Presidents and the Economy: Reflections Post President’s Day

The most important economic development presidents built economic institutions, provided a legal system that enforced private contracts and protected exchange, shaped or expanded free markets, and/or reacted forcefully and positively to contain an economic crisis. Presidents who shaped American economic development needed both opportunity and action.

By Ned Hill, A One-Handed Economist, and Professor of Public Administration and City & Regional Planning at The Ohio State University’s John Glenn College of Public Affairs, powered by The MPI Group

In an earlier post on President Obama’s performance in guiding the U.S. economy through the Great Recession and the ensuing recovery, I asserted that a president’s economic legacy rests on one of three types of accomplishments:

• Did the administration face profound economic crises and react well to them?
• Did they institute policies that either seeded or triggered profound economic crises—even if the crisis appears years afterward?
• Most importantly, did the administration positively affect the long-term health and growth of the US economy through their policies and actions? And, is that growth reflected in the improved wellbeing of Americans?

This lead me to think about the performance of all of our presidents, so I looked at the literature. What I found was far from satisfying. There are two very good, recent, and somewhat technical articles that associate the terms of post-WWII Presidents with the business cycle—at times referred to as the political business cycle.[1] These two articles also summarize the existing literature well. They conclude that during the post-WWII period the macroeconomy, measured in terms of real Gross Domestic Product growth rates and unemployment rates, performed better under Democratic presidencies than under Republican ones. But neither can attribute the empirical performance gap to specific or identifiable public policy actions.

Blinder and Watson write: “Democrats would probably like to attribute a large portion of the D-R growth gap to better fiscal (and perhaps monetary) policies, but the data do not support such a claim. If anything, and we would not make much of such small differences, both fiscal and monetary policy actions seem to be a bit more pro-growth when a Republican is president, even though GDP grows significantly faster under Federal Reserve chairmen appointed by Democrats than by Republicans.” (p. 1043) They attribute the differences to “more benign oil shocks, superior total factor productivity (TFP) performance,” stronger growth internationally, and faster defense spending if the Korean war period is included.

Comiskey and Marsh conclude that Democrats have benefited from taking office during times of high unemployment and low inflation [in other words, being voted into office near the bottom of business cycles] and Republicans have been awarded Presidential power at times of low unemployment and gathering inflation [or at the top of business cycles]. One party got to predominantly ride the economic rollercoaster up, and the other party down. Is there something to be made of this timing? Is it luck that business cycles line up in a way that favors Democrats over Republicans? Or do voters in the modern era turn to Democrats when economic times are hard and shift to Republicans when the seas are less turbulent, resulting in 8-year election cycles that roughly align with business cycles? Comiskey and Marsh do not speculate on this.

I next looked at C-SPAN’s recent poll of 91 Presidential historians and biographers who scored all 43 former Presidents [Grover Cleveland was both the 22^nd and 24^th President] on 10 factors on a one to ten scale.[2] C-SPAN averaged the score in each category and added them together to produce their Presidential Leadership Score. One of the categories covered in the survey was “economic management.”

The C-SPAN panel put Washington at the top of the list for economic management with an average score of 84.1 out of 91, followed by Lincoln. Coolidge was the median president—half were above him and half below—with a score of 52.7. There was a separation in scores between the 10^th and 11^th positions on the list that also corresponds to the results of a statistical test I ran on the data [Besides, top 10 lists have an appeal evident in social commentators from Moses to Letterman.]

The C-Span top ten are:

Arguments will ensue over the inclusion of Clinton and Obama, the exclusion of Reagan [who was in 16^th position with a score of 60.9 and was bracketed by the Adams family—John ahead and John Quincy behind], and possibly about a tilt toward the modern era of the activist Presidency. My list differs a bit from the C-SPAN group, but not wildly.

In my view, the most important economic development presidents built economic institutions, provided a legal system that enforced private contracts and protected exchange, shaped or expanded free markets, and/or reacted forcefully and positively to contain an economic crisis. Presidents who shaped American economic development needed both opportunity [crisis] and action [agency]. Frequently their actions were shaped by advisors such as Hamilton for Washington, Gallatin for Jefferson, FDR’s Brain Trust, and General George Marshall and Vannevar Bush for both FDR and Truman. These advisors were brilliant pragmatists, not economists.

