uring his acceptance speech at Invesco Field in August, Barack Obama earned big applause for a line that compared Democratic and Republican economic policies. "We measure progress," he told the partisan crowd, "in the twenty-three million new jobs that were created when Bill Clinton was president—when the average American family saw its income go up $7,500, instead of go down $2,000, like it has under George Bush."
As rhetoric, it was effective. But was it a fair point, or a cheap shot? It’s true that the Bush expansion was one of the weakest economic recoveries in postwar history, but can you really lay the blame for that at the feet of the president? Isn’t it the case that, ritual campaign promises to the contrary, presidents actually have very little influence on the economy?
The conventional wisdom among economists says yes, but a growing mountain of historical data suggests that they may be wrong. In the postwar era, it turns out, Democratic presidents consistently produce higher growth rates, lower unemployment, better stock market growth, and less income inequality than Republican presidents. Nobody quite knows why, but the results are surprisingly robust.
Within the economics profession this topic is known as the study of "political business cycles," and I first became interested in it ten years ago, before the dot-com boom of the Clinton era and the weak recovery of the Bush era. Even back then the data was clear. Add up growth rates under Democratic administrations, and you get a higher number than under Republican administrations. Ditto for employment levels. Inflation rates are about the same. Do it again with lag times, since presidents inherit economies from their predecessors, and you get the same result. Change the lag time from one year to two, or three, or four, and you still get the same result. Fast-forward to 2008, and the results become even more dramatic. We’ve now had eleven presidents since World War II, with over sixty years of data points to draw from, and no matter how you slice the results, Democratic presidents are better for the economy.
Why? The answer is complicated, not least because it’s a subject that’s inherently partisan and most economists probably prefer to stick to more neutral ground. Nonetheless, it’s been a small but active area of interest among academic economists for more than thirty years, and it’s one that recently got some time in the limelight thanks to the publication of Unequal Democracy, a book about political business cycles by Princeton political scientist Larry Bartels that’s accessible to professionals and laymen alike.
To begin with, Bartels lays out the basic evidence for partisan economic differences since World War II. Annual economic growth is over a point higher under Democrats than Republicans. Unemployment is more than a point lower. Income growth among poor families is two points higher, among the middle class a point higher, and even among the rich about 0.2 percent higher. And growth is spread more evenly under Democrats too: income inequality stays about the same under Democratic administrations but grows consistently under Republicans. Inflation rates, meanwhile, which conventional wisdom suggests should be a Republican strong point, are about the same no matter who’s in power. What’s more, none of this is a coincidence. It’s not just that Republican presidents are unlucky. The results stay robust even under a wide range of statistical tests.
Still, not everyone is convinced. Princeton economist and New York Times columnist Paul Krugman, for example, said recently that he had not written about Bartels’s results before now because he couldn’t figure out a "plausible mechanism" that might account for them. But then he went on to draw an intriguing parallel to Alfred Wegener, the German geologist who first proposed the theory of continental drift in 1912 but was roundly ignored during his lifetime. Why? Because even though Wegener had accumulated plenty of evidence in favor of his theory, there was no plausible mechanism to explain it. Continents are big pieces of rock, after all. How can they drift?
Well, we all know how that story ended: thirty years after Wegener’s death, scientists discovered that continents sit on top of a hot, viscous layer of earth that does indeed allow them to move over geologic timescales. The resulting theory of plate tectonics is what explains both California earthquakes and the reason that South America and Africa look like matching pieces of a jigsaw puzzle. It turned out there was a plausible mechanism for Wegener’s theory after all, which leads Krugman to ask, "So is Larry Bartels the Wegener of income distribution?"
Maybe. Bartels’s mechanism is twofold. First, he demonstrates an odd regularity in the data—although Republicans on average are worse for the economy than Democrats, there’s one specific period when they’re better: during election years. And ever since the pioneering work of Ray Fair in the late 1970s we’ve known that voters don’t respond to average economic conditions. They respond almost exclusively to economic conditions during election years.
But this just pushes the question back a step: Why is there such a partisan difference in economic performance during election years? Bartels’s answer reaches back to the "honeymoon period," the first year after an election, during which presidents have the maximum leverage to implement their economic program. Democrats tend to focus on employment and middle-class wage growth, which is reflected in things like job creation programs, increases in the minimum wage, more generous EITC benefits, worker-friendly appointments to the National Labor Relations Board, pro-unionization policies, and so forth. The result is a spike in economic activity, but it’s a spike that has mostly worn off by the fourth year of their term.
Republicans, by contrast, tend to focus their honeymoon period on tax cuts for high earners and inflation-fighting measures. This may produce poor economic results on average, but it turns out to be timed to briefly produce a spike in activity three years in the future. Add in some extra generous spending just before election years and a possible partisan boost from the Fed (research by University of Texas economist James K. Galbraith suggests that, controlling for economic conditions, the Fed’s monetary policy during election years is looser for Republican presidents than for Democrats), and you get consistently great economic performance during campaign seasons.
Bartels’s model accomplishes two things. First, it’s a start at proposing a plausible mechanism for partisan differences in economic performance: it turns out that it really is due to substantive differences in economic preferences between the parties, mostly focused on what they get done in the first year of each presidential term. Second, it answers the obvious objection to this theory: If Republicans really are consistently worse for the economy, how could they ever get elected? The answer is that while they may not perform well on average, they do perform well during the one year in four when it counts.
There are more twists and turns to the story, but this is the gist: Democrats really are better for the economy than Republicans, and it really does seem to be related to differences in their economic programs. Given that, then, I’ll make this prediction: If Barack Obama is elected president, the economy over the next eight years will be better than if John McCain is elected. In fact, I’ll go further and put some hard numbers to that prediction. Here they are:
If Obama wins, unemployment will average about 5 percent. If McCain wins it will average about 6 percent.
If Obama wins, real GDP growth will average about 3 percent per year. If McCain wins it will average less than 2 percent per year.
If Obama wins, poor families will see their incomes grow by more than $6,000 during the next eight years. If McCain wins their incomes will grow by less than $1,000.
If Obama wins, middle-class families will see their incomes grow by about $13,000 during the next eight years. If McCain wins their incomes will grow by about $5,000.
If Obama wins (hold on to your hats for this one), rich families will see their incomes grow by about $36,000 during the next eight years. If McCain wins their incomes will grow by about $32,000.
If Obama wins (hold on to your hats again), the stock market will perform better: the average return on stocks compared to Treasury bills will be about 9 percent. If McCain wins it will be about 4 percent.
If Obama wins, the national debt will grow about $150 billion per year. If McCain wins it will grow $400 billion per year. (For more, see Gregg Easterbrook, page 15.)
And no matter who wins, average annual inflation will be around 4 percent.
So that’s that. Look me up in 2016 and let me know how good my crystal ball is.