Cast your mind forward to October 2014. The economic rebound for which Barack Obama had worked so hard and hoped so long is finally underway: Growth is humming, unemployment is steadily dropping, and the stock market is hitting one record high after another. But unfortunately for Obama, he’s not in the White House anymore — and President Mitt Romney is the man whose approval ratings are being carried aloft by the Dow.
Romney is widely considered to have won Wednesday night’s presidential debate by attacking Obama’s economic record and promising, if elected, to restore job growth and middle-class incomes. The irony is that, if Romney wins the election and the economy rebounds on his watch, much of the recovery will be due to efforts undertaken during the Obama administration.
Every president faces two painful, immutable truths about the economy: First, he has far less influence over it than voters think. Second, even when his actions make a difference, it is often not felt until after he’s left office, and not always in the expected way.
Consider the two most successful presidents of recent decades. Ronald Reagan is often credited with sparking an economic renaissance by defeating inflation and deregulating the economy. But it was Jimmy Carter’s appointment of Paul Volcker as chairman of the Federal Reserve that spelled the death knell for inflation (not to mention Carter’s reelection bid), and the deregulation of airlines, trucking and railroads all began under Carter’s watch.
Similarly, the economic boom during Bill Clinton’s presidency was kick-started by an extended decline in long-term interest rates, which began with the budget deal George H.W. Bush signed in 1990 at great personal cost. And if you want to go really big-picture, the technology bubble that gilded Clinton’s second term can be traced to investments in computer-network technology that began under President Dwight Eisenhower in the 1950s.
Of course, not everything presidents bequeath to their successors turns out well. Obama’s term has been cursed by the effects of a financial crisis that bears the fingerprints of every president going back to Lyndon Johnson, who turned mortgage giant Fannie Mae over to private shareholders, as well as Carter, who ushered in the era of deregulated finance by loosening interest-rate controls. And for all the problems George W. Bush left for Obama, he also did him one big favor by creating the bailout fund that helped end the crisis.
Paradoxically, the same forces that made for such a weak recovery during Obama’s first term suggest that the next four years will be better, regardless of who holds the White House. Right now, businesses, households and governments are all trying to wrestle down their debts. That “deleveraging” saps spending and blunts the power of low interest rates. But eventually it ends, on average six to seven years after the debt (as a percentage of GDP) peaks, according to the McKinsey Global Institute and a study by economists Carmen and Vince Reinhart.