The Economy: Who is to Blame?

When talking about the economy, some people like to say that a president deserves far less blame and far less credit than they actually get. This statement seems so reasonable and nonpartisan when you first hear it. Granted, Republicans often say this, and this allows them to avoid giving Clinton credit for the boom of the 1990s and avoid blaming George W. Bush for this recession. So it isn't so non-partisan.

But it is also wrong. There is a lot presidents can do about the economy. They can create conditions that lead to speedy recoveries from recessions - with the help of good policy from the federal reserve. And they can create conditions that lead to bubbles and an overleveraged a financial system.

The president has helped the economy recover but I think the president could be making it recover faster. There is no question that the stimulus helped. It just wasn't large enough (and maybe poorly targeted). But recent budget cuts at the federal, state, and local level have not helped the recovery. Federal reserve policy has been helpful, but again, they could be doing more. And President Obama could encourage them to do more. 

Also, I blame presidents for aspects of the Great Recession. President Clinton and President George W. Bush supported decontrol of the banking system, allowing banks to overleverage, putting the whole system at work. It also allowed a lot of risky borrowing by homeowners and investors alike. 

But there were other aspects that were outside the control of Presidents Clinton and Bush. Excessive savings by Asian countries had a role in our recent housing bubble.  

Also, I don't give Clinton too much credit for the 1990s dot-com boom. Sure, his decision to balance the budget and create surpluses helped create market confidence. But really, that boom was driven by technology and efficiency improvements (and a bit of a bubble). 

Mitt Romney's economic adviser, Greg Mankiw, had a good thought on evaluating presidents and their economic policy :

What you would not do is judge him by the outcome. Even the best physicians have patients die. And even witchdoctors can have patients recover. Randomness is a fact of life (and death). In the case of a medical doctor, the answer seems clear: Instead of looking at the outcome, you would judge him by the decisions he makes and treatments he prescribes. That is, you would examine whether he followed best practices for the circumstances he faced.

I think this makes a lot of sense. Following this method, we might blame Obama if we enter a double-dip recession caused by further government austerity. But we would not blame Obama if Europe's austerity causes them to have a double-dip recession and then bring us along for the ride or if the Federal Reserve decides to implement monetary tightening. 

Mitt Romney himself takes a different approach. When there is good news about the economy, he gives Bush credit. When the recovery is faltering, he blames Obama.

I think it is clear though that a president can have a very big impact on the economy. We just need to be nuanced (Romney has inexplicably attacked Obama for nuance) and thoughtful about what a president is and is not responsible for.