On Presidential Candidates And Economic Policy Claims

Dear readers, this now-retired economics professor (who also taught finance in my last two decades in the classroom) always spent a few minutes in the fall of election years reminding my students of a lesson in introductory macroeconomics: presidents in the United States have only partial control over fiscal policy (taxing and spending) and absolutely NO control over monetary matters. The latter is the work of an independent central banking system, the Federal Reserve.

The Federal Reserve is NOT an elected group, nor was it one of the institutions created in the Constitution in the late 1700s. Instead, about 120 years later, after the country had been through horrific economic crises (sometimes for lack of Congressional or Presidential action, sometimes because of one or both of them acting in crazy, politically-motivated ways, and sometimes because of other factors), Congress and President Woodrow Wilson (a Democrat, but elected as leader of the Progressive movement) in 1913 brought the Federal Reserve Act into effect.

This legislation created a three-pronged system of (a) 12 independent regional banks; (b) a Washington-based Board of Governors, seven in number, appointed by the President to rotating 14year terms; and (c) a so-called Open Market Committee (which actually sets interest rates to control inflation and otherwise influence the economy), made up of the governors plus five presidents of the regional banks. One of those five seats is always filled by the New York Reserve Bank President, and the other four seats rotate among the presidents of the other 11 banks.

Why would we want such a group to be in charge of monetary policy? All we need to do is listen to some of the rhetoric in political speeches to hear the answer to that, dear readers. Vice-president Kamala Harris, for example, seems to favor price controls to bring down grocery prices. Well, it may be news to her, but price controls are a nightmare to economists, because once introduced, they totally upend the free-market signals producers and consumers rely on to make their decisions about how much to make available for sale and how much to purchase. President Nixon tried price controls on gasoline (with other goods as well) in the 1970s, and the lines of cars waiting to fill up went around the block at gas stations nationwide. Talk about a nightmare . . . (I guess someone else would be filling up President Harris’s limousine.)

Former President Trump has claimed he will put a tariff on all imported goods, in hopes that this will increase domestic jobs. Who pays tariffs, folks? It’s not the countries sending the goods to us: the tariff is added to their price and paid mostly by U.S. consumers. I don’t want to pay higher prices for bananas and coffee and cocoa, none of which can be grown here . . . much less higher prices for cars, which are already out of sight. (Does President Trump truly not understand this concept? Just who might be writing the checks for his groceries these days at Mar-A-Lago?)

If monetary policy were the purview of the President or Congress, instead of a panel of banking officials, what could we expect? Well, we could check out the historical inflation rates in many countries around the world over decades of time. In studies by the International Monetary Fund, other research bureaus, and “think tanks,” all are in agreement: higher independence of monetary authorities goes hand in hand with lower overall inflation rates. But those politically independent banks must be transparent about their decision-making, and must be accountable, which is why Jerome Powell, current chair of the Board of Governors, must testify before Congress twice every year and is subjected to at-times grueling questions.

OK, so presidents don’t control monetary policy: so what? Well, the only other direct ways for government to affect economic policy is through spending and taxing powers (“fiscal” policy). So the government budget and how we choose to pay the bills (taxes or borrowing) are clearly the president’s responsibility for influencing our economy. But not solely in the president’s control: Congress has as much if not a bit more influence Of indirect but significant importance to the economy and its well-being is the consumer and business confidence level: if consumers and businesses have a positive outlook, they will spend their income and/or hire workers and the economy will grow.And if the president “talks a good game” on the economy, the economy improves. Thus it’s leadership and the confidence we have in our leaders that are important drivers of our economy, for good or ill.

It’s about a positive attitude, dear readers. Keep a positive outlook, and life is brighter for you, personally, and if the President keeps a positive outlook, so much the better for all of us.