Today, we are pleased to present a guest column written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers. This is an extended version of a column appearing at Project Syndicate.
Hillary Clinton has been saying that the US economy does much better when a Democrat is president than when a Republican is. When the press goes to fact-check the claim, they can be forgiven for having a presumption that it can’t be 100 per cent true. After all, if it were completely true, then wouldn’t we all already know it?
Well, there is no other way to say this: The claim is 100 per cent true.
The qualifier is that the president is only one of many influences of what happens to the economy. Luck of course plays a big role. Hillary’s speeches don’t include footnotes making this obvious point. But that doesn’t justify a rating of only “half true” for Clinton’s claim, as some fact-checkers proclaim. And the surprising reality is that the difference in economic performance between Democratic and Republican presidents is sufficiently systematic that it cannot be statistically attributed to mere chance alone.
The gap in economic performance
She says (e.g., June 5, 2016), “It is a fact that the economy does better when we have a Democrat in the White House.” What is the evidence for this claim?
A timely and careful statistical study was published in April in the American Economic Review [106(4): 1015-45] by Alan Blinder and Mark Watson of Princeton University: “Presidents and the US Economy: An Econometric Exploration.” The starting point, the central fact, is that the rate of growth of GDP has averaged 4.3 percent during Democratic administrations versus 2.5 under Republicans, a remarkable difference of 1.8 percentage points. This is postwar data, covering 16 complete presidential terms—from Truman through Obama. If one goes back further, before World War II, to include Hoover and Roosevelt, the difference in growth rates is even stronger.
The results are similar regardless whether one assigns responsibility for the first quarter of a president’s term, or the first few quarters, to him or to his predecessor.
Of course many political actors in Washington influence the course of events. Blinder and Watson find that the economy does better if the Democrats have appointed the Federal Reserve chairman and if they control the Congress. But these conditions are not necessary for the central result: it is the party of the presidency that makes the big difference.
Furthermore, over the 256 quarters in these 16 presidential terms, the US economy was in recession for 1.1 quarters during the average Democratic presidency and 4.6 quarters during the Republican terms, a startlingly big difference. These gaps in performance are highly significant statistically. The odds that they are the result of mere chance are 1 in a 100 or less.
The two Princeton economists find superior results by other measures as well, including the change in unemployment during the president’s term and the performance of the stock market. The unemployment rate fell by 0.8 percentage points under Democrats on average and rose by 1.1 under Republicans, a significant gap of 1.9 percentage points. Perhaps better known than the other economic statistics, returns in the S&P 500 have been higher under Democrats: 8.4% versus 2.7 % for a differential of 5.7% (though this differential is not as significant statistically, because stock market prices are so volatile). Also the structural budget deficit is smaller under Democratic presidents (1.5% of potential GDP) than Republicans (2.2%). But the authors mainly focus on GDP.
Could it be chance?
One does not need to understand fancy econometrics to understand how unlikely it is that chance alone could have produced such big differences in outcomes. Economists use sophisticated econometrics when publishing an article in the AER, the top peer-reviewed journal; but sometimes simpler calculations are more effective.] Consider some very simple facts, which anyone can easily check for themselves. The last four recessions all started while a Republican was in the White House. If the chances of a recessions starting during a Democrat’s term were equal to that of a Republican’s term, the odds of getting that outcome would be (1/2)(1/2)(1/2)(1/2), i.e., one out of 16. Just like the odds of getting “heads” on four out of four coin-flips. Not especially likely.
Still, four data points constitute a very small sample. So let’s go back ten business cycles. By my count nine of the last ten recessions have started under Republican presidents. The odds of the Democrats doing that well just by chance are about 1 in a hundred. (Anyone can easily check the recession dates for themselves, at the site of the NBER Business Cycle Dating Committee.)
An even more startling fact emerges from a review of the last 8 times when an incumbent from one party handed over the White House to a president from the other party. In four of these transitions, a Democrat was succeeded by a Republican; each time the growth rate went down from one term to the next. In four of the transitions, a Republican was succeeded by a Democrat; each time the growth rate went up. No exceptions, as Blinder and Watson point out. Eight out of eight. What are the odds of this happening by chance? The answer is the same as the odds of getting heads on 8 coin tosses in a row: ½ times itself 8 times, which is 1 out of 256. I.e., ¼ of 1 percent. Very unlikely.
