The President's Economic Impact Isn't What You Think

It's not about GDP or inflation.

Everyone is thinking about the question of which candidate for president is better for the economy in completely the wrong way.

I’m going to elaborate on that, but first, listen to this clip of former president Barack Obama slamming Trump’s record on the economy.

Is Obama right? Did Trump inherit his good economy?

Well, let’s take a look at that.  

I want to start by showing you a chart of the U.S. unemployment rate— typically the single most important metric when it comes to judging the health of the economy.

If a lot of people are unemployed, that’s usually a bad sign for the economy. On the other hand, if there’s not a lot of unemployment, that’s usually a good sign.

Trump became president in Jan. 2017, when the unemployment rate was 4.7%.

But as you can see, the unemployment rate had been steadily declining for seven years prior to Trump becoming president—a period when Obama was president.

During Obama’s presidency, the unemployment rate fell from 7.8% to 4.7%.

So, that might be what Obama is talking about. Trump became president after the unemployment rate had already fallen significantly during the Obama years.

It’s also true, though, that during Trump’s presidency, the unemployment rate continued to fall, reaching a low of 3.5% in Sept. 2019— and that was actually a 50-year low in the unemployment rate at the time— a very low unemployment rate.  

But who deserves credit for that, Obama or Trump? I’m going to get back to that.

First, though, let’s continue the story. The 50-year low in the unemployment rate that was reached in 2019 didn’t last for long.

Several months later, the unemployment rate saw one of its largest increases in history, reaching nearly 15% in early 2020.

By the time Trump left office in Jan. 2021, the unemployment rate was 6.4%— down from those extremely lofty levels, but a lot higher than when he entered office.

Now, of course, that increase in the unemployment rate was primarily due to the Covid pandemic, so it’s probably not right to blame that on Trump (and a lot of Trump supporters will eagerly point that out).

Instead, they’ll tell you to look at what the economy was doing in late 2019, prior to Covid. And as we just saw, the unemployment rate was as low as 3.5% back then, which is fantastic.

But again, who deserves credit for that? Obama, under whose presidency the unemployment rate fell from 7.8% to 4.7%, or Trump, under whose presidency it fell from 4.7% to 3.5%?

We still need a little more context before we can answer that question.

So far, we’ve looked at the unemployment rate, but that’s just one economic metric. It’s a very important metric, but it’s only one piece of the economic puzzle.

There are many other criteria you could judge the economy on. In fact, there’s one other metric which has overshadowed the jobs market over the past few years— inflation.

In 2021 and 2022, the U.S. experienced some of the highest rates of inflation in decades, pushing up the price of everything from food to vehicles to houses.

This is at the heart of why I think so many people feel nostalgic about the Trump economy. They remember the period of his presidency being a time when prices were lower and more stable.

But before you give credit to Trump for that, take a look at this chart.

This shows the rate of inflation by year, and what you’ll notice is that low inflation isn’t solely a Trump phenomenon; we’ve had low inflation for much of the past few decades.

In fact, the inflation rate was lower during Obama’s two terms (1.46%) than it was under Trump’s one term (1.62%).

Inflation was actually so low during Obama’s time that there were concerns about deflation, or falling prices (but that’s a completely separate topic).

Now, as you’re surely aware, that long stretch of low inflation that we had ended in 2021, and a lot of people blame Joe Biden for causing the spike in prices.

I think that’s misguided, and this next chart really illustrates why that is.

This shows the rate of inflation in several of the biggest economies in the world, and what you’ll notice is that inflation spiked across all of them at the same time.

That isn’t a coincidence. The pandemic caused massive shifts in the global economy that strained supply chains.

When you suddenly had billions of people cooped up at home, it created all sorts of imbalances in the demand for goods versus services.  

You add the war in Ukraine on top of that— which disrupted the supplies of key commodities— and you had the perfect storm which caused prices to soar across the world.

So, contrary to what some people would have you believe, Biden didn’t cause inflation to rise in the U.S.

In fact, blaming the rise in inflation on Biden would be like blaming the increase in the unemployment rate during Trump’s presidency on Trump, even though we know it was largely caused by Covid.

Both would be unfair.

No Singular Metric

Okay, so now that we have that context, I want to make a few points.

The first is that, as I’ve alluded to, there isn’t a singular economic metric that can tell us how healthy the economy is.

You can look at the unemployment rate and inflation as we’ve done. But you could also look at GDP, GDP per capita, disposable income, or even the stock market.

Each of those metrics could tell you a different story about the economy.

There are countless economic metrics out there and different people will have different opinions about which are the most important.

The second point I want to make is that the president’s impact on some of these broad economic metrics is pretty limited in the short-term.

Longer-term, the story is a little bit different, as I’ll talk about later. But in the short-term, the president can do very little to affect the unemployment rate, the GDP growth rate, or the inflation rate.

And that’s because most of the factors that drive these metrics is outside of the president’s control.

Other Forces

The U.S. has a mixed, capitalist economic system. Market forces— the collective actions of hundreds of millions of people— determine how the economy fares.

The government influences that system through regulations and legislation, and the president has a hand in shaping those things.

