When Does the President "Own" the Economy?

"Anything good is me. Anything bad is my predecessor!"

Captain Obvious here with a prediction: The Trump administration will blame any bad economic outcomes on the Biden administration and claim any good outcomes for themselves. In this post, after some throat clearing around an important graph, I’ll say a few words about when a new president “owns” the economy, and whether that’s pure correlation or something more. As usual, it’s both, but what’s happening now is highly unusual.

But first, to his credit, President Trump has, at times, said his agenda will cause some pain before heralding in great outcomes, which to his team means factories currently producing elsewhere will pack up and set up here. I’d love an example from history wherein sweeping tariffs have this effect, as I’ve not seen one.

Here’s a good David Lynch column on why this is such a heavy lift. None of it is rocket science: sweeping tariffs hurt our consumers, which dampens growth; over 40% of our imports are inputs into US production so tariffs hurt much of domestic manufacturing; contemporary factory production uses fewer workers; other countries like their factories too.

But I think DOGE should make a poster of this graphic and pin it on every wall in the West Wing. It plots Germany’s large trade surpluses as a share of their GDP (left axis) against their manufacturing share of employment (right axis; I’m sorry that one is a percent and the other is a ratio—my former CEA juniors are bowing their heads in shame). Clearly, in the German case, persistent trade surpluses have not prevented the shift of employment from manufacturing to services. True, we’re not them, but this is just what happens as advanced economies grow (see Paul K on this).

FTR, I do think there’s a useful and important play re industrial policy to build more here, which I’ll get back to that below. But one underappreciated negative fallout from this manufacturing agenda is far too little attention being paid by policy makers to improving the quality of the much larger and much faster growing services sector, where job quantity is a lot stronger than job quality.

Now, when do presidents “own” their economies? There’s the perception answer and the substantive answer.

As regards perceptions of both the media and the public, they pretty much own it when they take office, largely because they usually start claiming credit right away for good things that happen on their watch.

That’s a key phrase. While some presidents will imply their actions caused some economic outcome, in many—not all—cases, a more accurate way to say this is “On our watch, etc.” “Good things happened while we’re in charge!” versus “Good things happened because we’re in charge!”

At this point, I should clearly note that the record shows that economies do quite a bit better under D admins than R admins. Here’s the classic academic paper on this (by national econ treasure Alan Blinder and the excellent Mark Watson); here’s my summary of it; here’s a quite good Wikipedia entry). Why this is the case is up for grabs. D’s probably do more to fill output gaps (we’re more Keynesian) but lately it does seem like D admins fix it; R’s break it. Rinse and repeat.

I like to think of presidents and their econ ownership like pilots of airliners. At 30,000 feet with no turbulence, you definitely want a capable pilot at the helm, but the smooth fight isn’t their doing. That’s nature, your preferred deity, luck. It’s when you hit storms, or economic shocks, that their prowess matters.

In the current context, this is worrisome, to say the least. Not just because you don’t trust this admin and this Congress to get the passengers through a storm (the five-year anniversary of COVID seems like a good moment to raise that point), but because the DOGE is blithely whacking away at agencies and services that we will need when, not if, that storm hits.

So, outside of shocks, president’s claims of “that’s my economy” are more correlation than causation. But important exceptions abound.

In the current case, no one should question whether President Trump is behind the recent economic turmoil, including sharp equity losses and tanking confidence. To return to the pilot example, he took the controls in smooth skies and intentionally, by his own admission, steered into turbulence. I’m not a presidential historian but I can’t imagine any other examples of such recklessness.

Presidenting 101 has a firm, basic rule: when you’re ahead in the match (i.e., presiding over a strong economy) do not kick the ball in your own goal. Yet team Trump is doing so on a daily basis. And their arguments that these actions are necessary to win the game later have no basis in logic, fact, or history.

Another exemption gets back to my point about building things here. In the Biden administration, while the economy was in the midst of a strong expansion, we introduced and somehow managed to legislate an industrial policy that was designed to address a series of market failures, which featured strong incentives to pull in private investment in key sectors with insufficient private investment, including clean energy and microchip production, and geo-targeting those investments to places that previously lost good production jobs. Remarkably, Trump’s tariffs have the potential to seriously hurt the very places we were trying to help.

In other words, when the economy is doing well, we should expect good jobs and GDP reports. Any president is going to claim credit for them, though the right way to talk it about is “On our watch…”

But when it comes to managing shocks and correcting market shortfalls with investments in the future, administrations matter a great deal. Not to mention own-goal kicks.

And these truths are a source of great concern right now.