Fact-checkers
Given the strength of these results, it is surprising that Hillary Clinton’s claims have been rated as only “half true” by some media, including the Pulitzer Prize-winning PolitFact. Its source appears to be a particular fact-checker in Arizona. (I feel a personal stake in setting the record straight, because I am inexplicably quoted as supporting this finding that the claim is only “half-true.” I had told the Arizona interviewer that the claim of a performance gap was clearly true, even though finding the gap was not the same as proving its cause.) The “false balance” syndrome strikes again.
The first half of the Blinder-Watson paper reports the aforementioned numbers showing the difference in how the economy has behaved under the two parties. This difference seems incontrovertible. The second half of the paper tries econometrically to identify causes for the gap. Here the authors are less successful, because it is inherently a much harder task. The precise reasons for the surprisingly big differential are unknown.
They find some evidence of four or five factors that may together explain 56% of the gap between growth rates under the two parties: oil shocks, productivity growth, defense spending, foreign economic growth, and consumer confidence. It is impossible to know whether some of these five factors may have been influenced by the policies of US presidents and we know still less about the channels that might explain the remaining 44% of the gap. Thus it is impossible to say to what extent specific policies adopted by presidents are responsible for the difference in economic performance.
This is the reason that the fact-checkers give for rating Hillary’s claim as only half true. But her claim was that the gap in performance exists, not what were the specific causal channels. The claim that a gap exists is not the same thing as a claim to have identified the policies that contributed to the gap, let alone a claim that they explain the entire gap.
The fact-checkers also make much of a finding by Blinder and Watson that, contrary to widespread assumptions, fiscal and monetary policies are not more “pro-growth” (i.e., expansionary) under Democrats than under Republican presidents, and therefore can’t explain any of the performance differential. But, in the first place, presidents make lots of policy decisions beyond fiscal and monetary stimulus, including energy, anti-trust, regulation, trade, labor, foreign policy, and much more. There is no way to test econometrically this myriad of policies.
In the second place, leading Republican politicians claim to believe that easy money and high spending hurt the economy rather than helping it. At least, they claim to believe that when they are out of office, and especially if the economy is weak, as in the post-2008 environment (which of course is precisely the time when the stimulus is needed). When they are in office, they tend to find that they rather like spending money, even if the economy doesn’t need it. Remember, for example, when Vice President Richard Cheney reportedly said “Reagan proved that deficits don’t matter.” It should not be news that Ronald Reagan and George W. Bush cut taxes and increased spending, whereas Bill Clinton acted to bring the budget deficit down.
Regardless, let’s be clear about the central finding. Hillary Clinton’s claim that the economy does better on average when a Democrat is in the White House is true, judging from past history. And the difference is large enough that it cannot be attributed to pure chance.
This post written by Jeffrey Frankel.
A more interesting question is why Republicans vote Republican then. I would say when you are well off, an economy worse off is better investment opportunity. If you can’t make it on the trend, you can make it on the swing. Do we really need an economy worse off at this point though?
You have a point. The distributional aspects make folks vote rethuglican. We are well off. So when the housing crash hit we bought rentals. Winning!!! Thanks rethuglicans!!
The other reason is workers can demand too much at full employment, lowering profits and raising inflation, so an occasional recession disciplines them, allowing greater returns to capital.
I have been answering this question for decades now and the answer is the inverse of cause and consequence:
People elect democrats (mommy) when times are good,
…and they elect republicans (daddy) when times are bad.
And the vox populi play the same mommy-daddy game all our children do.
More accurately, they elect democrats when the economy is already bad and they fear losing their jobs, and republicans when the economy is already good and fear losing their income (to taxes). The gains are from the bottom, and the losses from near the top. So democrats are better for the economy, but once the economy is good, republicans are worse because it is more likely to fall.
It’s completely the opposite. The 1932 and 2008 cases are more the rule than the exception.
To Curt Doolittle:
The statistical correlation between political party and economic performance that Blinder and Watson document is not a relationship between economic performance in the year of the election and who moves into the White House after the election. It is, rather, a relationship between the party of the newly inaugurated president and the economic performance over the subsequent four years. One can distinguish the two hypotheses from the timing.
JF
One can’t argue with the facts, only the process. Therefore, for the sake of efficiency in our economy, I suggest that you send your tax dollars directly to me after which I will directly stimulate many sectors of the economy simultaneously.
