it is hard to identify a single policy that led to that shift. Government policies on taxes, health care, education and infrastructure all play important roles in determining the long-run path of the American economy, but it takes years if not decades for their effects to be felt. “Their impact in the short-run is minimal,” said Eugene Steuerle, a tax policy expert at the Urban Institute.

But while presidents can’t control how fast the economy grows, they have more influence over how that growth is divided. Presidents probably can’t do much, for example, to bring back lost manufacturing jobs, but they can try to help the workers who lost those jobs. At this week’s convention in Philadelphia, Democrats promised to raise the minimum wage, guarantee paid leave to new parents and hike taxes on the rich; those policies might have long-term effects on the size of the economy, but they would have the far more immediate effect of redistributing income from wealthier Americans to poorer ones. Republicans, of course, propose a different set of policies — lower taxes, reduced regulation — that would affect distribution in different ways. (Donald Trump also proposes various policies — bringing back manufacturing jobs, reducing immigration — that most economists consider either unrealistic or dangerous.)

In other words, neither Clinton nor Trump can realistically promise to avoid recessions or boost economic growth. Instead, voters should be asking themselves a series of questions: Which candidate do I trust to manage a crisis, or to avoid creating one? Which candidate will set up the economy for success after he or she leaves office? And which candidate’s policies will help the most people succeed in the economy that we have now?

## Minimum wage

Donald Trump wants to raise the federal minimum wage to $10 an hour — maybe. At a press conference on Wednesday, Trump said he’d “like to raise it to at least$10,” but also said “states should really call the shots.” (The federal wage is currently $7.25 an hour.) Trump’s campaign hasn’t clarified his position. But in one (possibly too generous) interpretation, Trump’s policy may be similar to that of many economists: Raise the federal minimum by a modest amount, then let states raise it further if they see fit. As I’ve written before,$15 an hour means something very different in high-cost California than in low-cost Mississippi. Or, as Trump told Bill O’Reilly on Tuesday, “It’s very expensive to live in New York.” (There is also, of course, significant variation in the cost of living within states, which explains why many of the most aggressive minimum-wage increases have come at the city level.)

New research this week supported that position. A preliminary study from economists at the University of Washington found that low-wage workers in Seattle have thrived since the city passed a $15 minimum wage law in 2014. (The wage floor is still being phased in; the$15 minimum won’t kick in for all workers until 2021.) Workers’ success, the report found, is largely because of the booming local economy, which has led to strong hiring and solid wage growth up and down the earnings spectrum. But the law itself has had a modest positive effect on low-wage workers without seeming to hurt companies or cost jobs.

On the other hand, separate research from James Sherk at the conservative Heritage Foundation concluded that a $15 federal minimum wage would eliminate 7 million jobs, with the brunt of the impact falling on the most vulnerable workers. Sherk’s analysis is, by definition, speculative, and other economists might well come up with a smaller estimated impact. But even many liberal economists are skeptical that a$15 minimum makes sense in low-cost parts of the country, where as many as half of workers earn less than \$15 an hour. (On the other hand, leaving the decision up to the states often means that minimum wages will often be set based on politics, not economics. Five states, all in the South, have no state minimum wage.)

## The Fed

To hear Republicans tell it at their convention last week, the U.S. economy is a shambles. To hear Democrats tell it, the recovery is strong. Policymakers at the Federal Reserve? They’re somewhere in the middle.

The Fed this week, as expected, decided to leave interest rates unchanged, as it has at every meeting this year. The Fed, which once expected to raise rates four times this year, has become more cautious in the face of a slowing global economy. But in its statement on Wednesday, the Fed said “the near-term risks to the economic outlook have diminished” and hinted that it could raise rates as early as September.

## Number of the week

Newly opened businesses created 889,000 jobs in the final three months of 2015, the Bureau of Labor Statistics reported Wednesday.1 That’s the most since early 2008, when the recession was just getting started.

The pickup in entrepreneurial activity is still modest, but if it lasts, it would be an important step forward for the economy. New businesses are the lifeblood of a dynamic economy; they spread innovation, improve productivity and, crucially, play a disproportionate role in creating new jobs. But for all the focus on Silicon Valley, startup activity has been muted in this recovery. Even with the latest rebound, startups account for a significantly smaller share of job creation than they did before the recession. Moreover, entrepreneurial activity was falling even before the recession. The rate at which Americans start new businesses has been falling for more than 30 years — a troubling trend that economists can’t fully explain.

## More from us

On Tuesday, Carl Bialik looked at the diverging paths of the two convention host cities. Philadelphia has begun to emerge from its late-20th century struggles; Cleveland, however, continues to shrink.

The Democratic convention has featured lots of talk about the economy. Catch up on our analysis from our week’s worth of live blogs.

## Elsewhere

No, the government is not cooking the books on the unemployment rate to make Obama look good. Matt O’Brien explains (again) in The Washington Post.

Gideon Lewis-Kraus takes a deep look in The New York Times Magazine at the progressive group trying to put inequality at the center of Clinton’s economic agenda.

Stop worrying about robots taking our jobs, writes Robin Harding in The Financial Times. Worry about climate change instead.

Note: In Real Terms will be taking next week off.

## Footnotes

1. The BLS figures technically don’t count new companies but rather new “establishments” — new business locations, whether or not the parent company is new. But separate, less timely data from the Census Bureau that does look at companies shows a similar trend.

Ben Casselman is a senior editor and the chief economics writer for FiveThirtyEight.

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