Every year on the third Monday of February we celebrate President’s Day in the United States. Whether your political leanings are left, right or center (or not even on the map), we can probably agree that all 45 of our Presidents to date, and politicians more generally, have historically had a loose relationship with what can be considered the objective truth. Particularly, it seems, when it comes to taking credit or laying blame.
One area where politicians most commonly misapply reality to suit their needs is the economy. How often have we heard them blaming their predecessors or the opposing party for a sputtering economy, only to turn around and expect adulation when things naturally make a turn for the better?
The current administration is no different than those before it in that regard. When the stock market was hitting new highs in January we heard all about how we had President Trump to thank for that. Democrats, on the other hand, predictably claimed the economy and the market highs were residual effects of the Obama administration.
Unsurprisingly, when the markets got off to a very rocky start in February - with the Dow Jones Industrial Index losing a thousand points on two separate days - suddenly both sides quickly changed their tunes. The Trump administration immediately stopped touting (and tweeting) about the economy, while the Democrats were quick to blame the administration, and President Trump specifically, for the suddenly sputtering market.
Political leanings aside, we may find ourselves asking what, if any, impact does the president have on the economy? Should they get the credit when things go well (and the blame when they don’t) and if so, how much?
Before trying to answer those two important questions it is critical to remember that the economy and the market are two distinctly separate entities. Yes, they are related, and one is a barometer of sorts for the other, but a roaring market doesn’t necessarily equal a solid economy and a good economy isn’t necessarily immediately reflected in the markets. Also, consider that the economy is more of a slow moving, gradual thing, whereas the markets, while they reflect long-term trends too, are punctuated by short-term moves that bare little to no resemblance to long-term economic trends.
If you understand the inter-relation of markets and the economy and still comprehend that they are distinct entities, and while correlated, are not one and the same thing, then you are already far ahead of not only the average person but also the average politician who can’t seem to differentiate between the two (unless of course it suits them).
While the president does have great influence over both markets and the economy due to the nature of the office, giving him or her absolute credit or blame, while politically expedient, is a mistake. Yes, the office of the president can and does influence both markets and the economy through rhetoric and policy.
Markets and the economy are complex enough and have so many moving parts and participants that the president, while having an outsized influence relative to say an individual investor, or even an institutional investor for that matter, cannot and does not singlehandedly direct it up, down or sideways. If that were the case then we’d never have recessions or market drops, the president could just decree that they immediately correct course, which of course is a ridiculous assertion.
Aside from that, the U.S. economy is not centrally planned and for good reason. Nowhere in the modern world could a centrally planned and controlled economy compete on a global stage or give its citizens the standard of living they demand. With the Olympics recently completed look no further than North Korea for a great example of a centrally planned economy. An economy so weak that the average North Korean citizen is much shorter than their southern counterparts because proper nutrition is so hard to come by regularly.
When it comes to markets, which react to news quickly and often more extremely than warranted, the office of the president can quell fears and spur confidence. What it cannot do it make companies innovative or profitable, and the total profitability and outlook for all companies is what ultimately drives the market. Any bump or drop due to rhetoric by the president or other politicians is likely to be temporary unless followed by legislative action.
One area where the president can exert greater influence over the direction of both the markets and the economy is by promoting and passing good policy. Lower taxes, a more favorable regulatory environment and clear direction going forward all encourage investment and innovation. These types of policies don’t guarantee economic expansion or market growth, but they are often a precursor to improved economic conditions. Again, many other factors come into play, but policy should not act as a hindrance to economic growth.
It’s important to understand that markets tend to go in cycles. There are peaks and there are valleys in both the business/economic cycle and in the market. Knowing that these cycles typically repeat every few years, it can be expected that a 4-year and certainly an 8-year term as president will likely encompass both environments. If, as president, you claim credit for a booming market, it’s easier to be blamed when things inevitably turn around. From a political perspective its probably not the smartest strategy to tie the success or failure of your presidency to economic conditions, given the nature of cycles.
With that said, when the office of the president supports, and signs into law, policies that are pro-business he or she does deserve some credit for the resulting growth, just like they would deserve blame if the policies curtailed growth. The danger, politically speaking, is laying too much blame or taking too much credit for the resulting actions. Is the president an outsized influence on the market/economy? Yes, the office certainly has that kind of power. Is it smart to tout the short-term market gains or seek political favor by touting short-term market drops? No.
Let’s demand that our politicians worry less about who gets the credit and who deserves the blame and make sure we have the right policies and regulations in place that encourage growth, investment, trade and technological advancement, rather than those that stifle them. The right policies may not immediately translate into market moves, but ultimately we want to play the long game and ensure a strong, healthy and vibrant economy for many years to come and that simply cannot be done if we’re too busy arguing.