How much does the presidential election matter? A lot less than you probably think | Opinion

All is calm. But is it the proverbial calm before the storm, which is the US presidential election this year?

By all standard economic measures, the economy is growing near its historical trend. Employment and stock prices remain high, while the inflation rate is near the historical average of 2 to 3 percent.

But uncertainty over who will next be in the Oval Office raises the anxiety level of most Americans. Should we be nervous? Standard measures of risk or uncertainty say no, and economic theory says presidential policy doesn’t matter.

Consider first the measures of uncertainty over the economy. A widely cited measure of market volatility and economic risk is the CBOE Market Volatility Index or VIX. The index reflects the cost of mitigating price risk using option contracts on large US stocks. This cost rises when prices move dramatically in one direction or another, reflecting more significant uncertainty over what their price will be in the future.

On Wall Street, the VIX is frequently called the Fear Index. When the cost of options rise, it is said that investors are getting more nervous about future prices. These days, the VIX is trading around 13, well below the index’s long-run norm of 20. The implied volatility for some companies, like Boise-based Micron Technology, is above average at around 45, but there is little concern for the market as a whole.

At the peak of the 2007 – 2009 financial crisis, the VIX was over 70 for many weeks, more than four times the current level. In the early days of the COVID pandemic, the VIX spiked to nearly 80. The index fell dramatically following both these events as concerns abated.

So, even with the uncertainty surrounding the November elections, the financial markets are calm today. Investors don’t seem nervous. According to research by the Securities Industry and Financial Markets Association (SIFMA), the VIX tends to rise slightly in the month before presidential elections but moves quickly back down. Further, SIFMA reports no discernible pattern in the index regarding whether the incumbent wins or the political party.

Ok, so the VIX does not reflect high risk. But shouldn’t we care what the next president will do? It turns out, no.

Economists have long studied what makes the economy flourish, and it is not our leaders. Adam Smith’s famous book on economics is entitled: “An Inquiry into the Nature and Causes of the Wealth of Nations.” Smith asked what gives rise to a higher standard of living, or wealth.

Smith learned, and later economists have since verified, that innovation and specialization are the sources of wealth. For Smith, the division of labor duties gave rise to more specialized workers with better skills, that is, greater labor productivity.

Smith further pointed out that efforts to grow the economy through political means (the so-called mercantilist system of his day) failed. Such policies benefited only some — namely, those with political power.

In his 2008 book, “The Cult of the Presidency,” Gene Healy argues that our society vests too much power in the presidency. He demonstrates that the office has grown far beyond its original constitutional limits, leading to a dangerous concentration of power that is supported by both major political parties. Perhaps we are making today the same “mercantilist” mistakes that Smith pointed out.

Healy showed the need to rein in the power of the executive branch and return to a constitutional balance of power. Congress has increasingly delegated its powers to the executive branch of government and, in so doing, raised the American public’s expectations of the president to unreasonable levels.

Current prices in the financial markets don’t reflect concern over the upcoming presidential election, and historical evidence and economic theory say we shouldn’t rely on our president for answers. If anything, the makeup of Congress is more critical.

So yes, we can all remain calm.

Peter Crabb is a professor of economics and the director of the Center for the Study of Market Alternatives at Northwest Nazarene University in Nampa.