Today, we present a guest post 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. A shorter version appeared at Project Syndicate. I thank Sohaib Nasim for research assistance and Emil Kaneti for catching a mistake in an earlier draft.
March 28, 2024 — We have heard much about the puzzle that US economic performance under President Joe Biden has been much stronger than voters perceive it to be. But the current episode is just one instance of a bigger historical puzzle: the US economy has since World War II consistently done better under Democratic presidents than under Republican presidents. This fact is even less widely known, including among Democratic voters, than the truth about Biden’s term. Indeed, some poll results suggest that more Americans believe the reverse, that Republican presidents are better stewards of the economy than Democrats.
In a sense, it is not exactly surprising that so few people know that economic performance has been consistently better under one party than the other. The proposition sounds implausible on the face of it, like the sort of blatantly partisan claim that is not even worth checking out. The puzzle is the fact itself: that it is completely true.
The relevant statistics have been compiled before. But let’s update.
- Believe it or not
Since World War II, Democrats have seen job creation average 1.7 % per year when in office, versus 1.0 % under the GOP. US GDP has averaged a rate of growth of 4.23 percent per annum during Democratic administrations, versus 2.36 per cent under Republicans, a remarkable difference of 1.87 percentage points. This is postwar data, covering 19 presidential terms—from Truman through Biden. If one goes back further, to the Great Depression, to include Herbert Hoover and Franklin Roosevelt, the difference in growth rates is even larger.
The results are similar regardless whether one assigns responsibility for the first quarter of a president’s term to him or to his predecessor. Relatedly, the average Democratic presidential term has been in recession for 1 of its 16 quarters, whereas the average for the Republican terms has been 5 quarters, a startlingly big difference.
- Reasons to be skeptical
Even those of us who believe that Democrats may have pursued better policies than Republicans, overall, have a hard time explaining the big observed gap in performance. After all, many other powerful and unpredictable factors impact the economy, often dwarfing the effect of any policy levers that the president can control.
Furthermore, many policies, good or bad, have their main effects only over a time span longer than a presidential cycle. For example, Jimmy Carter deserves credit for appointing Paul Volcker as Chairman of the Fed in 1979 with a mandate to defeat inflation at all costs. The subsequent disinflation was ultimately successful, helping to set the stage for the Great Moderation of the next 20 years. But its immediate impact in 1980 was a recession. Most economists consider the Volcker monetary contraction to have been worth the price. But the downturn contributed to Carter’s failure to win re-election in November of that year. Ironically, that is the one and only recession in the last 70 years that took place with a Democrat in the White House.
- Is it just chance?
So, are these differences in outcomes just the result of random chance? One would think so. But the application of universally accepted statistical methodology says otherwise.
The last five recessions all started while a Republican was in the White House (Reagan. G.H.W. Bush, G.W. Bush twice, and Trump). Readers can check out the chronology for themselves. The odds of getting that outcome by chance, if the true probability of a recession starting during a Democrat’s presidency were equal to that during a Republican’s presidency, would be (1/2)(1/2)(1/2)(1/2)(1/2), i.e., one out of 32 = 3.1%. Very unlikely. The same as the odds of getting “heads” on five out of five consecutive coin-flips. Such a rejection of equality is said to be “statistically significant at the 95% level of confidence.”
What if we go back further? A remarkable 9 of the last 10 recessions have started when a Republican was president. The odds that this outcome would have occurred just by chance are even more remote: one out of 100. [That is, 10/210 = 0.0098.]
Blinder and Watson (2016) pointed out another remarkable fact. They considered the eight times since World War II when an incumbent from one party had handed over the White House to a leader from the other party. We have had two more presidents by now. Let us update, by adding the records of Trump and Biden (so far). In five of the last 10 transitions, a Democrat was succeeded by a Republican; each time the growth rate went down from one term to the next. In five of the transitions, a Republican was succeeded by a Democrat; each time the growth rate went up. No exceptions. Ten out of ten. What are the odds of this happening by chance? The answer is the same as the odds of getting heads on 10 coin tosses in a row: ½ times itself 10 times, which is 1 out of 1,024. In other words, the difference is statistically significant at the 99.9% level.
So, one can safely reject claims of stronger economic performance under Republicans. But what accounts for the surprisingly better record under Democratic presidents? It remains a puzzle.
