Insights & Advice


Don’t Count on either Obama or McCain to Fix the Economy

So, now the economy is the number one issue in the hearts and minds of this country’s voters.

We are a fickle lot. A year ago it was Iraq followed by health care. Energy made the grade a month ago. Who knows what burning issue will take center stage this fall but since this is a financial column let’s stay with the economy. Have you ever wondered how much power the president actually has to change the economy in the short or even medium term?

The short answer is precious little. Our economy is based on free-market principles. Unless we decide to go the way of government-managed central economies such as Myanmar or the old Soviet Union, a capitalist economy has a life of its own. We call it an economic or business cycle. There are four stages of this cycle—expansion, prosperity, contraction and recession—and the seeds of each stage can be planted long before a new president arrives on the scene.

FDR, for example, was a president who promised to jump-start an economy reeling from the Great Depression while suffering an unemployment rate of 25%. He didn’t start the depression (that was another administration) and he couldn’t stop it although he used all the government’s resources to try. Contrary to popular myth, his policies, while expanding the power and scope of government, never did succeed in besting that great economic downturn. Economic victory required a world war. It was only then that the unemployment rate actually declined while production rose on the back of the U.S. war machine.

Or take the much vaunted prosperity of the Regan years. Reganomics was all about cutting government spending, regulation and taxes while controlling the money supply to reduce inflation. They were all great policies but the recovery in 1982 had more to do with the end of recession while Jimmy Carter was still in office. Big Ron benefited from that and took credit for it. His policies over time aided and abetted the recovery but much of the credit was due to Federal Reserve Bank polices.
How often have you heard a president say that “under my administration 20 million jobs were created in this sector or that region of the country”? Don’t believe a word of it. It’s you and I together with a whole lot of small business entrepreneurs that created those jobs. We risk our time, effort and money making decisions that we’re not even sure will work out. We do it because our environment encourages risk taking and rewards us for trying. It’s here that a president can make a difference over time. He can help create an atmosphere where we are willing to invest, work our butts off and succeed.

The government can impact the economic business cycles through taxes and government spending. In both cases, cutting each has proven to have a much more beneficial effect on the economy then raising them. However, Congress controls most of that power. Clearly, in this country, the spending side is out of control. And taxes, it appears, will be raised regardless of which candidate wins so “jump-starting the economy’ under those conditions is rather dubious.

I’m not saying that taxes shouldn’t be increased in order to pay for much needed programs like universal health care but if the economy is truly your number one priority then you can’t have both unless, of course, you cut spending somewhere else. If you really want to do something about the economy, start with voting out the free-spending boys and girls that are up for re-election.
As for our new president, it helps if he has clout on Capital Hill and knows his way around the legislative bodies so that he can influence congress and create the right atmosphere for growth. Both candidates appear to have several far-reaching policies that will impact the economy over time but not before we are all quite a bit older. In the short term, I fear, we are on our own and at the mercy of this rather vicious economic cycle.

Posted in Macroeconomics, The Retired Advisor