But in any given year, forces outside of the president’s control are going to dictate what the economy does.

Things like technological progress, business/consumer confidence, and monetary policy will usually have a much greater effect on the economy than what the president does.

Usually, these factors work in favor of the economy. The most likely outcome in any given year is for the economy to grow and for people to become wealthier.

Occasionally, though, there are economic downturns, which are completely natural to see in a market-based economy.

But even though the president’s impact on the economy is limited in the short-term, presidents often do get credited or blamed for what happens with the economy during the relatively short period of time that they’re in office.

Personally, I think that’s a big flaw with how many people analyze presidents’ economic policies.

They’ll look at metrics like GDP growth or the unemployment rate during a president’s four- or eight-year presidential term and judge their economic policies based on that.

Recently, the Wall Street Journal published a story comparing the economy under Trump versus the economy under Biden based on how metrics like GDP, inflation and the unemployment rate did during their respective terms.

But as I just talked about, that’s not the right way to look at things. In fact, I’d go as far as to say that it’s silly to judge presidents based on the strength of GDP or the changes in consumer prices during their time in office.  

It’s not like the president has a magic wand that they can wave on their first day in office to dramatically shift the trajectory of the economy.

So, yes, the jobs market improved under Obama, and got even stronger under Trump and Biden.

And yes, inflation was low under Obama and Trump and then went up under Biden.

But they really didn’t have anything to do with that.

That doesn’t mean, though, that the president has no impact. The U.S. economic system is the most important thing when it comes to the performance of the economy, but like I said, the president has a hand in shaping the system that we have, and depending on what they do, the long-term consequences could be really big.

The president’s impact usually comes in the form of regulations, legislation, and executive actions. But even foreign policy and immigration policy can have significant effects.

Competing Ideologies

As you’re probably well aware, the two major U.S. political parties have differing perspectives on their roles in the economy.

Recent Republican presidents have favored lower taxes and fewer regulations. They’ve tended to see free markets as the engine which drives economic growth and prosperity, and therefore, they usually implement policies that encourage the economy to operate with minimal government intervention.  

Recent Democratic presidents have also been proponents of free markets, but they’ve tended to prefer higher taxes on the wealthy to fund social programs and to reduce income inequality, as well as more guardrails on the capitalist system to ensure that it serves the broader interests of society and to protect vulnerable populations.

Because the party in power changes from one election to the next, U.S. economic policies tend to go back and forth between greater government involvement and a more hands-off approach.

Additionally, some presidents take more forceful actions to accomplish their goals, while others make more incremental changes.

Sometimes the actions a president takes are reversed by subsequent presidents, while other times the impact is longer lasting.

As you can see, there are a lot of things to consider!

Let’s make this all more concrete by talking about some of the big economic policies that recent presidents have enacted, starting with President Obama.

Barack Obama

The centerpiece of Obama’s economic legacy is the Affordable Care Act. Popularly known as Obamacare, the law expanded health insurance coverage to tens of millions of Americans. It was funded by slightly raising taxes on high-income earners and putting fees on health insurers.

Obama’s successor, Trump, tied to repeal Obamacare many times during his presidency, but he was never successful and the law largely remains intact today.

This is an example of a law that, at least so far, has stood the test of time.

Another signature piece of legislation that Obama signed into law was the Dodd–Frank Wall Street Reform and Consumer Protection Act, a law designed to increase oversight of the financial services industry.

This law was essentially Obama’s response to the housing bust and financial crisis which had pushed the U.S. economy into its worst downturn since the Great Depression back in 2008.

A lot of people blamed that crisis on a lack of regulatory oversight, which allowed big banks and other financial institutions to take on too much risk.

Most people today believe the Dodd-Frank reforms have been a success, though parts of the bill were repealed by a law that Trump passed later (the Economic Growth, Regulatory Relief, and Consumer Protection Act).

This illustrates the back-and-forth nature of regulations. One president decreases regulations, another president increases regulations— and we kind of go back and forth like a pendulum.

The last piece of Obama’s economic legacy that I want to talk about are his spending cuts. Though he was strongarmed into it, together with a Republican Congress, Obama helped bring U.S. deficits down by two-thirds compared to where they were when he took office.

However, those deficit reductions were reversed under the Trump and Biden administrations, so there was really no lasting impact there. In fact, we really haven’t had a president who has made deficit reduction a central part of their economic platform in a really long time.  

Donald Trump

Okay, so we’ve covered Obama. His successor, of course, was Donald Trump, whose signature piece of legislation was the Tax Cuts and Jobs Act, a law which reduced taxes for corporations and individuals, with the aim of increasing economic growth and making the U.S. a more attractive place to invest.

Those tax cuts are still intact today, but many of them— including those for individuals like you and me— are set to expire next year. The tax cuts for corporations are permanent, though they could be increased in the future with new legislation.

In general, the verdict on the tax cuts has been mixed. There’s evidence that some corporations increased their investments in America after the law was passed, but the overall impact on economic growth has been relatively modest.

I noted that the tax cuts were the most significant legislation passed under Trump but— in my opinion— his most consequential impact on the economy wasn’t his tax cuts— but rather his trade philosophy.

