The economy is the central issue in the US presidential campaign – as it is in all such contests. Even during wartime, foreign policy plays a subordinate role in American elections and social issues like abortion are never more than subtext.
Both Mitt Romney and Barack Obama would have us believe that their policies are diametrically opposed to each other, with little if any room for compromise between the two. Therefore, voters apparently face a Manichean choice between two competing visions for restoring America’s economic prosperity
Yet however strong the contrast between the two candidates’ economic plans, readers need not fear that Tuesday’s vote will herald either the end of the Federal Reserve system, or a massive expansion in government. The reality is that the victor will not have the power to change the nation’s economic direction, at least in the short run.
There are two reasons for that – the structure of US government, and America’s changing place in the world.
The important thing to remember is that the US president has far less power over the economy than is commonly believed – and not nearly as much as the British prime minister, for example. The reason is simple: the constitution expressly limits the president’s power and the institutions of government that have developed since 1789 limit it further.
Unlike prime ministers, who necessarily have working majorities in parliament, US presidents must frequently deal with congresses under control of the other party. Different parties may also control the House and Senate, as is the case now with Republicans controlling the former and Democrats the latter.
In all likelihood the current political split in Congress will not change after the election. But even if Republicans gain control of the Senate, it will be by the skin of their teeth, while a 50-50 split is quite possible. A thin majority or split senate will likely mean more paralysis given that only 40 votes are needed to block almost any presidential initiative, since 60 are necessary to break a filibuster (the practice of senators extemporising at length to prevent a vote).
Moreover, even under the best of circumstances, in which a president controls the House and has 60 votes in the Senate, changing policy is very difficult, as we saw when President Obama enjoyed this advantage during the early days of his administration. That is because members of Congress are provincial and myopic, subject to very little in the way of party discipline, and have different institutional perspectives even when they share the president’s political philosophy.
Furthermore, US presidents have far less control of the government’s operations than most people realise. They can appoint only a few thousand staff. Ethical constraints and financial disclosure requirements discourage many of the best people from serving in government. Without political leadership, cabinet departments are run by career bureaucrats, who tend to maintain the status quo. Many important government functions are now performed by independent agencies such as the Federal Reserve Board or Securities and Exchange Commission. Those agencies’ leaders serve fixed terms, which often outlast the president’s, by 10 years in the case of members of the Federal Reserve Board for example.
Indeed changes at the central bank are likely to have far more influence on the economy than the presidential election. With politicians unable to hammer out an agreement on fiscal policy, it has been left to Ben Bernanke and his Federal Reserve colleagues to pilot the economy through monetary policy alone. That means the next president’s most meaningful economic decision may well be nominating a new chair of the Federal Reserve, should Mr Bernanke not seek a third term in the post.
Finally over the years the Supreme Court has become deeply involved in economic policy questions, for example only allowing Obama’s signature health reform to stand by a hair’s breadth. Over the years Republicans have been far more aggressive in appointing federal judges, who serve for life, that are not shy about using the courts to implement their ideology. In the past, the same was true of Democrats, but both Obama and Bill Clinton have tended to appoint nonideological judges who do not provide a counterweight to those appointed by George W. Bush.
All this means that America’s basic economic policy is unlikely to change much or quickly whoever wins the presidency. What really matters for the economy is the economy itself – the actions of workers, business people, entrepreneurs, investors and so on, who go about their jobs largely oblivious to what comes out of Washington.
That is unlikely to change materially for some time, even were presidential authority unlimited. The economy is like an ocean liner that changes direction only very slowly, although a small change is meaningful if sustained long enough.
The fact is that the underlying trend rate of growth of the US economy is a function of two things politicians can’t do much about: productivity and demography.
The formula for long-term growth is basically labour force growth plus the growth in productivity or output per worker. America’s demography is a low birth rate and falling immigration, which prevents the population and labour force from rising. As population growth falls, so, necessarily, will growth.
So far, productivity has held up, but in the long run it is dependent on research and development and a continuing new supply of ideas and technological innovation. Government policy affects such things only slowly and indirectly, and the payoff may not come for decades.
Finally presidents can do very little about the business cycle – the quarterly ups and downs in the economy around the long-term trend.
In short, much of the economy’s trend is baked in the cake, and there is not much presidents can do to change it. To the extent they can exert influence there are institutional and political obstacles to doing so. The reality is that whoever wins, the economy will be pretty much the same for the foreseeable future.
The writer is a former senior economist at the White House, US Congress and Treasury. He is author of ‘The Benefit and the Burden: Tax Reform – Why We Need It and What It Will Take’.