=============== ============= ==============
Some links
Alan Blinder and Mark Watson, 2016, “Presidents and the US Economy: An Econometric Exploration.” American Economic Review, 106(4): 1015-45 April.
Jeffrey Frankel, 2016, “Does the Economy Really Do Better Under Democratic Presidents?” June. www.jeffrey-frankel.com/2016/06/27/does-the-economy-really-do-better-under-democratic-presidents/
Joint Economic Committee, US Congress, 2022, “President Biden Continues the Trend of Strong Economic Growth and Job Creation Under Democratic Presidents,” March 8, www.jec.senate.gov/public/index.cfm/democrats/2022/3/biden-continues-the-trend-of-strong-economic-growth-and-job-creation-under-democratic-presidents
John E. Schwarz, 2024, “Democratic Presidents Have Better Economic Performances than Republican Ones,” March 1, 2024. https://washingtonmonthly.com/2024/03/01/democratic-presidents-have-better-economic-performance-than-republican-ones/
This post written by Jeffrey Frankel.
Jeffrey Frankel,
It seems rather curious to quote Binder & Watson and then conclude your piece with the following line: “But what accounts for the surprisingly better record under Democratic presidents? It remains a puzzle.” Yet, Binder & Watson find 69% of post-1963 difference in economic activity between parties is due to several variables less closely tied to fiscal policy (with the balance unknown via their research). They also note policy actions are a bit more pro-growth in R administrations. Sure, the puzzle isn’t complete but your piece basically suggests that the puzzle pieces are still all in the box despite the fact that Binder & Watson completed the edge pieces of the puzzle nearly a decade ago.
For those of you who are wondering WTF Econned is bitching about now, read the past two paragraphs of the Blinder-Watson paper:
It seems we must look instead to several variables that are less closely tied to U.S. economic policy. Specifically, Democratic presidents have experienced, on average, better oil shocks than Republicans (some of which may have been induced by foreign policy), faster growth of defense spending (if the Korean War is included), and a better record of productivity shocks (which may relate to many different policies). More tenuously, both in terms of sample size and statistical significance, Democratic presidents may have also benefited from stronger growth abroad.
These factors together explain up to 56 percent of the D-R growth gap in the full sample, and as much as 69 percent over shorter (post-1963) samples. 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.”
56% or 69% is not exactly explanation of the gap which even Blinder and Watson admits. So when Dr. Frankels agrees, Econned has to bitch? Come on man,
Now Econned seems to think R administrations are better for long-term growth but Blinder and Watson note that D administration has had better productivity shocks. Hmmm – Econned does not get what that means either.
The paper by Blinder & Watson was important. (I think other macroeconomists have stayed away from this topic, for fear of sounding partisan.) But it explained the gap between Democratic and Republican economic performance by a few factors like a gap in productivity growth. That doesn’t really help answer the puzzle. The productivity differential might be exogenous or, just as well, it could be the result of different economic policies pursued by Democratic presidents versus Republican presidents. — JF
Always been a Blinder fan, going back to when I was about age 19. co-wrote my undergrad macro and micro books. Made the material accessible to dingbats like me but also where it made many parts of “the real world” easier to see through. See through the smoke and mirrors guys like Mike Johnson put up with their phony smiles and phony gestures. All Johnson is is a slightly better dressed L. Ron Hubbard. That’s all Mike Johnson is. That’s all Glenn Hubbard is as well—it’s fitting they have the same last name because they’re both just as fraudulent with every word that’s come out of their mouth.
Thank you for posting this. Thanks Professor Frankel.
When I was in middle school – I thought when Ronald Reagan defeated Carter and then proceeded to raise Social Security full retirement age to 67 – I;ve just been screwed by the Republicans – no way I will ever live to 67. Then the Republicans cut taxes for the top 1% and cut regulations causing some kind of speculative bubble (housing, financial, Bitcoin, etc.) and crash every time that GOP got in office throughout my career. I was let go during the Bush/Greenspan Great Recession – leading to six months of trying to find another job at 2/3 of salary level. Just in the past four years I’ve managed to make more in salary than I did 20 years ago. The Republicans have been an unmitigated economic disaster for everyone but especially for the tail end of Baby Boom and Gen X generations.
