Both our current president and his immediate predecessor share a characteristic: they both make frequent references to the “legacies” they received upon taking office. Barack Obama constantly blamed his troubles on the mess that George W. Bush had left him; and Donald Trump constantly refers to the economy’s mess that Obama had left him.
In a sense, both were right to make the repeated references to their legacies. And each, in his own way, played the hand he was dealt.
The American presidency encompasses a lot more than economics, but the economy is usually an important part of a president’s legacy when his successor is inaugurated. That was certainly the situation for Obama as well as for Trump.
It is worthwhile to examine these legacies to see how the presidents have dealt with them and to understand their impact on the prospects for our economy. It is particularly important that we understand this as new economic policy decisions have to be faced.
Obama inherited a terrible economic mess. Our financial markets had survived a near-total collapse, but they remained shaky, nervous and barely functional. There were enough layoffs on Wall Street to create a mini-recession of its own.
No one blamed Obama for the mess, but his efforts to pull us out of the recession that followed were a sorry combination of foredoomed and outdated ideas that cost billions but were only marginally effective at best.
His major effort to jump-start the economy involved a deficit-financed stimulus program costing nearly a trillion dollars. But most of the money was directed into the economy’s least productive sectors. As a result, it became a holding action and our economy languished as the pages of the calendar flipped over. By the end of his second term our economy seemed hopelessly bogged down.
Obama’s further options appeared limited by the financial markets. The U.S. government was already financing a huge accumulated deficit, and that did not include over two trillion dollars’ worth of crisis-related bonds held by the Federal Reserve.
Trump’s resultant inheritance was an economy that was resilient enough to have survived the worst economic crisis since the Depression of the 1930s but was having trouble coping with a lethargic recovery. The shrinking middle class was being worn down, and uncounted numbers of people were growing dispirited by the fading of the traditional American dreams. And no one’s spirits were lifted by experts proclaiming that this was the “new normal.”
When the current president looked at the economy he inherited, he calculated that unless we improved our economic growth rate our country would eventually go bankrupt – because it wasn’t generating enough to pay for the growing entitlements and other governmental expenditures. Gradual, almost minuscule improvements in incomes and employment weren’t good enough.
In that light, the radical changes in our economy that he has pursued make sense. But each element brings its own risks. The federal tax cut, for example, was a gamble that its positive effects on the economy — and on public confidence — would more than offset the negative effects of any net reduction in Treasury receipts.
So far, the tax reduction has been a resounding success, and the recent Treasury receipts data show that receipts from individual tax payments, instead of declining, rose since the tax cuts. That doesn’t mean that the risk wasn’t there, for no one knew with certainty what would happen. And, in fact, there is a continuing risk that the positive impact of the federal tax cut could be undermined by the seemingly insatiable funding demands of state and local governments.
Many of Trump’s other economic actions are aimed at the same target: economic growth. His emphasis on revitalizing manufacturing is based in no small part on the fact that it is easier to raise productivity in the manufacturing sector than in the service sector. And rising productivity boosts both wages and economic growth.
The same can be said of his efforts to rebalance our global trade balance. Our current trade deficit is a drain on our gross domestic product and, while consumers usually benefit, has generally negative effects on our employment and wages.
Economics is not the only way to evaluate a presidency and it may not always be the best way. Like cause-and-effect confusion, we can sometimes misdirect credit or blame due to mismatches in the time line. Our economy does not always move at the same speed of other events, including economic policy changes.
An economics perspective on the legacies that presidents receive and how they deal with them, though, can give us a clear sense of their strengths, skills and shortcomings — without the distorted images that a polarized political viewpoint so often provides.