by Dr. Daniel Thornton, D.L. Thornton Economics
In a January 22nd op-ed piece in the Wall Street Journal, Alan Blinder wrote:
“Here is an interesting historical fact. Since Harry Truman, the growth rate has fallen every time a Republican president replaced a Democrat and has risen every time a Democrat has replaced a Republican.”
Obviously, he wanted to give the reader the idea that Democrats are good for growth and Republicans are bad for growth.
I have always believed that the party of the president should be relatively irrelevant for growth. Economic theory suggests that economic growth is affected by a myriad of factors, many of which are outside of the president’s control. Hence, I believe that Blinder’s fact tells us nothing about the effect of the party of the president on growth.
Here’s my evidence. The figure below shows the year-over-year growth rate of real GDP quarterly from 1948Q1 to 2016Q2. The figure also shows the negative trend in output growth that I discussed previously here. The vertical lines denote the party of the president for the period until the next vertical line. The color of the lines denotes the party of the incoming president. The shaded areas denote recessions.
Who's Better for Growth? Republicans Or Democrats?
The first thing to notice is that for three Republican presidents except President Nixon, the recessions began between 2 and 6 months after taking office. In the case of Reagan, the economy was essentially in the midst of two back-to-back recessions—some economists believe these recessions should be considered one long recession.
In the case of President Nixon, the first of the two recessions during his presidency occurred 11 months after taking office. Hence, Blinder’s statement that growth slowed when a Republication replaced a Democrat. Recessions are the culmination of developments that had been building for some time. They are not things that a president can bring about in a few months.
It’s unlikely that these presidents caused the recessions that began shortly after their taking office. It is more likely that the Republican presidents had the misfortune of taking office when these developments culminated in a recession. Indeed, Republications could argue that they had slow growth because they inherited the recessions caused by the Democratic presidents that preceded them.
Recessions: Who's To Blame
In contrast, all of the Democratic presidents took office during economic expansions or just one month (President Kennedy) or five months (President Obama) prior to the start of an expansion. This undoubtedly contributed to Blinder’s fact: economic growth has risen every time a Democrat has replaced a Republican.
Republicans could argue that the higher growth during the Democrat’s tenure was due to the policies of the Republican presidents who preceded them. The problem is that it is difficult to say what causes a recession. There is general agreement that the 1973-75 recession was due to OPEC increasing the price of oil, which can hardly be blamed on President Nixon.
It is widely accepted that the 1980 and 1981-82 recessions were due in large part to Paul Volcker’s aggressive monetary policy to bring down inflation, and not to any particular thing that President Reagan did. The 1990-91 and 2007-09 recessions are almost certainly due to the bursting of the dot.com and home-price bubbles, respectively. The former was the consequence of what Alan Greenspan called irrational exuberance.
President Bush contributed to the latter by making home ownership a national priority, but this was not the sole reason for the recession. There is plenty of blame to go around. The point is that it is hard to blame recessions on the party of the president in office at the time. Furthermore, the high growth rates during the first two Democratic periods was due, at least in part, to two ill fated wars. I’m not sure that Blinder would want to tout these as successes.
Moreover, the relatively high growth during Clinton’s presidency cannot be attributed to President Clinton because, as I have noted here and here, it was caused by a confluence of events. In particular, it was caused by an unexpected increase inproductivity in 1995 (for more information go here).
Finally, there is the question of whether the differences in the growth rates are statistically significant. The table above shows the average growth rate during each period and the corresponding t-statistic—the ratio of the growth rate to the standard deviation of the growth rates over the entire period.
These data are presented for the growth rates and the growth rates relative to trend. The latter are more meaningful because the growth rate has trended down during the period. However, either way, none of the growth rates are two standard deviations from the mean. The first two Democratic periods come close for the growth rate but not when growth is measured relative to trend.
Hence, while growth was higher under Democrats than Republicans, it seems likely that the difference is due to chance and not to the political party of the president. More precisely, the difference is due to the fact that three of the four Republican presents took office shortly before the start of recessions that were caused by events that occurred much earlier.
Bottom Line
These data and analysis support my belief that the party of the president has had little to no effect on economic growth. Individually, presidents and their policies can affect growth, but the ultimate effects of these policies may not be reflected in growth during their term in office. We would need much more data and many more changes in the political party of the president to have any reasonable chance to say whether one party is more pro-growth than the other.
But even if we had such data, I’m inclined to believe that we would find it difficult,if not impossible, to attribute the effect to the party in power. We would have a better chance to attribute the change in growth to a particular action taken by a particular president or party, but, even here it would be difficult to separate the effect of this action from the effects of other factors that determine growth.
The lesson to be learned from this essay is this: facts do not always imply what they seem to. There is no substitute for careful, thoughtful, and detailed empirical analysis and good theory.
EDITOR'S NOTE
This is a Hedgeye Guest Contributor research note written by Dr. Daniel Thornton. During his 33-year career at the St. Louis Fed, Thornton served as vice president and economic advisor. He currently runs D.L. Thornton Economics, an economic research consultancy. This piece does not necessarily reflect the opinion of Hedgeye.