That used to be true until Obama (for 2009-15) (Data sources: BLS & BEA):
1.) GDP (average performance by president): 1.4% – lowest since end of WWII, including not one year over 3% – worst since Hoover
http://newdealprogressives.org/blog/wp-content/uploads/2016/06/GDP.png
2.) Not in the Labor Force (average by president): 87,981,000 – highest of any president
http://newdealprogressives.org/blog/wp-content/uploads/2016/06/Not-in-Labor-Force.png
3.) U-3 Unemployment Rate (average by president): 7.8% – highest of any president)
http://newdealprogressives.org/blog/wp-content/uploads/2016/06/Unemployment-Rate.png
The Presidential Scorecard (including data source links):
http://newdealprogressives.org/blog/2016/06/07/the-presidential-scorecard-job-creation-unemployment-not-in-labor-force-gdp/
Both Obama & Bush have set new lows for presidential performance.
Alex:
You are judging by the absolute number of people out of the labor force? It should be obvious that total population rises over time and also that the proportion of the population that is of retirement age has recently been rising. One must express the number as a percent of the total and then control for age distribution.
It should also be obvious that Obama inherited the worse recession since the 1930s. He (and the Fed) managed to turn it around within his first six months in office. One could add now a list of positive statistics, such as a record in the consecutive months of private job gains and a record reduction in the budget deficit.
JF
Jeff,
Regarding the U-3 unemployment numbers, yes, Bush inherited a good economy from Clinton, and Obama inherited a bad economy from Bush.
The U-3 number in Jan-2009 was 7.8% and it continued to rise through Jan-2013 to 8%, and then started slowly going down.
Those are the BLS numbers here: http://data.bls.gov/timeseries/LNS14000000
They’re in table form here at the bottom:
http://newdealprogressives.org/blog/2016/03/06/a-critical-eye-on-obamas-jobs-and-unemployment-record/
That’s longer than six months.
As far as the jobs Obama has created, most have been low wage in contrast to the ones lost which were higher paying jobs:
http://www.nelp.org/content/uploads/2015/03/LowWageRecovery2012.pdf
David Cay Johnston also wrote about that here:
http://america.aljazeera.com/opinions/2015/8/flat-wages-show-the-us-doesnt-have-a-labor-market.html
As far as the People out of the Labor Force, I’ll try to come back and reply to that this weekend.
Thanks for your comment.
Jeff,
I took a look at the U-3 numbers again and throughout 2009 & 2010 it kept bouncing around in the 9% range hitting a 9.9% high in March & April of 2010.
My bad.
Jeff,
About your first point, the Atlanta Fed takes care of that here:
https://www.frbatlanta.org/chcs/calculator/?panel=1
It calculates the number of jobs needed each month based on population growth, including people retiring and new people entering the workforce.
Each month, the number of jobs needed varies depending on population growth.
The Economic Populist has a good piece on it here:
http://www.economicpopulist.org/content/how-many-jobs-are-needed-keep-population-growth
For May, the number of jobs needed for population growth was 118,030.
The number of jobs created for May was 38,000.
The April jobs numbers were also revised downward by 59,000.
The May U-3 unemployment number (the headline news number) is 4.7%.
In addition, Challenger Gray & Christmas said there were 65,000 job cuts and over 250,000 job cuts from January through April.
It looks nothing like an economy that is supposed to be in recovery.
In fact, Clinton said in an economic policy speech last week that “the economy is messed up, but I can fix it”:
http://www.nytimes.com/2016/06/23/upshot/hillary-clinton-campaign.html?ref=todayspaper&_r=1
So much for the unbelievable 4.7% unemployment rate and the Obama “recovery”.
As economist Michael Hudson said in an interview, the economy is shrinking which leads to higher unemployment, lower wages, and a declining standard of living.
http://www.counterpunch.org/2016/06/23/the-slow-crash-when-global-economies-are-run-by-banks/
When you look at Piketty’s chart on the Distribution of Average Income Growth During Expansions, the trend has dramatically changed from Truman to Obama. With Truman, the majority of the gains went to the bottom 90%; under Obama, not only did all gains to the top 10%, but the bottom 90% lost significantly (as in a “take away”, +/-20% through 2012):
https://twitter.com/JustinWolfers/status/514907147638157312
That explains the rise of Sanders and Trump against the establishment candidates.
Last, about the BLS numbers for Not in the Labor Force (1975 – present), Discouraged Workers (1994-present), Marginally Attached Workers (1994 -present), and Labor Force Participation Rate (1948 – present).
