How Much Power Does The President Really Have Over the Economy?
By Christopher R. English, President of Lumen Capital Management, LLC
We are now a couple of weeks past the much-anticipated 2020 presidential election. In the era of the endless news cycle and our current heightened emotions, there’s a lot of opinions and misinformation flying around. Given all that’s happened this year, many wonder about how much power any president has to control the economy. We can’t fact check every tweet coming from the current occupant of the White House, but we can shed some light on how much power the President has over the economy.
The Limits Of Power
Well, the short answer is: It depends. Presidents are usually awarded praise or denounced as failures depending on the state of the economy during their tenure in the Oval Office. But the modern American economy is a complex, many-faceted system, and the President has more influence over some aspects of the economy than others.
The stock market and the economy are not the same thing. However, markets do reflect the current state of the economy. Also, since markets by and large are looking into the future, the President doesn’t truly have as much control over investor behavior as many think (although the choices they make can certainly have short-term effects on investor confidence and market performance, particularly on certain securities and sectors).
For example, history shows us that the stock market performance at the beginning or end of a President’s term in office isn’t necessarily indicative of their choices. It may have more to do with the naturally-occurring cyclical nature of the economy, socio-political changes, or a myriad of other factors that can impact the market’s performance. Research tells us that there is no trend driving the market returns of a particular political party, and the President probably shouldn’t receive much credit or blame for stock market performance during their term, as evidenced below in the hypothetical growth of $1 invested in the S&P 500 since January 1926 until December 2019.
As you can see from the chart above, the party that controlled the Oval Office didn’t have as much impact on the markets as events that occurred like the Great Depression, World War II, the tech boom in the late 1990s followed by the crash in 2001, and the Great Recession in 2008 followed by the recovery. Similarly, the party that controls Congress also doesn’t show any pattern of market performance.
Which brings us back to our main question. What influence does the President have? Common powers the President does have include (but are not limited to):
• Proposing fiscal policy (i.e., tax law) and regulatory policy
• Appointing Federal Reserve governors
• Responding to external shocks and crises
Fiscal and Regulatory Policy
Upon entering office, the President steers fiscal and regulatory policy. The tax and regulatory policies they propose, if passed by Congress, have major effects not only on how citizens are taxed but also on how businesses are taxed and regulated. For example, President Trump’s Tax Cuts and Jobs Act of 2017 lowered income tax rates for most people, increasing spending power and boosting savings and investments. It also lowered the corporate tax rate from 35% to 21% in an attempt to promote job creation and business reinvestment.
Additionally, the President oversees regulatory policy, which aims to strike a balance between efficiency and equity. Regulatory policies limit what companies can do in the marketplace in an effort to protect vulnerable consumers, and these policies apply to many industries, such as the finance, manufacturing, and energy sectors. Typically, deregulation is believed by many to be better for businesses, as less regulation frees up resources that can be used for more productive goals, thus boosting the economy.
Federal Reserve
The Federal Reserve (more commonly known as the Fed) is an independent agency from the federal government that provides the nation with financial stability and flexibility. In addition to supervising banks and other financial institutions, the Federal Reserve oversees monetary policy, which can involve governing interest rates (among other things) to achieve macroeconomic policy objectives, such as hitting certain targets for unemployment levels and inflation rates.
Although the Fed is an independent agency, the President appoints the seven members of the Board of Governors. Their terms are meant to be staggered and can last up to 14 years to maintain independence from the Oval Office. Of these seven members, the President also nominates the chair and vice-chair for the Federal Reserve. The President’s appointees work to fulfill the President’s goals for national employment, price stability, and financial stability.
External Shocks and Crises
The President is also responsible for making economic decisions in response to external shocks and crises. The President’s response to the current COVID-19 crisis provides an illustrative example. The global pandemic has jolted national economies around the world and affected American citizens across all income levels. The response to this shock was an economic stimulus package known as the CARES Act. While it is up to Congress to draft legislation such as this, the President is responsible for signing stimulus packages into law, {which he did on March 27} and the President’s administration usually plays a large role through negotiations on what such laws contain as it did here. This stimulus package offered economic assistance to American individuals, families, and businesses. Other external shocks that might require the President to respond with economic policy include commodity disruption, natural disasters, and warfare.
Financial Planning In Uncertain Times
2020 has been chaotic (to put it mildly), and the current state of American politics is just another thing likely keeping you up at night. Before you start to worry, it’s important to remember that the economy is driven by many complex and interconnected factors, of which politics is only one small component. Ultimately, any President’s tangible influence over the economy is uncertain and difficult to prove, and keep in mind that policies implemented earlier in presidential terms can have long-term, far-reaching effects that current economists may not realize in short-term analyses.
Our team at Lumen Capital Management is serious about our job of stewarding our clients’ finances well, and part of that stewardship involves continually educating ourselves and you about relevant economic changes. If you have questions, we can help answer them. And if you’d like to feel more secure about your portfolio, consider partnering with a financial advisor who takes your full financial situation into account, current economic environment included. If you think our firm would be a good fit for your financial needs, call my office at 312.953.8825 or email us at lumencapital@hotmail.com.
About Chris
Christopher R. English is the President and founder of Lumen Capital Management, LLC-a Registered Investment Advisor regulated by the State of Illinois. A copy of our ADV Part II is available upon request. We manage portfolios for investors, developing customized portfolios that reflect a client’s unique risk/reward parameters. We also manage a private partnership currently closed to outside investors. Mr. English has over three decades of experience working with individuals, families, businesses, and foundations. Based in the greater Chicago area, he serves clients throughout Illinois, as well as Florida, Massachusetts, California, Indiana, and other states. To schedule a complimentary portfolio review, contact Chris today by calling 312.953.8825 or emailing him at lumencapital@hotmail.com.
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(2) https://darrowwealthmanagement.com/blog/stock-market-performance-by-president-in-charts/
posted by CR English at 6:22 PM
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