The president matters to the economy much less than you think.
FROM POLITICO | March 7, 2018
o it happened. After months of speculation about whether and when Gary Cohn might resign, he finally did. The former prince of Goldman Sachs—and the unofficial leader of the free-traders, internationalists and Wall Streeters at the White House—apparently had had enough and announced his resignation after Trump tilted toward tariff-loving protectionism last week.
The widespread assumption is that Cohn’s departure is a bad omen for economic growth and sound economic policy domestically and internationally. That may prove correct about actual policy, but the concern is overblown. White House economic policy may indeed become nativist, nationalist, protectionist with less attention to domestic initiatives, less focus on a grand infrastructure bill and even less engagement with Congress.
None of it may matter much to inflation, economic growth, wages, inequality, employment rates and the revival of industry. That’s because the power of the presidency over this thing we call “the economy” never has been and still is not particularly significant absent an immediate crisis. The presidency can act to stanch an economic collapse, as it did in 2008-09, though even there, it requires Congress, the Federal Reserve and other actors to play a substantial role. Most of the time, however much presidents take credit when times are good and are blamed when times are bad, their ability to manage the economy is far more limited than most—including the occupant of the Oval Office—believe.
The reaction to Cohn’s departure was swift and negative, with many convinced that it portends ill. Financial markets dove on the news, though who knows whether that reaction will prove ephemeral. The common reading in the worlds of business and finance was that “Gary Cohn, among a few economic advisers, had interposed his body between the president and bad policy,” as Vincent Reinhart, chief economist at a Boston-based investment firm told the Washington Post. With Cohn gone, the fear is that the president will now have only minimal checks on his desire to erect even higher trade walls along with the literal border walls and will pursue a long-deferred dream of reversing decades of globalized commerce.
Trump’s tilt toward protectionism should not have come as a great surprise to Cohn or to anyone else. Looking at Trump over the decades, the only surprise was that it took 15 months after the inauguration for those nationalist protectionist impulses to burst free of their chains. Cohn’s departure may indeed leave the proponents of a trade war, the opponents of NAFTA and the champions of Made-in-America in the ascendency. And that may not matter all that much.
One reason is legal. Yes, if the president had the power to start a real, no-holds-barred trade war by pulling out of the World Trade Organization and slapping a blanket 25 percent to 50 percent tariff on all imports, that would indeed by an economic game-changer. Markets would crater; commerce would come to a sudden and painful halt; economic activity would plunge; and prices would rise. But the president doesn’t have that authority, either constitutionally or delegated by Congress. Even the plan to raise tariffs on steel and aluminum requires a creative and highly debatable reading of a 1962 law that allows the president to find that certain trade flows endanger national security. That authority, as with all trade authority, has been granted to the president by Congress, which has the ultimate say over trade, and no president has ever fully tested just how much power he actually has. Trump may be the first to test the legal and political limits, but there is as yet zero indication other than fear that he has nearly as much sway as he believes.
So yes, he may succeed in firing the opening salvos of a trade war, but unlike a hot war on the Korean peninsula, trade wars do not break out overnight or spread in days. There is also no rallying around the flag in an unpopular trade war, which is why the Senate is already pre-emptively considering legislation to curtail the president’s power even before he has fully exercised it. Now imagine that Trump attempts to withdraw from NAFTA, many aspects of which have been passed into legislation by Congress. The president’s authority to withdraw is legally vague, and the idea that Trump could just snap his fingers and say "we’re done" is questionable at best.
The other reason to be skeptical that Cohn’s departure means all that much is that he didn’t really have a lot of power. Sure, economic policy from the White House could be both less predictable and less trade-friendly now that he’s gone. That does not mean, however, that any of those policies can significantly alter the trajectory of the economy. Under Barack Obama and indeed under every president from Richard M. Nixon to Donald Trump, it has been popular to hold the president responsible for employment, wages and inflation. But the tools the White House has to spur higher wages or employment or prices are quite limited and quite blunt.
Nixon used provisions in the Economic Stabilization Act of 1970 to order a 90-day freeze on wage and price hikes in the summer of 1971 and again during the summer of 1973. That certainly affected markets and businesses, but those were invoked during significant economic and political turmoil, had been expressly authorized by Congress to address that tumult and were for a very limited period of time designed to halt a crisis.
Other than some vague emergency powers, the White House cannot, for instance, mandate wages or hiring, and it certainly cannot set prices (the Economic Stabilization Act powers were dissolved in 1974). It cannot pass a budget and spend without Congress, meaning that the sway of the presidency over inflation is limited to whom it appoints to the board of the Fed, and, as already noted, the president’s trade powers may be much more modest than most people (including the president himself) think.
Cohn’s departure, therefore, could indeed be a sign of more troublesome (or better if that is your perspective) economic policy to come. That does not mean that any of those policies will have much effect or be effectively implemented before being halted either by courts, Congress or massive public blowback. And that’s probably why markets sagged but have not yet cratered. No man makes the market or the economy, not a Goldman alum and not the president, no matter how much we—and they—think they matter.