From 1975 1992, the Not in the Labor Force numbers stayed consistent, and then it began significantly increasing beginning in 1993 under Clinton. You can find the BLS data here:
http://data.bls.gov/timeseries/LNS15000000
I write about the probable cause for that here:
http://newdealprogressives.org/blog/2016/03/06/a-critical-eye-on-obamas-jobs-and-unemployment-record/
The Marginally Attached Workers and Discouraged Workers trend has been upward, but under Obama both jumped significantly. The BLS data can be found here:
Discouraged Workers: http://data.bls.gov/timeseries/LNU05026645
Marginally Attached Workers: http://data.bls.gov/timeseries/LNS13327709
The Labor Participation Rate is just about the same as the Carter years (63.2%). An growing economy means increased Labor Participation Rate, except in the Obama years (63.8% through 2015), where it has dropped. The BLS data can be found here:
http://data.bls.gov/timeseries/LNS11300000
I empathize for someone trying to make a case for the Democrats, but Obama has been more or less carrying on the Bush policies. Combined, Obama & Bush have lost 12,017,000 jobs ( http://newdealprogressives.org/blog/wp-content/uploads/2016/06/Jobs-Created.png ),
Also, for Obama
Job creation (net after gains & losses): 5th best in job gains, 3rd worst in job losses
http://newdealprogressives.org/blog/wp-content/uploads/2016/06/Jobs-Created.png
The Presidential Scorecard:
http://newdealprogressives.org/blog/2016/06/07/the-presidential-scorecard-job-creation-unemployment-not-in-labor-force-gdp/
It’s a silly comparison. For example, Truman and Johnson were wartime presidents. The 1960s boom led to the 1970s bust. The two longest peacetime expansions started under Reagan and Bush 41. Bush 43 extended the boom. The Obama depression, since 2009, continues, etc..
It was a very conservative and very religious people that made the U.S. a superpower. We’ve seen what socialists and atheists have done to economies. We need to be open-minded about the benefits and consequences of each policy. We don’t need too few good policies and too many bad policies.
“Obama depression since 2009”. You say this in almost every one of your comments, and follow up with pure nonsense. The recession started in 2007 and ended in 2009, and you know it. Literally everything you say is false. I cannot wrap my head around how someone can persistently display such willfull ignorance.
My statements are supported by credible sources and data. I’ve shown per capita real GDP not only had an L-shaped recovery from the deep recession trough, it’s been moving away from trend. Obviously, reality is hard for you to accept. You remain in denial.
you also believe a strong recovery from a financial crisis should be expected. you think this was a typical recession with poor response. it was not a typical recession. it was the result of balance sheet leverage. it takes time to unwind a highly leveraged balance sheet. in addition, you had a congress hell bent on making sure the recovery was poor, for their own possible political gain. blame obama. unfortunately, many people paid a significant price for such actions.
You need to stop making excuses and shifting blame. This is the worst recovery in U.S. history. The GOP was completely out of the picture the first two years, as Democrats in Congress suffered from “spending fatigue.” And, the GOP only recently gained the Senate. Rather than being a rigid ideologue with executive orders, the country would’ve been much better off if Obama worked with the GOP Congress, like Clinton in the ’90s. The American people gave the GOP House the biggest majority in a hundred years for a reason.
“This is the worst recovery in U.S. history. ”
how many private sector jobs has obama overseen? again, baseless arguments.
and the last six years have seen open arm support from the republicans? can you actually say with a straight face they have not intentionally obstructed anything put forth by the president? with nearly a quarter of his term still remaining, republicans would not even consider his nomination for the supreme court. you cannot turn off the water supply and then blame the president for not putting out the fire.
Below is what I wrote in May last year. The employment-population ratio is much lower and more part-time jobs were created in this recovery.
“We lost 8.7 million jobs in the recession.
We created 11.5 million jobs, since the start of the recession.
So, we had an average increase of 33,000 jobs per month, since the economy peaked in December 2007.
However, if we needed 125,000 jobs per month, since December 2007, to keep up with the population growth, then we need over 7.5 million more jobs.
Even if one-third of the output gap has been destroyed, we’d still need over 5 million jobs beyond population growth.”
Regarding politicians, there are rigid idealouges on both sides. Leadership was needed to bridge the gap. And, Obama-Reid-Pelosi didn’t help the moderates in the party.
“The employment-population ratio is much lower and more part-time jobs were created in this recovery.”
that is simple demographics. and if the government had not slashed jobs, the opposite of what has occurred during republican president recoveries, the recovery would have been even stronger.
“Leadership was needed to bridge the gap.”
and one side decided it was best to shut down the government rather than compromise-the conservatives. thank you tea party, ted cruze and the weak leadership of boehner.
This guy has been looking at presidents for a bit:
https://www.amazon.com/Presimetrics-Facts-Presidents-Measure-Issues/dp/1579128351/188-8879648-9047159?ie=UTF8&*Version*=1&*entries*=0
Thank you dd.
It piqued my interest enough I ordered a used copy.