The economic development greats start with the founders—Washington, Adams, and Jefferson. We then move on to Lincoln, followed by embracing the economic reformers who built economic governing institutions for the industrial age, Teddy Roosevelt and Wilson. Applaud the presidents who led the nation through back-to-back existential crises of depression, world war and cold war, FDR, Truman and Eisenhower; and acknowledge the contributions of both Kennedy and Johnson in taking the steps needed to free up important components of the labor market.

My emphasis is not on short term fluctuations in the business cycle during a president’s term in office but on how their policies and actions developed the competitive assets of the economy for the long haul. These include developing the laws and institutions that support free markets, enforce contracts, and tame instincts toward monopoly. The actions of some presidents supported investments in education and science that made the nation smarter and more productive. Presidents also invested in infrastructure and put in place policies that encouraged businesses to invest in plants and equipment, or put in place business assistance programs that improved competitiveness—this includes agriculture extension and the Manufacturing Extension Partnership.

George Washington was the father of the country and also the father of a free market economy. He followed Hamilton’s advice to accumulate the state’s war debt to establish a federal debt and build a US national credit record, an act of economic nation-building. Washington also gets credit for establishing the First U.S. Bank. Most importantly, President Washington had a national vision for the U.S. economy and saw the intersecting economic interests of the states; and he institutionalized that vision by appointing Supreme Court Justices who were interested in nation-building.

Adams needs to be recognized for appointing John Marshall to the Supreme Court. The Marshall Court provided laissez-faire restraints to keep the government from interfering with free markets—especially at the state and local level where markets are more easily captured by local business interests looking to protect their bottom lines. Marshall’s precedents, coupled with the Commerce Clause of the Constitution, are fundamental to building a national free market.

Jefferson is included for making the Louisiana Purchase and for his appointment of Secretary of the Treasury Gallatin. Gallatin was the longest serving Secretary of the Treasury, serving under both Jefferson and Madison from 1801 to 1814. Jefferson and Gallatin were responsible for establishing the independence of the Department of the Treasury and for continuing support for the First Bank of the United States. Gallatin reduced the new nation’s Revolutionary War debt, increased internal taxation to pay for the War of 1812, and financed the Louisiana Purchase. His 1808 plan for internal improvements of canals and roads along the Atlantic and across the Appalachians was supported by Madison, but upended by the War of 1812 and the mountain of debt that war triggered.

Abraham Lincoln and George Washington are the two greatest American economic development Presidents. Lincoln kept the nation together by winning the Civil War. In so doing,  he made massive contributions to the economic development of the nation.

• The 13^th Amendment freed a large segment of the national labor market and stopped slavery from competing against wage labor.
• Lincoln provided the raw material for a non-agricultural development future of the old Confederacy by ending slavery and setting the stage to end American apartheid.
• Lincoln established the land-grant college system, democratized higher education, and provided a place for the “practical arts” in higher education as well as harnessing science and technology in support of industry.
• Lincoln also passed legislation that enabled the railroads to expand to the west beginning the process of city-building and development west of the Mississippi, establishing a continental market, and attracting migrants to the nation—primarily from Europe
• The war itself promoted urbanization, mass production, and set the stage for the industrialization of the U.S. economy that followed.
• The necessity of financing the war led to the circulation of a national paper currency—the Greenback—but this lesson would not take root for another half century.

The Progressive Presidents: Theodore Roosevelt, Taft, and Wilson. Together they established the machinery for the regulation of monopoly, industry and the labor market. They also set in place the Federal Reserve System, which was established in 1913 under Wilson. All three administrations moved the emerging industrial economy from a pure laissez-faire system to a modern, urbanized, mixed economy.

Franklin Roosevelt has multiple claims to being on this list, first because of his actions during the Great Depression and again for his leadership during the Second World War.