People vote for GOP based on fear and greed – hoping some of those tax cuts will trickle down to them – doesn’t happen and we have the economic data/research to prove it.
And now some want to put Republican Trump – an adjudicated rapist and tax fraud – back into office so he can cut your healthcare and Social Security.
It is almost all fear but with a little bit of greed sprinkled in. I remember someone at work being so happy that the Bush tax cuts had given her another $25 per paycheck. You got to shake your head at that kind of nonsense. Its like the infinite morons who talk about increased corporate profits being bad, without looking at where that profit came from, and whether it was shared with workers. Innumeracy is a pandemic almost as bad as pure stupidity.
However, I do think GOP is mostly building their strength on fear. It has always been the big GOP distractor for the sheeple that crime, illegals, drugs, national debt, etc. is an out of control CRISIS (when democrats are in power) that the “party of law and order” (you can’t make this sh** up), will fix.
One thing for sure…corporate profits have risen dramatically under Biden, reaching record highs for both profits and profit margins:
https://fred.stlouisfed.org/series/A053RC1Q027SBEA
https://fred.stlouisfed.org/series/A053RC1Q027SBEA
It’s what happens when Corporate American Oligopolies can just pocket the savings on their cost of goods. [But shhh…let’s not talk about that!]
myf.red/g/QUX0
Remember how some of the corporate stooges here were bleating about how much Corporate America was suffering as a result of higher interest rates?
You’re lying again, Johnny. Find any comment here in which corporate profits were the concern of those calling for lower interest rates. Just one.
Liar.
Actually, you’re right, Tricky Ducky. You weren’t directly calling for higher corporate profits when you were calling for higher interest rates. But higher corporate profits are unquestionably an unstated collateral benefit of lower interest rates…or are they actually a primary feature?…along with the resulting higher equity prices to pad the fortunes of the Top 1%.
Like Sherlock Holmes dog that didn’t bark, you have to look for what’s unstated when Wall Street stooges advocate for a policy that “benefits workers” (maybe someday) while actually helping the wealthy immediately.
“But higher corporate profits are unquestionably an unstated collateral benefit of lower interest rates”
Are you truly the dumbest troll ever? Operating profits are by definition the revenues a firm generates minus the operating expenses it occurs. Lower interest rates raise operating profits? WTF? Jonny boy – we have asked you to stop embarrassing your own mother with such idiotic comments but NO. You continue to write the dumbest trash God ever imagined.
Dude – we get you’ll never pass a community college course in basic economics but could you at least try to grasp Accounting 101? GEESH!
Johnny is, of course, lying again. He insists that his preference for job-killing policies is motivated by his concern for workers. You can judge his sincerby the number of times he has mumble-splained to us that high interest rates are good for savers. The biggest savers are rich people – look up “capitalism” for an explanation of how that works – so what does Johnny do? He accuses me of working for rich people. Every accusation is an admission.
This is just another aspect of Johnny’s corruption. Whenever he is caught making a basic logical error or lying or revealing his own ignorance, he lies about the motives of those who have exposed him. That’s who Johnny is.
Did you see that the DOJ initiated an anti-trust suit against Apple? Jonny boy missed this apparently. Oh wait – you have been informing us of a lot of pro-competition efforts from the Biden Administration. It seems little Jonny boy has not noticed this either.
I have worked on a couple of these things in the past and trust me – these efforts take time. But little Jonny boy has an attention span of a retarded monkey so this pathetic troll thinks that if such efforts do not materialize in a day or two – they do not count.
Johnny desperately wants to blame Biden for high corporate margins. Of course, Biden opposes Putin’s war on Ukraine, so naturally high corporate profits are Biden’s fault.
Or maybe the problem is low corporate taxes. Here’s corporate tax payments as a share of GDP:
https://fred.stlouisfed.org/graph/?g=1jaRS
Oh, and Johnny? In case you missed it, corporate taxes are an automatic stabilizer. With Joe calling for higher taxes on corporate earnings, exactly in line with what Johnny claims he wants, you’d think Johnny wouldn’t blame Joe, but that business of supporting Ukraine just has to mean that everything is Joe’s fault.
