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How Much Power Does The President Really Have Over The Economy?

By Darren Wurz

 

We are less than a month away from the much-anticipated 2020 presidential election. Debates are in full swing, the political news cycle is endless, and we’re hearing plenty about the platforms the candidates are campaigning on, everything from international relations to immigration to—of course—the economy. 

 

While it’s normal to hear about potential tax changes, jobs, and trade policies at this point in an election year, the impact of COVID-19 on our economy has made politicians’ promises to decrease unemployment, cut taxes, and increase GDP even more attractive. But an important question remains: How much power does the President really have over the economy? Will their plans really make a difference?  

Power And Its Limits

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 economy is a complex, many-faceted system, and the President has more influence over some aspects of the economy than others. 

 

In reality, the President doesn’t have much control over the stock market (although the choices they make can certainly have effects on investor confidence and market performance). But how the market is performing at the beginning or end of a President’s term in office isn’t necessarily reflective of their choices. It may have more to do with the naturally occurring cyclical nature of market performance, socio-political changes, or myriad of other factors which can impact the market’s performance.

 

For example, history 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.

 

(1)

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.

(2)

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. Proponents of lower taxes argue that lowering taxes leads to greater economic activity by incentivizing companies to hire more people and invest in research and infrastructure. However, tax cuts do not always correspond to job creation and business reinvestment. Companies may use this cash for other purposes like buying their own stock instead. And ironically, unemployment has been the lowest in our history at times when corporate income taxes were the highest. 

 

The President also oversees some regulatory policy, which aims to strike a balance between efficiency and equity. Regulatory policies limit what can be done in the marketplace to protect vulnerable consumers, and applies to many industries, such as finance, manufacturing, and energy sectors. Deregulation may be better for businesses, as less regulation frees up resources they can use for more productive goals, thus boosting the economy. However, deregulation may also result in customers being exposed more to fraud, excessive risk taking by companies and higher levels of inequality which in turn could negatively affect the economy. 

The Fed

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. 

 

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.

Surprises And The World Around Us

The President is also responsible for making economic decisions in response to external shocks and crises. The global pandemic has jolted national economies around the world and affected American citizens across all income levels. Other external shocks that might require the President to respond economically include oil price wars, natural disasters, and warfare.

Financial Planning In Uncertain Times

Ultimately, any President’s tangible influence over the economy is uncertain and difficult to prove. The economy is driven by many complex factors, and policies implemented in earlier presidential terms can have long-term, far-reaching effects that current economists may not realize in short-term analyses.

 

Whatever questions you might have, we can help you answer them. At Wurz Financial Services, we are 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, and helping you make the most optimal financial decisions. If you’d like to feel more secure about your financial and retirement plans, consider partnering with a financial advisor who takes your full financial situation into account—current economic environment included. Schedule a no-obligation consultation, and together let’s find out if we’re the right people for you to depend upon during your journey to a comfortable retirement. Contact us at 859-291-9879 or darren@schmerge.com today! 

 

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About Darren

Darren Wurz is a co-owner and financial planner at Wurz Financial Services, an independent, family-owned and operated financial services firm dedicated to helping its clients transition from their working life to a comfortable retirement with confidence. Darren received his master’s of science degree in financial planning from Golden Gate University and also holds the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. He operates the Northern Kentucky/Cincinnati office of Wurz Financial Services and is an active member of the Covington, KY rotary club, the Northern Kentucky Chamber of Commerce, and the Covington Business Council. To learn more about Darren, connect with him on LinkedIn.

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(1) https://www.forbes.com/sites/kristinmckenna/2020/08/18/heres-how-the-stock-market-has-performed-before-during-and-after-presidential-elections/#7ab8c9b94f86

(2) https://darrowwealthmanagement.com/blog/stock-market-performance-by-president-in-charts/

 
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