Lessons from the Presidents

Written by Andrew Szabo
Thursday, 17 February 2011 00:00

In this series, we have examined the economic policies of U.S. Presidents since Herbert Hoover. It’s time to sum up and look to the future.

Several patterns have emerged. The first relates to “coalition building.” We have seen how politicians stir positive and negative elements into a customized brew that is meant to energize their supporters. The positive elements state “who and what we are for,” the element of affinity in politics. Since the New Deal, the Democrats have championed the working class and lower middle class and their interests. The Republicans have identified themselves with the business class and upper middle class. The negative element, “who we are against,” the stirring of social resentment, has been more volatile as to its targets. Prominent periods of negative politics include the McCarthy era and the Nixonian era.

Some see a long-term decline in civility in our contemporary politics, but history suggests more of a cycle. One major factor driving negativity is the character and personality of particular political leaders, but behind these are emerging social fissures that politicians opportunistically wedge into. Richard Nixon undoubtedly was a much less pleasant man than Ronald Reagan, but he was able to stoke conflicts already raging over race relations in the United States and the Vietnam War.

As to economic policy, there is some truth to the saying that “we are all Keynesians now.” The FDR administration wavered and did not follow a consistently stimulative policy until (under force of events) World War II. In the Eisenhower era, the Republicans maintained ideological adherence to a balanced budget idea, even when breached. However, since at least Kennedy’s inauguration, presidents of both parties have followed the notion of using deficit spending to counteract business recession — Nixon as much as Kennedy, Reagan as much as Johnson. Indeed, the ideas of supply side economics, including those of economist Arthur Laffer, were adumbrated by Keynes.

Not that politicians need the cloak of economic doctrine to run deficits. Indeed, we have seen the misuse of Keynes’ ideas to run massive deficits in booming economies. In this way, we have, I’m afraid, depleted that stock of national savings that can be deployed in a true crisis, such as the one we faced 2007-09 — not to mention that our national pattern of dis-saving played a part in fomenting that catastrophe.

The use of federal and central bank power to moderate the severity of the business cycle can be taken too far. The idea that we can transcend that cycle is surely an illusion, yet this notion has enjoyed recurrent popularity in academic economics and among policy makers. The economist Schumpeter spoke of the “creative destruction” brought on by market crashes and recessions. Marginal firms go out of business. There is an economic process of survival of the fittest. If government steps in to prevent that destruction, it invites misallocation of capital and economic stagnation. Government assistance helps zombie firms live on. Easy money encourages bad lending. Let us not, in trying to ease the present emergency, set the stage for a crisis to come.

Andrew Szabo CFA is managing director of NewOak Financial Solutions LLC. Questions, please contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it .