Roosevelt acted against 19^th-century economic orthodoxy and embraced Keynesian principles in his response to the Great Depression.  The President was not dogmatically following the world’s second most influential free market economist [Adam Smith is first, Keynes comes in second]. Instead, he reacted pragmatically to the crisis and used tactics of public spending and employment to ease human suffering, stem unemployment, and end “idleness.” These actions also stimulated aggregate demand and were Keynesian in outcome. His fiscal activities were coupled with spending on infrastructure and programs, such as rural electrification and the activities of the Works Progress Administration, that provide economic benefits to this day. Also important was Roosevelt’s focus on southern rural poverty and the near serf-like conditions of tenant farming. Here the invention of the Tennessee Valley Authority joins a list of economy-building public interventions.

FDR and Truman shaped the peaceful expansion of the US economy over the past 70 years first by successfully prosecuting the Second World War and then by winning the peace.

• Truman’s Marshall Plan established an economic environment that stimulated global free trade and economic integration.
• The GI Bill —the Servicemen’s Readjustment Act of 1944—was a model of investment in the nation’s human capital. This action took place on Roosevelt’s watch.
• Truman gets credit for establishing Big Science, which is the foundation of technology-based economic development, with the establishment of the National Science Foundation, and establishing the American-style research partnership between the federal government and research universities. The Council of Economic Advisors was formed in the second year of Truman’s term in office.

Eisenhower earns a nod for the Interstate Highway Act, not because of the direct employment that it created through its construction, but because of the economic benefits derived from creating a unified continental market and making the American suburb possible. Suburbs changed American patterns of consumption and production by stimulating the home-building and automobile industries, making efficient single-floor production possible, and creating a competitive alternative to monopolistic railroads that flourished on predatory pricing.

Kennedy and Johnson get credit for extending civil rights, making major investments that enhanced the competitive position of the U.S. labor market through education funding, and for directly addressing economic inequality and opportunity.

Reagan has to be considered for supporting Fed Chairman Volker in battling cost-push inflation, pushing deregulation forward and for acting to curb some of the regulatory excesses of the New Deal. Reagan may have been the most prominent inadvertent Presidential Keynesian when his administration lowered tax rates and ran up large Keynesian deficits. Reagan’s downside is in taking tax rates too low and creating an unnecessary federal debt. I am not ready to put him on the list. A stronger case for the inclusion of President Reagan is made by Robert M. Merry (http://www.theamericanconservative.com/articles/the-greatest-presidents/) in his consideration of the rankings that come from the C-SPAN data.

Obama will be judged for his strong actions to save the Detroit-headquartered automobile industry, for engaging in fiscal stimulus to help stem the Great Recession, for fully supporting the Federal Reserve Bank in its efforts to create liquidity in the economy in the darkest hours of the Great Recession, and for bringing near-universal health insurance into being—even if the law is changed, the principle has been established.

I end up with 12 in my list:

• Washington and Adams, the founders of a national free market.
• Jefferson for the Louisiana Purchase and support for Gallatin.
• Lincoln for saving the nation and creating monumental economic development institutions.

Roosevelt, Taft, and Wilson, the reformers of the industrial age:

• F.D. Roosevelt, America’s Keynesian.
• FDR, Truman, and Eisenhower, for building institutions that created human capital and knowledge.
• Eisenhower, the creator of suburban, industrial America.
• Kennedy and Johnson, investors in human freedom and capital.

President Obama has to be considered for policies that stopped the 2^nd Great Depression and improved health outcomes.  His contributions to the economy are being denigrated by those on the left who complain about the decline in homeownership and the income distribution. The right is cranked up over small increases in taxes on the 1-percent to pay for health care and for making health care an entitlement. President Obama’s case needs to be considered with a little tincture of time.

It just proves that today’s fractured American politics leaves nothing in the middle of the road but two yellow lines, dead squirrels, and a one-handed economist.  The squirrels and  one-handed economist are pleased to welcome a former left-leaning president to our part of the road.

[1] Blinder, Alan S. and Mark W. Watson. 2016. “Presidents and the US Economy: An Econometric Exploration.” American Economic Review 106(4): 1015-1045. Comiskey, Michael and Lawrence C. Marsh. 2012. “President, Parties, and the Business Cycle: 1949-2009. Presidential Studies Quarterly 42(1): 40-59.

[2] C-Span. Survey of Presidential Leadership, February 17, 2017. https://www.c-span.org/presidentsurvey2017/

© 2017 A One-Handed Economist featuring Ned Hill is powered by The MPI Group