Private Sector Jobs
During Pres. Obama’s administration more than 10,000,000 new private sector jobs have been created which is nearly 10 times the number created during the last 2 GOP presidencies COMBINED. During Pres. Clinton’s administration, TWICE as many private sector jobs were created as during Obama’s administration.
The score is: last 2 Dem presidents – 31,000,000 private sector jobs; last 2 GOP presidents – 1,000,000 private sector jobs.
Going back to the end of World War 2 – Sept., 1945, when Japan surrendered – the period consists of 35 years of Dem presidents (as of 9/16) and 36 years of Republicans, evenly interspersed. The results are clear:
63,000,000 private sector jobs under Dem presidents
26,000,000 private sector jobs under Republicans
Only Republican Reagan created more than 10,000,000 jobs, while Democrats Truman, JFK/LBJ, Clinton and Obama all surpassed that number and Carter hit 9,000,000 private sector jobs in just 4 years.
https://fred.stlouisfed.org/series/USPRIV
One possible reason for the success of the Brexit campaign was President Obama’s ill-conceived intervention, when he threatened that if Britain voted to leave the Union, it would have to go to the “back of the queue” as far as any trade agreements are concerned.
Republican President Bush blows up Iraq.
Democrat President Obama blows up the EU.
Manfred: I don’t know if it was a threat, so much as a realistic appraisal of the prioritization. Still got TPP and TTIP to go, and if UK ends up breaking up, how high in the priority list is a FTA with England?
You might want to look at a comparison of the stock market under democratic and republican administrations.
http://angrybearblog.com/2012/10/s-500-under-democratic-and-republican.html
Starting with Truman so as to get a post WWII comparison of almost 36 years under each party, the S&P 500 has risen an annual average of 14.2%under democrats compared to 7.3% when republican held the presidency.
Yup. Democratic presidents are better for future corporate profit expectations than republicans.
Republicans are about creating myths. I am about facts. The facts state the truth, not the conjecture afforded by Faux News watchers. I have known this for many years and have documents/data, graphs that show it. Finally, someone is speaking the truth about the numbers. I don’t care which party it is but I do care about the truth!
If the Republicans had a real strategy, vs. the B.S. trickle down economics (Reaganomics – and I was over 25 when this occurred so I know it from real experience) which NEVER trickles, income inequality would not be in the shape it’s in today and the economy would be shored up via a strong middle class.
The result depends almost entirely on which presidents you include. For me, living memory means since Reagan. I think that’s a fair comparison since Republicans and Democrats have each been in power about 50% of the time, and there was one severe recession each on the Republicans’ watch (Reagan) and on the Democrats’ (Obama). I ran a simple ols regression of GDP growth on a constant and a Republican dummy since ’81 and found growth was almost exactly the same for both parties. The coefficient on Republican was negative, but at -0.03 it was nearly zero. In other words, growth was 3 hundredths of a percent less under Republicans. I think this matches most people’s intuitive belief that outcomes are about the same for both parties. It’s a dumb comparison anyway since presidents generally deserve neither credit nor blame for most economic outcomes while they were in power.
Harry Lime
Your second sentence forgets that the severe recession that you say came on Obama’s watch in fact started in December 2007, under George W. Bush! Only the very tail end persisted after Obama took office in January 2009. (Again, the heavy majority of recessions have begun during Republican Administrations.) In fact, a look at the relevant charts shows that the economic freefall that Obama inherited turned around surprisingly sharply: http://www.jeffrey-frankel.com/2012/02/20/did-obama-turn-around-the-economy/
JF
I am well aware of the timing of the latest recession. You can move the goal posts around all you like to assign blame for particular shocks (plenty of Republicans would – wrongly – blame the 81-82 recession on Carter) but the fact remains that growth has been about the same since 1981 on average regardless of which party controlled the presidency. My broader point is that giving credit or blame to presidents of either party is dumb “magical” thinking. It’s like people in the middle ages blaming a plague on whether their King is catholic or protestant. What about congress? What about the fed? If they are controlled/appointed by the other party does that not count for anything? All recessions have both Republican and Democratic fingerprints all over them (no shortage of dumb, bi-partisan policies like mortgage interest deduction), or are just due to bad luck (e.g. oil shocks). I think the modern presidency needs to be taken down a peg or two, and a good place to start would be stop saying this or that president “caused” this recession or “created” this many jobs. It’s all nonsense.
Sorry, wrong about the middle ages since there weren’t any protestants 😉 , but you get the point. Instead, let’s say “whether their king is sufficiently pious”.