Who’s Better in the Driver’s Seat?

Economist friends who have served in government like to joke that after a newly arrived president has finished admiring the Oval Office, he starts hunting for the secret room containing the knobs that control the economy. It’s always a fruitless search. Still, presidents are not completely powerless to affect the economy.

Since World War II, the economy seems to have performed better under Democratic presidents than under more overtly pro-business Republican chief executives. Republicans from Dwight D. Eisenhower through George W. Bush presided over economies that grew, on average, at an annual rate of about 2.6%. By contrast, the gross domestic product under presidents John F. Kennedy, Lyndon B. Johnson, Jimmy Carter and Bill Clinton rose, on average, at about a 4% rate. Only three presidents left office with the unemployment rate higher than when they were sworn in: Richard M. Nixon, Gerald Ford and George H.W. Bush.

Shareholders also have done better when Democrats resided at 1600 Pennsylvania Ave. Between 1953 and the end of the Clinton administration, share prices averaged about a 10% annual increase when Republicans controlled the White House, well below the 15% during Democratic administrations. If the more-than-10% decline in the Standard & Poor’s average during the current Bush administration is included, Republicans have been even worse, relatively speaking, for shareholders. But the healthy-profits picture makes it premature to include President Bush in this tally, as share prices might recover by year-end.

Interest rates tell a different story. During the administrations of Kennedy, Johnson and Carter, interest rates rose. Clinton is the only Democrat in modern times to leave office with interest rates lower than when he was sworn in. Republican presidents, on the other hand, typically depart with interest rates lower than when they moved into the White House. Only Nixon, he of wage-and-price controls, left Washington with rates up; Ford, Reagan and both Bushes presided over falling rates.

A president’s economic performance is affected by many factors. For one thing, every president inherits an economy shaped by his predecessor. Nixon inherited the inflation caused by Johnson’s unwillingness to choose between guns and butter during the Vietnam War. And George W. Bush took over a weakening economy. Clinton was luckier: He was handed a recovery that began in the last months of George H.W. Bush’s single term, and a banking system newly restored to health.

Some presidents squander their inheritance; others build on it. Former President Bush frittered away the tax and regulatory reforms bequeathed to him by Reagan; Clinton capitalized on the peace dividend left by Reagan by putting the fiscal house in order.

Then there are what former British Prime Minister Harold Macmillan said he feared most: “Events, dear boy, events.” Johnson had Vietnam; Carter, the emergence of the OPEC cartel; George W. Bush, Sept. 11.

And just as presidents use their economic legacies differently, so do they differ in the wisdom of their responses to events. One of the least wise responses to events was Nixon’s to inflation -- he instituted wage and price controls. Another was Carter’s slaughter of the animal spirits that John Maynard Keynes contended drives business investment; this occurred when Carter donned the hair shirt of “national malaise.” Contrast these responses with Reagan boosting the national psyche and signaling to then-Federal Reserve Chairman Paul Volcker that he would take the political heat if Volcker would jack up interest rates to wring inflation out of the economy, and with the current president’s cutting taxes to stimulate the economy at a time of recession and terrorist threats.

But presidents are not only bound by economic conditions they inherit and events they cannot control. They are also constrained by two facts of political life. Congress will have its say. And the Federal Reserve might not comply with a president’s wishes, a course chosen by Alan Greenspan when he refused to stimulate the nascent recovery that would have boosted George H.W. Bush’s reelection. Greenspan may be doing it again to President Bush by raising interest rates, thereby cooling the housing market and consumer demand.

Is the past prologue? In one sense it is. Both Bush and John F. Kerry are well within the economic traditions of their parties. Bush is reluctant to increase the regulatory burden on industry; Kerry displays no such reluctance. If a President Kerry continues his party’s traditional insensitivity toward weighing the costs and benefits of regulation, business costs will rise. And if he fails to acknowledge the beneficial economic effects of Kennedy’s and Reagan’s tax cuts and reforms -- and insists on substantially increasing the marginal income and Social Security tax rates of those making more than $200,000 a year -- economic growth will slow sooner or later. Add a dash of protectionism to appease the trade unions, and you have a rather unappetizing stew.

On the other hand, if a reelected Bush continues to increase federal expenditures in a way that would make Johnson proud, he will be ignoring the lesson taught by Clinton: Fiscal probity has its advantages, even though it cannot repeal the business cycle. Conservatives appalled by the president’s crack, “It must be a budget, it’s got numbers,” and Vice President Dick Cheney’s famous remark, “Deficits don’t matter,” hope a reelected Bush will feel free enough of political pressures to press for the fundamental tax reforms he says he will fight for: higher taxes on consumption to stimulate savings, lower taxes on investment to stimulate growth.

So, if you believe that history repeats itself, Democrat Kerry might be your man. But you will have to forget the mess that Carter made -- rampant inflation and double-digit interest rates -- and ignore Reagan’s achievement of lowering both inflation and unemployment, a first in modern times. If you believe history teaches that lower tax rates stimulate growth -- Kennedy, Reagan and George W. Bush -- and antipathy to governmental regulation is crucial to a successful economy, Bush is your man.

And if you believe poet John Wolcot had it right more than 200 years ago when he urged, “Deal not in history .... ‘Twill prove a most unprofitable trade,” you will just have to peer into the future and decide between a candidate who prefers lower rather than higher taxes, less rather than more regulation, more rather than less reliance on individuals to solve our healthcare and Social Security problems, and one who prefers to take the country in what he calls a “new” -- actually, quite an old-fashioned Democratic -- and opposite direction.