Politics has been called “the art of the possible.” Well, so what! Just because it’s possible doesn’t necessarily make for good policy. The whole game of politics troubles me — both the art and the actions — and plenty of polls have shown that I am not alone. The more I know about economics, the more troublesome politics becomes. Why? One need look no further than the current presidential election cycle heating up here in the United States. All the claims about who will achieve what, where, and when are often so ill-founded they are downright laughable. Yet somehow these ridiculous claims live on in the media and even become campaign issues. Curious, isn’t it?
Oftentimes, we hear pundits ask: What US presidents were good for the stock market? How did the markets respond to a particular president? Or what political party has had more success in the markets? All of these questions are doomed to failure. Is it not possible for a president of one party to enact a policy typically favored by another party? For instance, Bill Clinton signed into law the Personal Responsibility and Work Opportunity Reconciliation Act, which was a conservative idea. Likewise, Ronald Reagan instituted an immigration holiday, which is a progressive idea. So, does it really make any sense to tie the market’s performance to a specific party over time? That would assume consistent application of ideology or principles over time. To put it mildly, a faulty assumption in any human system.
In any event, with an economy as large as the United States, only big policies are enough to move the needle on the whole stock market. Recently, Lauren Foster of CFA Institute highlighted some academic work examining the influence of presidents and their political parties on the stock market. Yet, most academic work ignores the vast differences and underlying nature of specific policies. So, the whole exercise of using statistical analysis to claim one party is better for the stock market than another is merely an exercise in . . . you guessed it . . . politics.
In 1971, President Nixon took the world off of the gold exchange standard. Over the ensuing 25 years, it had largely no impact as the US current account remained roughly in balance. However, beginning in 1996 the US current account shifted markedly toward a persistent deficit. Was this Clinton’s doing? And in 2002, it shifted into overdrive, reaching a peak of more than $200 billion per year by 2006. Was this George W. Bush’s fault? Who exactly is responsible for what? Nixon? Sure, by removing the gold exchange standard, it enabled persistent trade imbalances to develop, which have contributed mightily to the global debt crisis. But what about all the presidents between then and now that did nothing to correct it? Hmmm? And for those that tried and failed, is it their fault? Or is it the fault of Congress?
Moreover, the dramatic growth in the current account deficit helped goose US GDP growth — particularly in the 2002–2006 time frame. So a bad policy helped grow the economy? Yes, it helped create a bubble in housing. The upside masquerades as GDP growth and the downside is, well horrific, as we all found out in 2008. But didn’t George W. Bush receive kudos for a strong economy in his first term? Yes, and to the extent it was derived from the current account deficit phenomenon it was unwarranted (all else being equal).
As long as we are talking about housing bubbles, what was the Fed’s role? Of course, the Fed is, or at least is supposed to be, an independent agent of the US government. So by definition, a president can’t control it. As the Fed reduced interest rates in the early 2000s, the central bank stimulated housing and created a tremendous bubble. Is that George W. Bush’s fault? Or is it the fault of Woodrow Wilson, who was president in 1913 when the Creature from Jekyll Island was created?
Entitlements provide another lesson in the futility of the political credit and blame game. In 1965, Medicare was created under the Johnson administration as part of the Great Society program. As illustrated in my three-part series of posts titled “The Economics of Obamacare,” Medicare was a time bomb from the very moment it was created. An insurance plan is potentially sustainable when persons A, B, and C pay into a pool that later pays claims to persons A, B, and C. I say potentially, because the policies still need to be priced so that they are profitable over time. But it is sustainable so long as what one person pays in is adequate for what that same person can expect to get out. However, Medicare was set up so that taxpaying citizens A, B, and C pay for the medical costs of retired citizen X. With few elderly and many working during the 1960′s, the cost was a mild tax to the economy. Today, as the number of elderly citizens has increased markedly and life expectancy has risen dramatically, the ranks of those covered by Medicare have swelled. Now, persons A, B, and C pay for retired persons X, Y, and Z. As such, Medicare exposes the absence of a relationship between the tax revenues of the program and the costs of administering the program.
From a purely financial standpoint, Medicare is a cancer that is metastasizing throughout the American economy. Who is responsible for today’s unfunded Medicare liabilities of as much as of $90 trillion? Many presidents have in fact not addressed the problem. And President Obama’s solution to health care is to emulate the Medicare model for the rest of the population. Thus we have now added another time bomb to the American economy. But Obamacare won’t completely be put into place until 2014, and the ill effects of the time bomb will be faced by some future president.
A third example can be found in the origins of the housing crisis. Barney Frank, as chairman of the powerful House Committee on Ways and Means, was able to get Fannie Mae and Freddie Mac to “roll the dice” with reductions in lending standards and to push for subprime loans. Of course, by using regulatory changes, these policies circumvented the president entirely and much of Congress. And while President Bush fought hard for restraint on the part of Fannie Mae and Freddie Mac, he also embraced the home “ownership society.” So how much responsibility does he bear for the housing crisis? Or does President Clinton own the housing crisis given that his administration pushed lenders to reduce lending standards during his second term?
The point of all this is to illustrate that specific policies have impacts that reverberate for many years afterward. Oftentimes, the world gets lulled into a sense of complacency as significant time passes between when policies or decisions are enacted and when trouble first arises. During these long periods, it is often widely presumed that everything is okay. As previously mentioned, these policies can have positive effects before the negative effects manifest themselves. And what politician would have the courage, let alone the political capital, to remove a program that is currently perceived as “working?”
The media and political parties often act as cheerleaders for positive outcomes and events that occur during their candidate’s watch, regardless of the source. Likewise, they blame opposing candidates for negative outcomes and events that occurred on the other guy’s watch. Heck, they’ll even blame the opposing candidate when he or she had absolutely nothing to do with said event.
The stock market is ultimately a reflection of underlying news and events, which vary in terms of how well-anticipated their outcomes are by the market. Likewise, if the timing and nature of individual policies and world events vary as greatly as they do, how then can we relate the performance of the stock market to the performance of specific presidents using statistical techniques which presume a common time frame (i.e., four years)? It’s not possible to standardize the analysis.
Certainly, if we are being honest, we should judge presidents on the performance of their policies and their actions — not their rhetoric and definitely not what their political cheerleaders or the pundits think. To be sure, presidents have enormous impact. But let’s not kid ourselves. We should measure US presidents — and the leaders of other nations as well — by evaluating the impact, for better or worse, of specific policies over each policy’s life and against its intended goals.
Alas, I live in the real world too. And perhaps the one constant almost everywhere in the world is that honesty in politics is a rare thing. Politics may be the art of the possible, but using statistics to gauge the impact of political leaders on the stock market may well be the art of the impossible.
But that said, when has impossibility ever constrained a politician?
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