Tuesday, December 3, 2013

The White House and the economy

I've long held the belief that what party holds the presidency has little impact on the economy. Perhaps I'd hold this view less if the economy didn't do better on average when the Democrats are in the White House, but that's the nature of bias.

Still, there are plenty of people who claim that the economic policies of Democrats must be superior because of GDP performance during their terms as president. Here's what the GDP growth numbers look like from an analysis by Alan Blinder and Mark Watson of Princeton:

Notice that the numbers leave out FDR, who took office during the Great Depression, and start during Harry Truman's second term. However, if one starts with Nixon in 1969 the averages look a lot more even, although the Democrats still win the contest.

What Blinder and Watson set out to do was respond to that claim that a Democrat in the White House is the reason the economy got better.

The superiority of economic performance under Democrats rather than Republicans is nearly ubiquitous; it holds almost regardless of how you define success. By many measures, the performance gap is startlingly large--so large, in fact, that it strains credulity, given how little influence over the economy most economists (or the Constitution, for that matter) assign to the President of the United States.

My usual response has been that the president is a small factor and the party distribution in Congress also plays a role, such as the Republican led Congress during Clinton's time in office. But they found that on average, the party in Congress is not the deciding factor either. It's also not the conditions the president inherited when he came into office. Instead, it's a bit of luck:

Democrats would no doubt like to attribute the large D-R growth gap to better macroeconomic policies, but the data do not support such a claim….It seems we must look instead to several variables that are mostly “good luck.” Specifically, Democratic presidents have experienced, on average, better oil shocks than Republicans, a better legacy of (utilization-adjusted) productivity shocks, and more optimistic consumer expectations.

Please keep in mind that Blinder has been a high-profile economist for Democrats and the conclusion is not a love letter to those connections. Bravo to him.

It looks like we all need a reality check on our political positions now and then, myself included. Luck is a very unsatisfying answer, as I strongly believe that institutions matter and one would expect the policies we choose would play a larger role in growth.

Perhaps in a way they do. Are the macroeconomic policies of Republicans and Democrats really that different? We think of them as opposites, but both parties agree on a lot of issues. Our current president has an economic team filled with people who believe in markets; heavily regulated markets, but markets none the less. The GOP gets votes by saying it will shrink the size of the federal government, a promise it always breaks. Tax rates are a point of disagreement, but President Obama isn't seriously considering bringing a single bracket above the Clinton rate.

In a historic perspective, the policy differences are small and from a quarter that already has a limited impact on the economy. From the small sample size of the modern presidents, luck is a perfectly rational explanation.

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