The end of the empire?

  • Written by 
  • 10/10/2016

“ ‘My name is Ozymandias, king of kings: Look on my works, ye Mighty, and despair!’ Nothing beside remains. Round the decay Of that colossal wreck, boundless and bare The lone and level sands stretch far away.” Percy Bysshe Shelley

Some see the prospect of President Trump as the beginning of the end for a period of American hegemony that stretches back to the first half of the 20th century. Do such worries overestimate the powers of the US president? To what extent can we believe campaign trail rhetoric? Has it mattered historically which side of the political aisle the president hails from? We take some solace in the constitutional checks and balances...

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Residents of the United States, please read this important information before proceeding

Please read this important information before proceeding.

The most powerful person in the world….

The President of the United States is often depicted as the most powerful human being on the planet by a distance; whether battling alien invasions, vampires or just an assortment of home invaders, fiction portrays the inhabitant of the Oval Office as central to all our fates. In this context, a frequently abrasive US presidential election campaign has left many investors (and human beings) dreading November.

“A frequently abrasive US presidential election campaign has left many investors dreading November”

In trying to gauge how much the US president really matters, we can start by looking at the relative performance of Republican vs. Democrat presidents over the post-war period. Admittedly, this is a small sample size, with only 16 presidential terms and 12 different presidents (seven complete Democratic terms and nine complete Republican terms), but we are limited in our scope by the availability of plausible economic statistics. In their opening shot in a still lightly furnished debate, Blinder and Watson (2016) find that real GDP growth over the 60-odd years in question averaged 3.3% per annum. However, the average growth rates under Democratic and Republican presidents were starkly different: 4.3% and 2.5% respectively (Figures 1 and 2). This startling gap in relative economic performance remain when you look at trends in employment and industrial production too1 (Figures 3 and 4).

Interestingly enough Blinder and Watson find that this strong relationship survives attempts to test the significance of the political leaning of Congress, any lagged policy effects or inherited economic momentum (Figure 5). The dataset apparently tells us that it is the president’s political leaning that is the dominant factor to consider. So what can explain these surely damning statistics?

Those of a Democrat persuasion would perhaps like to point to sounder fiscal (and perhaps even monetary) policies, but this is not necessarily supported by the data. The differences here are more or less insignificant, though Blinder and Watson suggest that if anything, fiscal and monetary policy actions could be construed as more pro-growth under Republican presidents. The most important factors seem to be exogenous - Democrat presidents have, on average, presided over fewer harmful oil shocks than Republicans (some of which may admittedly have been induced by foreign policy), faster growth in defence spending and stronger productivity shocks. Essentially, context is as vital as ever - for example, Presidents Truman and Johnson (Democrat) oversaw increases in defence spending during the wars in Korea and Vietnam, while Presidents Eisenhower and Nixon (Republican) oversaw the drawdowns; to what extent were these post-war presidents subject to forces outside of their control?


The Blinder and Watson paper represents one of the few academic forays into this subject matter - understandably so; cause and effect are extremely difficult to disentangle, no matter how thorough and methodical your attempts. For example, classifying Congress as dominated by one party or another in a country where party unity is looser than in some parliamentary systems, even as the divide between the two parties grows, can be problematic2.

It is this point that is perhaps most relevant to the debate on the actual powers of the president. The US Constitution assigns the power of the purse, and most other domestic powers, to Congress, not the president. As noted above, the ability of the president to work productively with the legislative branch is not necessarily dictated by whether Congress can be considered Republican or Democrat. Interestingly, Blinder and Watson find that presidents who were once members of Congress (a group that includes Presidents Truman, Kennedy and Johnson) tend to preside over better economic outcomes. The sample size is small, but this perhaps gives some weight to the idea that the most valuable skill a president can bring to office is the ability to cut deals and find consensus. The increasingly partisan nature of Congress3, with cross-party voting close to vanishing over the last few decades in particular, may suggest that this is more true now than ever.

What can the president do?

Bernadette Meyler, a professor at Cornell Law School specialising in the Constitution and executive power, suggests that there are five areas where the president can act unilaterally, or something close to it.

First, as Commander and Chief of the Army and the Navy, the president has power both to order military actions and to stop them. Second, he or she has the power to select the nominees in powerful positions such as the judiciary. Admittedly, the Senate then has to confirm such nominations, but the power to select the nominees is significant in itself. Third, the president has the power to not enforce laws. Fourth is the power to persuade Congress and influence public discourse by virtue of his/her position as the figurehead of the nation - a post that is arguably the largest soapbox of the land. The final power is in relation to negotiating or withdrawing from certain foreign treaties. An example of this would be when President Bush withdrew from the Anti-Ballistic Missile Treaty in 2001 without obtaining prior consent from the Senate or Congress.

“Investors are likely better served by focusing on the fundamental backdrop to the US economy, rather than who presides over it”


So the president is neither toothless nor omnipotent. He or she needs to work closely with the legislative branch in order to effect change, with the political colour of Congress possibly less important than imagined. The most famous examples of presidents bringing about major change have come at times of major crisis, with President Roosevelt’s New Deal perhaps the most oft-cited example. Those looking for more recent examples of presidents who were hamstrung in their attempts to effect change need look no further than the incumbent. The point being that absent a major crisis such as the Great Depression, investors are likely better served by focusing on the fundamental backdrop to the US economy, rather than who presides over it.

1 Presidents and the US Economy: An Econometric Exploration – Blinder, Watson, April 2016
2 How Much Does the President Really Matter? – Stephen Dubner, Freakonomics
3 The Great Divide – The American Interest