Meltdown 101: A president's power over the economy

[November 06, 2008]  NEW YORK (AP) -- How much can the president -- one man -- shape the U.S. economy, a $14.4 trillion tangle?

Some economists say President-elect Barack Obama can have an outsized influence on the economy. They argue that a well-timed stimulus package could lead to a swifter recovery. He could also, with cooperation from Congress, shepherd in long-term policies that could remake trade, regulation or healthcare over a four-year term.

Others argue that the notion of presidential influence on the economy is nothing more than myth-making.

Economics columnist Robert J. Samuelson this summer dismissed presidential economic influence, including Reaganomics and Clintonomics, writing, "Sensible voters ... should recognize that if presidents could control the business cycle, recessions would never occur, there would always be 'full employment' and inflation would remain forever tame."

Those who agree say much of a president's economic legacy depends on luck and timing. If a president takes office during a valley in the business cycle, unemployment is likely to improve during his term as the economy grows. A president who takes office during great economic times may eventually preside over a foundering economy as growth turns to decline.

Here are some questions and answers about what's within a president's economic power and what isn't.

Q: In what areas do presidents exert the most economic influence?

A: Presidents are hugely influential in setting the policies that can shape the economy. Bill Clinton fought for the North American Free Trade Agreement, or NAFTA; both Clinton and the current President Bush championed deregulation. Franklin Roosevelt brought the nation Social Security.

Such initiatives make history. But their economic impact is hard to measure, said Dan North, chief economist at accounts-receivable insurer Euler Hermes.

"We've had Social Security since the Depression, but no one will be able to tell you what the return on having Social Security is because no one will be able to tell you what the last 70 years looked like without it," he said.

When presidential policies reshape the economic landscape, their results are sometimes difficult to see until years later. For instance, many economists now argue that the deregulation of the last decade set the scene for the credit problems that are now plaguing the economy.

The president also sets the agenda for what's called fiscal policy -- the government's plan for spending money and taxing individuals and companies.

But the independent Federal Reserve's monetary policy decisions on raising or lowering interest rates and pumping money into the banking system or pulling it out tend to have a much more immediate impact, North said.

"You can draw a strong correlation between what the Federal Reserve does and what the economy does a year later," he said. "There's no single thing you can really lay at the president's feet, unless he declares war."

Q: So what are a president's most important economic moves?

A: The answer may be his choice of appointees, since they can be have much greater immediate influence than his policy choices. Paul Volcker, who served as chairman of the Federal Reserve System under presidents Carter and Reagan, is widely credited with taming the runaway inflation of the era.

President-elect Obama, when he takes office, will be able to nominate a new Treasury Secretary to replace Henry Paulson. Federal Reserve Chairman Ben Bernanke's four-year term will expire in one year. Both positions are subject to Senate confirmation.

Q: What are Obama's economic priorities?

A: First will be deciding how to implement the $700 billion rescue program Congress passed last month. The initial idea behind the package was that the government would buy troubled assets from banks, but now the government is spending $250 billion to buy stakes in banks, in the hopes the banks will turn the cash infusions into loans.

Obama has proposed a 90-day moratorium on home foreclosures by companies getting assistance from the bailout bill. He's also called for tighter restrictions on executive pay at those companies.

Obama supports a second stimulus bill, perhaps as large as $150 billion, to boost the economy. He would spend more on government infrastructure projects to create jobs, and he would give more aid to states that are having to cut services.

The line he must walk on additional stimulus or bailout plans is that the more money the government prints to fund such plans, the greater the risk of increasing inflation.

[Associated Press; By ELLEN SIMON]

AP Economics Writer Martin Crutsinger contributed to this report.

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