Trump came into office absolutely gung-ho about how other countries, and particularly China, were ripping off the U.S.— that they were stealing our jobs and our intellectual property by using unfair trade practices.

His solution for this was to put large tariffs on goods made in China so that they’re more expensive to buy. This, he said, would a) encourage China to make a trade deal that would make the playing field between the two countries fairer and b) encourage companies to produce goods in the U.S. instead of China.

I say that this is the most consequential thing Trump did as president because his approach to trade with China is something that completely upended the status quo that existed for years before he came to office, and effectively became the new norm.

President Biden has largely left Trump’s China tariffs in place and he’s even instituted new trade restrictions on the country. In general, both major U.S. political parties have come to see China as an economic adversary that must be defeated.

And that all really started with Trump.

That said, in typical Trump fashion, the ex-president has promised that if he becomes president again, he’s going to take things to another level by putting even larger tariffs on China— something like 60% tariffs on all Chinese goods.

Not only that, he wants to raise tariffs across the board on all U.S. imports, no matter where they come from.

These types of draconian tariff policies aren’t very popular, even within Trump’s own party. But who knows? Trump shifted the narrative once on China and on trade, maybe he can do it again.

Regardless, tariffs are an area where the president can take unilateral action. So, if he becomes president again, there is a very good chance that Trump does use tariffs as a means to achieve his economic goals.

Joe Biden

Next up we have Joe Biden, the current president of the United States.

Biden has helped pass a number of big, consequential pieces of legislation, including the Infrastructure Investment and Jobs Act, which provides hundreds of billions of dollars to modernize America’s roads, bridges, public transit, and broadband infrastructure.

This is one of those bills that has long lasting impact; it’s not going to be reversed by a future president. And these infrastructure investments should, in theory, pay dividends for years to come.

Another big economic bill signed by Biden is the CHIPS and Science Act, which provides billions of dollars of subsidies and tax cuts to incentivize companies to bring chip manufacturing back to the United States, and to bolster America’s science and technology infrastructure.

This, again, is another bill with lasting implications. There are already chip manufacturing plants being built on U.S. soil as a result of this bill.  

Last but not least, another one of Biden’s big economic achievements is the Inflation Reduction Act, which has less to do with inflation per se and more to do with climate change.

The law provides hundreds of billions of dollars of federal funding for clean energy industries, like solar and electric vehicles. It also encourages companies to upgrade America’s energy infrastructure.

To be fair, the IRA does have some key features that are designed to reduce certain of prices; specifically, it allows the government to negotiate with drug companies to lower drug prices on behalf of those on Medicare.

This is a pretty bold step and like Obamacare, it’s an example of the government getting more involved in the health care industry in order to benefit certain groups of people.

As you can see, Biden has been very successful in implementing his economic agenda, which is heavy on industrial policy.

His goal has been to rejuvenate manufacturing in the U.S., strengthen supply chains and to invest in what he calls the “industries of the future.”

Many of the laws he’s helped pass will have a long-lasting impact, though only time will tell whether they are successful or not in achieving his aims.

Kamala Harris

Let’s finish things off by talking about Kamala Harris.

Unlike the Obama, Trump and Biden, Harris has never been president, so we don’t know exactly what she would do if she were president.

I’d imagine, though, that she’ll have similar policy goals as Biden and most mainstream Democrats. Where it looks like she wants to make more of an impact is on housing affordability.

She’s said that she wants to incentivize the construction of millions of new homes, while offering down payment assistance to first time homebuyers.

Whether we see anything like that would depend on her first getting elected and then having the votes in Congress to pass the legislation that she wants. We’ll see what happens with that.

The Bottom Line

I think the key takeaway from all this is that assessing which president or presidential candidate is better for the economy or has a better economic record takes a more nuanced analysis than what you tend to find out there.  

I think people are usually focused on the wrong things. Big, broad economic metrics like GDP and inflation over a relatively short period of time are not what you want to look at.

You want to look at specific policies a president has enacted, or policy goals that a presidential candidate has. And if those policies are successfully implemented, you want to see how they impact the metrics you want them to impact over a long period of time.

You also want to look at things that aren’t normally considered to be economic policy, but which could have big consequences for the economy— things like immigration policy, which impacts the labor market and the demographics of the country, and even geopolitics.

Something as seemingly benign as allowing China to enter the World Trade Organization at the turn of the century, eventually led to that country becoming a manufacturing powerhouse— to the benefit of U.S. consumers and to the detriment of the U.S. manufacturing industry.

A president’s temperament and leadership abilities matter too. I talked about how regulatory failures helped create the housing bubble, which then burst and ignited the financial crisis.

Even though that crisis began at the tail end of the Bush presidency, he had the right team in place to begin diffusing the crisis, and similarly, Obama put in place the right people to help turn the economy around starting in 2009.

Clearly, there’s a lot that goes into analyzing a president’s economic impact! While I didn’t cover everything, I hope this article provided you with some food for thought when it comes to assessing a president or presidential candidate's economic record and policies.

Thanks for reading!