The Economy: Who Calls the Shots?

In a blog post from last week, James Morone’s “The Democratic Wish” and his theory that American politics cycles through four stages which ultimately lead to a larger and larger government was used to compare the current presidential race to the 1824 presidential race. In the final two paragraphs of this post, the author connected this cycle to economics, something which I had never considered and found to be extremely interesting. In the comments, some people began discussing whether or not the president actually has any control over the economy, and, because I was unsure, I researched it.

It is true that when the economy is doing well in election season, votes for the incumbent are high. And when the economy is doing not so well, votes for the incumbent are low. This begs the question:  How much control does the president have over the economy?

In a purely capitalist society, recessions and peaks are part of a natural cycle and occur independent of presidential operations. However, the United States today is governed by a Keynesian style of economics. This is a way to cushion, or even avoid, recessions through the use of monetary and/or fiscal policy ie. changes in interest rates/ tax cuts and government spending. In essence, it is a way of putting bandages on a wound.

The task of keeping (or attempting to keep) the economy stable falls heavily on the chair of the Federal Reserve. This is a position appointed by the president and currently held by Janet Yellen. In addition to Yellen, members of the board of governors (also appointed by the president) have a majority of the twelve votes on the monetary policy committee which, if they’re in agreement, means they have the capacity to set the policy agenda. The system was set up in a way that was supposed to limit the president to appointing only the chair and two board members, but due to early resignations both George W Bush and Obama were able to appoint all board members. The difference between republican and democrat policy might not be very apparent in stable economic times, but becomes extremely obvious in times of crisis and can result in very different recovery times and determine the country’s vulnerability to future crises. Also, the president has a strong influence over fiscal policy when they are of the same party as congress.

Image result for the economy fed v congress

The United States treasury divides over 90% of all federal spending into mandatory spending and discretionary spending. Mandatory spending is spending that Congress legislates outside of the annual appropriations process (a process in which congress gets to decide how much money they want to allocate to different areas of the federal government) and is dominated by Social Security and Medicare programs. Discretionary spending refers to the portion of the budget that is decided by Congress through the annual appropriations process each year. Many times, congress receives its cue on where to allocate discretionary funds from the president (that is, assuming they are from the same party).

Additionally, the president also plays a role in determining how much taxation and social insurance occurs between income classes and how much protection workers have against lost income in times of unemployment. The president can also shape the policies of agencies such as the Federal Trade Commission that determine the regulatory environment in the U.S.

In summation, I believe that the president is typically given too much credit/blame when it comes to how the economy is doing because most of the control is held by the Federal Reserve and congress, but it would be wrong to completely disregard a president’s views on economic polices because they do in fact have some influence.

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1 Response to The Economy: Who Calls the Shots?

  1. rksmith8 says:

    First, I want to commend you for a really brief, but effective, explanation of basic economics. The concepts are not always easy and it can be difficult to explain exactly what you mean when dealing with the subject.
    Second, I present to you a fun conspiracy theory that came to me while reading your piece. It may be a bit of a stretch to say the least, but nevertheless I’ll discuss it. As you stated, the Board of Governors, including the Chair of the Federal Reserve, are all appointed by the current President, not elected. Essentially, they have no reason to work for the benefit of the people because they will never need their votes or approval. Furthermore, you mentioned that the President can suggest action to the appointed positions, but should they belong to a different political party, the appointed may choose to ignore those suggestions. For these reason, I ask if it could be possible that these members sometimes “sabotage” the economy while the opposing party holds the presidency. Clearly, they would not cause a collapse of the entire economy or anything of that degree, but it was a question that came to mind while reading: the possibility of these members to allow the economy to droop a little while a republican is president, then pick it back up for the democrats (or vice versa) in order to convince the public to vote a certain way in the future. Whether or not this has ever occurred, I have no way of knowing, but it’s an intriguing thought if nothing else.

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