Part 3 of 3. Part 2 appeared Jan. 25.
This is the final segment in a three-part series discussing the factors that control the economy and the role that the president plays in steering the economy. There are several principles at play that must be understood — monetary policy, fiscal policy, fiscal lag and the economic consequences to certain executive branch actions taken by the Treasury Department or the president.
My previous columns discussed how monetary and fiscal policies affect the economy. This column will discuss the concept of fiscal lag and the economic role of the president.
Fiscal lag refers to the time between when it is recognized that an economic condition requires a monetary or fiscal policy change and the time the change in policy is effective.
Fiscal lag has two components.
First there is the period of time it takes to implement the change, which typically is shorter for monetary policies. Then, once a change is implemented, there is the time frame for the policy change to actually affect the economy.
When I took macroeconomics courses in college 50 years ago, we were taught that the second component of the lag period is typically 18-24 months. Depending on the severity of the economic condition, it might take longer.
For example, it took years for the policies implemented in response to the 2008 Great Recession to restore the economic growth rate.
Fiscal lag can be particularly problematic for incumbent presidents if they are trying address a troublesome economic condition.
For example, in the final year of George H. W. Bush’s presidency, both monetary and fiscal policies became quite expansive, but the economy did not improve until after the election.
His successor, Bill Clinton, enjoyed the economic rebound resulting from the expansive policies and was quick to claim credit for an improving economy. (Perhaps that is one of the reasons his political opponents called him “Slick Willie.”)
Hitherto, we have discussed all of the economic policies that are beyond the president’s control, but what can a president to do affect economic policies?
The biggest impact a president can have is convincing Congress to enact fiscal policies. In the 1950s Dwight Eisenhower convinced Congress to divert defense spending to developing the Interstate Highway System.
John F. Kennedy nudged Congress into repealing taxes that were imposed to finance World War II.
More recently, in 2017 Donald Trump convinced Congress to reconfigure a revenue-neutral tax reform bill into a $1.5 trillion tax cut.
But to be successful, the president’s party typically must control both houses of Congress.
Many fiscal measures, especially tax legislation, are extremely complicated, so Congress frequently passes legislation setting forth only general parameters with instructions for the Treasury Department to work out the details. Moreover, the executive branch can influence the effectiveness of regulatory oversight of fiscal measures.
It is more difficult for the president to influence monetary policy because the Fed is less subject to political pressure. But sometimes presidents can jawbone the Fed as Trump did in 2018 when it increased interest rates due to inflationary fears.
Trump also took an unusual measure of imposing tariffs on certain Chinese products and Canadian lumber. This action was both inflationary (because it raised the price of imported goods) and was contractionary because it was a tax assessment. It is interesting to note that Biden has not repealed those tariffs.
Although Trump inherited a fairly strong economy from Barack Obama, he pursued expansionary policies that risked becoming inflationary. However, the pandemic changed everything as governments around the world shifted to expansive monetary and fiscal policies to combat a crumbling global economy.
Inflation was inevitable, irrespective of who won the 2020 presidential election.
With respect to Biden’s impact on the economy, the Secure Act II and the Build Back Better program have been the extent of the fiscal policy during his administration. The Fed has pursued strong contractionary policies to stem inflation, which appear to be working.
Overall the U.S. economy has fared better than the rest of the world during Biden’s tenure, but a rising tide has not lifted all boats as the benefits of a stronger economy have not trickled down to middle-class and lower-income households. While the rate of price increases has slowed, goods and services are still more expensive than they were before the pandemic while wages, pensions and Social Security benefits have not caught up. So, for many there is the lingering perception that things have not improved.
That is Biden’s dilemma. He claims credit for an improving economy when it has not improved for many. In reality Bidenomics is not the direct result of the Administration’s actions, but rather is culmination of monetary and fiscal actions to very challenging economic circumstances.
Therefore, Biden probably should neither claim credit nor share the blame for the economy.
Jim de Bree is a Valencia resident. If you are interested in learning more about this topic, College of the Canyons offers the course, “ECON 201, Macroeconomics.”