NOTE: I wrote this article some time ago. I revived it because there is a lot of revisionist history on cable and network TV and in print about the economy. The fact is that the economy always does better under Democrats than under Republicans. The professors in the article did not want to seem partisan, but the numbers and policies are what they are.
MSNBC Chuck Todd interviewed Princeton economist Alan S. Binder on his show the Daily Rundown a few weeks ago. They discussed a striking paper that he co-wrote with Princeton Economics, Professor Mark W. Watson. The title of the paper is “Presidents and the Economy: A Forensic Investigation.”
The paper is a very well-researched paper that analyzed the performance of the country’s economy under different presidents. The paper came to a striking conclusion. The economy does substantially better under Democratic presidents than Republican presidents. This occurs irrespective of who controls Congress.
Many already knew this. What these Princeton economists did was quantify the results. They also attempted to play with different degrees of freedom within the dataset to find out why Democratic presidents did so much better.
Following are some important excerpts from the paper.
This paper begins in Section 1 by documenting this stunning fact. The fact is not “stylized.” 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.
While there is substantial variation in growth rates (from over 6 percent for Truman-2 to under 1 percent for Bush II-2), the D-R gap is apparent. Panel B tells the same story in a slightly different way, by organizing the data by presidencies rather than by terms (with both the eight Kennedy-Johnson years and the eight Nixon-Ford years grouped together, and the data on Truman extended back to 1947:Q2). It is clear at a glance that GDP growth rises when Democrats get elected and falls when Republicans do. There are no exceptions, although the Carter-to-Reagan transition is almost a dead heat (3.6% to 3.5%).
NBER recession dating gives an even more lopsided view of the D-R difference. Over the 256 quarters in these 16 terms, Republicans occupied the White House for 144 quarters, Democrats for only 112. But of the 49 quarters classified by the NBER as in recession, only eight came under Democrats versus 41 under Republicans. Thus, the U.S. economy was in recession for 1.1 quarters on average during each Democratic term, but for 4.6 quarters during each Republican term.
Partisan differences extend well beyond the standard indicators of real growth and employment. For example, Panel D of Table 2 shows that stock market returns for firms in the S&P 500 are 5.4 percentage points higher when a Democrat occupies the White House than when a Republican does. But given the extreme volatility of stock prices, even differences that large are statistically significant at only the 17% level. The corporate profit share of gross domestic income was also higher under Democrats: by 5.6% versus 4.7%. Though business votes Republican, it prospers more under Democrats.
The only notable exception to the rule that Democrats outperform Republicans seems to be inflation, where the economy fares about equally well under presidents of either party. For example, the final panel of Table 2 shows that the average inflation rate was slightly lower under Democratic presidents (2.97% versus 3.32% using the PCE deflator; 2.88% versus 3.44% using the GDP deflator).
Official quarterly GDP data begin only in 1947, but both the nation and the economy date back much further. What happens if we extend the data back in time? We know that the Democratic-Republican gap would widen notably if we included the long presidency of Franklin D. Roosevelt, for real GDP growth from 1933 to 1946 averaged a heady 7.4% per annum. Going back to Hoover would also boost the measured D-R gap. But what about earlier U.S. history?
Fortunately, Owang, Ramey, and Zubairy (2013) recently constructed a quarterly real GDP series that dates all the way back to 1875. For the 72-year period spanning 1875:Q1 through 1947:Q1, the average GDP growth rates in their data are 5.15% when Democrats sat in the White House (119 quarters) and 3.91% when Republicans did (169 quarters). That D-R growth gap of 1.24 percentage points is smaller than the postwar gap, but still noteworthy. Similarly, the NBER says the U.S. economy was in recession in 133 of those 288 historical quarters (46% of the time). But 94 of those recessionary quarters came under Republican presidents (56% of the time) versus only 39 under Democratic presidents (33% of the time). Thus our main facts seem to be far from new.
Did the U.S. economy grow faster under Democratic Fed chairmen than under Republican chairs? The answer is yes. Table 11 shows that average real GDP growth was 4.00% when Democrats led the Fed, but only 2.74% when Republicans did — a notable growth gap of 1.26 percentage points. The table displays average growth rate under all four possible party configurations of president and Fed chairman.
It was disappointing to read the conclusion of the paper.
There is a systematic and large gap between the US economy’s performance when a Democrat is President of the United States versus when a Republican is. Democrats come out better on almost every criteria. Using real GDP growth over the full sample, the gap is 1.80 percentage points–which, at about 55% of the grand mean, is stunningly large. The partisan growth advantage is correlated with Democratic control of the White House, not with Democratic control of Congress
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. Fiscal policy reactions seem close to “even” across the two parties, and monetary policy is, if anything, more pro-growth when a Republican is president — even though Federal Reserve chairmen appointed by Democrats outperform Federal Reserve chairmen appointed by Republicans.
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 (as measured by the Michigan ICE). The latter comes tantalizingly close to a self-fulfilling prophecy in which consumers correctly expect the economy to do better under Democrats, and then make that happen by purchasing more consumer durables. But direct measures showing increasing optimism after Democrats are elected are hard to find.
These three “luck” factors together (oil, productivity, and ICE) explain 46–62% of the 1.80 percentage point D-R growth gap. The rest remains, for now, a mystery of the still mostly unexplored continent. The word “research,” taken literally, means search again. We invite other researchers to do so.
It seems these professors went out of their way to avoid knocking the political boat. They have the data that show Democratic presidents’ economies outperform Republican economies by a substantial margin. They removed the probability that this success was an offshoot of a previous administration. No matter how they change the degrees of freedom on their models, Democratic presidents come out ahead. Yet, they are willing to simply ascribe the reality to “mostly good luck.”
There are intrinsic values they did not explore. How do the rest of the world and the country relate to the character of the president? How do the president’s perceived values promote a particular behavior? Those items aren’t luck. There are likely many more, as the professors indicate, that need to be explored.
Professors’ conclusion squares poorly with the reality of presidents’ impact on the economy.
One must wonder if they simply wanted to ensure that their study would not be deemed as partisan, given the corrosively partisan environment. The data on the economy is what it is. It is surprising that this paper did not receive massive publicity. Had the results of this research shown a Republican advantage on the economy, you can rest assured every news station and PAC would be covering it and advertising it ad nauseam.
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