One President’s Economic Legacy Is His Successor’s Burden
As President Barack Obama has learned, the economic conditions left by a previous administration can be a heavy burden on a president’s record.
As I argue in my book, “The President as Economist: Scoring Economic Performance from Harry Truman to Barack Obama,” about half of any president’s economic performance depends on how much he improved or damaged the economy he inherited (as shown by the trends in economic indicators). The other half depends on how many good economic years the president racked up while in office (based on the averages of the same indicators).
The book analyzes the inheritance factor for each president since 1946, allowing us to view Obama’s performance in the context of his peers. President Harry S. Truman, for example, handled well the enormous challenges of transitioning from wartime to peacetime, including the withdrawal of the enormous stimulus of war expenditures. U.S. government spending plunged from 41.9 percent of gross domestic product in 1945 to only 24.8 percent in 1946. As a result, GDP fell by 10.9 percent in 1946; it rebounded strongly in the early 1950s.
After Truman, President Dwight D. Eisenhower achieved a high ranking -- fourth out of the 12 presidents -- because many of the economic indicators were sustained at better-than-average levels on his watch. He had the second-lowest average inflation rate, at 1.4 percent; the highest average growth (10.5 percent) in the Dow Jones Industrial Average; a positive trade balance; and a reduction in the national debt of 16.2 percentage points (for second place). But because he followed Truman, the best performer by far, Eisenhower couldn’t improve on the trend. Several mild recessions during Eisenhower’s administration (in 1954, 1958 and 1960) also marred his record.
Even if President Gerald R. Ford didn’t do well politically, his economic performance was quite positive, ranking him fifth overall. That may be due mostly to lucky timing: His record includes the period when the economy was emerging from the 1974-75 recession. Ford’s two-year record, 1976 and 1977, shows rapidly improving growth rates of 5.4 and 4.6 percent, handing President Jimmy Carter a strong economy. The U.S. continued to grow at 5.6 percent and 3.1 percent in 1978 and 1979 before falling into stagflation by 1980.
In 1981, the year Ronald Reagan became president, the economy was in rough shape with inflation averaging 10.3 percent, unemployment at 7.6 percent and the Dow Jones Industrial Average at only 875 points.
The weak economy presented an opportunity for Reagan to put in place his tax-cut and deregulatory philosophy. With the help of the Federal Reserve’s monetary policy, Reagan achieved a turnaround. But because he didn’t inherit a strong economy, his averages on inflation and unemployment weren’t stellar.
For example, Reagan’s average inflation rate was 4 percent, which puts him in eighth place out of the 12 presidents, though his reduction in inflation, 5.5 percentage points, ranks first. Reagan’s average unemployment rate was 7.2 percent, well above the 1946-2011 average of 5.7 percent, making him 10th out of 12 presidents. His reduction of the unemployment rate, 2.3 percentage points, also ranks first, though it dropped below 7 percent only by the sixth year of his presidency.
In the transition from Clinton to President George W. Bush, the economy slowed down. A mild recession occurred shortly after Bush took office, with growth in 2001 averaging only 1.1 percent. In scoring his performance, however, the younger Bush (Bush 43) isn’t blamed for that recession because, as the book explains, each president’s indicators are lagged by one year to allow for the effects of the previous administration.
The bursting of the dot-com bubble may have played an important role in the slow growth of 2001 and 2002, but to be fair, the technology sector’s crash wasn’t the fault of Bush 43. The one-year lag gives the recession to Clinton. On the other hand, Clinton bequeathed to Bush 43 a huge fiscal gift: The debt as a percentage of GDP steadily fell from 1996 through the recession year of 2001, to 56.4 percent from 67.1 percent. That’s an improvement of 10.7 percentage points.
Comparisons have been made between the economy Reagan inherited and the one Obama inherited, with some claiming Reagan was dealt the worse hand. True, Reagan had to cope with high inflation and high interest rates and Obama didn’t, but other than those two indicators, the economy Obama took on was significantly worse.
For example, Reagan inherited a national debt at the end of Carter’s last budget (1981) of only 32.5 percent of GDP. Obama inherited a national debt of 85.2 percent of GDP in 2009, including debt owed by the U.S. Treasury to the Social Security trust fund and other intergovernmental obligations. With the economy still spiraling down, debt was rapidly climbing. Obama had far less maneuvering room than Reagan did to jump-start the economy. In addition, Bush 43 left Obama with 9.3 percent unemployment, while Carter left Reagan a 7.6 percent jobless rate. Bush handed Obama an economy in steep decline, with GDP decreasing 3.5 percent. Reagan came to office with GDP growing 2.5 percent, a 6 percentage point difference in growth rates.
Looking at Obama’s performance in the context of his inheritance, his record is respectable. Obama’s score is 79 points higher than that of Bush 43, greater than the difference in scores between second and sixth place in the presidential rankings, and comparable to the margin between Reagan and Carter.
Under Obama, the federal budget as a share of GDP shrank by 1.1 percentage points, compared with Bush 43’s increase of 7 percentage points. Obama so far has the lowest tax revenue as a share of GDP, at 15.3 percent, and the largest reduction in real interest rates of 3.5 percentage points. He also has better stock-market growth -- 5.5 percent against 1.9 percent for Bush -- and a reduction in the unemployment rate of 1.2 percentage points versus the second largest increase under Bush of 4.5 percentage points.
When Obama reminds voters how much his predecessor’s tax- cut and deregulation policies harmed the economy, and supporters of Mitt Romney, the likely Republican nominee, respond that Obama is “dwelling on the past,” it’s important to remember that a president’s legacy is, indeed, his successor’s burden.
(Richard J. Carroll is an economist at the World Bank. This article, the second of three, is based on his new book, “The President as Economist: Scoring Economic Performance From Harry Truman to Barack Obama,” published in June by Praeger. Read Part 1. The opinions expressed are his own.)
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To contact the writer of this article: Richard Carroll at email@example.com