The Economic Cycle or the President
As we approach yet another presidential election, I often find myself fascinated at the
opinions, memes, and posts that find their way to me via social media. To some, reading
these posts can be like having their teeth pulled. What I tend to marvel at is the
perceptions that people have, especially on how powerful they think the person who sits
behind the Resolute Desk in the Oval Office.
In this short article I will briefly detail the Economic Cycle and how the public views the
economy and grades the president on something that is out of his or her control. In brief,
the Economic Cycle is the movement between expansion to contraction that repeats over
and over again.
This cycle, also known as the Business Cycle, has been in place and actively rotating since
the economy was being tracked. The average economic cycle in the United States has
lasted about five and a half years since 1950, but the length of economic cycles can vary.
The stages of the business cycle are irregular, with contractions lasting between two and
16 months and expansions lasting between 12 and 128 months.
This cycle is governed by aggregate demand, or total spending, within the economy.
Recessions occur when aggregate demand decreases, and expansions occur when it
increases. Factors that can affect aggregate demand include interest rates, consumer
expectations, and external issues. If the economy is growing too slowly, the central bank
may lower the cash rate, which causes commercial banks to lower interest rates. This
makes it cheaper to borrow money, which can lead people to save less and borrow or
spend more. A sudden change in expectations that affects consumer or investment
spending can be thought of as a shock to aggregate demand. These include random
shocks, or exogenous factors, such as weather changes, unexpected discoveries, political
changes, wars, energy shocks, natural disasters, and global events that influence foreign
trade.
The primary job of the Federal Reserve Board is to manage monetary policy and provide
stability in the monetary system. I believe our economy, though driven primarily by where
we are in the cycle, can be managed or mismanaged by the Fed. The president of the
United States simply has very little control over this. The only power that comes from the
oval office is that the US President is responsible for appointing the Federal Reserve
governors for a fourteen-year term (the Fed Chair serves a four-year term). Obviously, since
their term is fourteen years and the President’s is only four, they do not select all of them
during their term. They are staggered depending on when they were appointed.
Here is where it gets interesting if you are a nerd like me. Why do people blame the
president for where we are in an economic cycle? You have seen the posts...this is where
we were, and this is where we are now...vote for so and so. It’s ignorant.
Politicians are responsible for this misunderstanding along with the lack of education in
the school systems. Being that most people are under the impression that the economy is
under the direction of the president, depending on where we are in the cycle, will have a
direct effect on what they say.
The best example I can think of comes from the Bush Clinton presidential election.
Remember James Carville from the Clinton team? He is the one that is credited with
coming up with the phrase “It’s the economy stupid!” When HW Bush took office in 1989,
the unemployment rate was around 5% and we were close to the end of the cycle. While
the election was going on, the unemployment rate was over 50% higher clocking in around
7% and change. It’s the economy stupid astutely become the rallying cry of the Clinton
political army that marched straight into the White House. The economy, if you recall, was
in the back end of the cycle in the trough phase. Clinton was able to ride the wave of
economic expansion to peak during his two terms. Personally, I do not give the any
president credit for something they have no control over. But the masses do!
When President Obama took office, the cycle was in the trough phase. So, what comes
next? It is simple...we go to expansion and peak. He got to ride the wave! Where are we
today? You tell me. It sure appears that we are starting to contract. So, what do you hear
from the Trump camp? It’s the economy stupid. This is Biden’s economy. The merry go
round continues.
I can go back for decades and recite more data but to keep it simple, it really is the
economy stupid. But that is not on the white house.
Please keep in mind that I am not so blind as to state the sitting president has zero control
over the cycle. They do. But it is very small. As I noted above, extraneous factors can have a
massive impact on the cycle in the form of global events beyond the control of anyone.
Someone just happens to be sitting behind the desk at that time. Anything that a president
can do will not affect the cycle for many years as it takes years for any policy to have even
the slightest effect on the economy.
In conclusion, I feel that we should pay more attention to the economic cycle when it
comes to either blame or praise a politician. They will say and do anything they can to get
elected or reelected, including assigning blame or praise to something they have little to no
control over.
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