Forbes expands on how good Corporate America has it: “Nonfinancial corporations have also used their profits to increase their cash stockpiles. Liquid assets amounted to $7.2 trillion in December 2023 up from $6.1 trillion in December 2019 – all measured in December 2023 dollars. This increase in liquid assets was faster than the overall gains in all nonfinancial corporate assets. The share of liquid assets out of total assets increased from 10.8% in December 2019 to 12.1% at the end of 2023. Aside from rewarding shareholders, highly profitable companies prioritize their own cash reserves.
On the other side of the ledger, nonfinancial corporations have not been spending extraordinarily large amounts on capital expenditures. Capital expenditures always exceed profits as companies finance a lot of their investments with debt or new equity issues. But, the ratio of capital expenditures for this business cycle averaged to a historically low 132.8% of after-tax profits – the lowest such ratio on record, dating back to 1952. Capital expenditures from nonfinancial corporations equaled 10.0% of gross domestic product (GDP) in the last quarter of 2023 and 9.9% for the entire business cycle, in line with prior business cycles. This also means that corporations are not leading an investment boom across the economy, even as the country faces massive challenges in the areas of climate change, artificial intelligence and population aging, to name some of the most important ones.”
https://www.forbes.com/sites/christianweller/2024/03/20/high-corporate-profits-go-to-dividends-and-cash-stockpiles/?sh=2b88aa3a2842
Bottom line: With their increasingly ample pile of cash on hand coupled with their low capital investment rates, corporations are unlikely to be incentivized by lowering interest rates. Like during the 2010s, trying to stimulate growth this way would be like pushing on a wet noodle.
“corporations are unlikely to be incentivized by lowering interest rates. ”
companies with large amounts of liquid assets (ie cash) make more money by placing that in treasuries when rates are high. as I have told you before, high interest rates benefit those who have cash (ie the wealthy). they hurt the average Joe, who has little cash but always accumulates debt. ponzi Johnny, your comments make no sense. and your economic models make no cents.
You get basic finance. Poor little Jonny boy is still struggling with how to tie his shoe laces.
it just seems ponzi Johnny does not really understand economics and capitalism. he tries to fit the world into a communist economic model, which we have seen when implemented has failed every time. ponzi Johnny believes that high rates of return should be earned on risk free investments. then he goes on to argue that corporations flush with cash will be more incentivized to spend when interest rates on that cash are high rather than low. his economic models are completely backwards from reality. and yet he continues to pose on this blog like he has valid points. ponzi Johnny is a charlatan and a fraud.
High interest rates are an incentive to hold cash, you idiot. It’s bad enough when you make up some utter non sequitur, but you just made the case for cutting rates. Clueless.
I’ll explain, in short sentences so you might be able to keep up:
When interest rates are high, only investments which pay a high return are made. In a high rate environment, holding cash is likely to be preferable to many capital investments which firms might make in a lower rate environment. That’s why many capital investments which might be made in a lower rate environment aren’t made when rates are high.
Johnny, it’s amazing that you still pretend to Putin-splain economics here when you’ve been caught making mistakes like this on over and over, but you just keep doing it. It’s freaky.
Forbes is a right wing pro corporate newspaper. OK – there are a few good reports from them but little Jonny boy has to frequent Forbes as he is now Kudlow’s BFF.
“Capital expenditures from nonfinancial corporations equaled 10.0% of gross domestic product (GDP) in the last quarter of 2023 and 9.9% for the entire business cycle, in line with prior business cycles. This also means that corporations are not leading an investment boom across the economy”
So Forbes is saying investment demand is not that high. Huh – what one would expect when interest rates are high. But not in Jonny boy’s little world. Dude – you need to stop reading the business press as your incredible ignorance of even the basics is already too damn obvious.
Instead of reading Johnny’s “Underwear Gnome” logic, we can see what real empirical analysis reveals about investment decisions. This is from U. Chicago:
https://bfi.uchicago.edu/working-paper/sticky-discount-rates/?utm_campaign=Hutchins%20Roundup&utm_medium=email&utm_content=300263974&utm_source=hs_email
The gist is that firms do not readily change their investment decisions in response to increased inflation expectations. That means firms accept lower rates of real return with an increase in expected inflation. Accepting lower rates means, all else equal, more capital investment.
So, here’s what we have:
– Johnny made a hash of the relationship between interest rates and investment for the umpteenth time. He got both the direction of causation and the effect wrong.
– Meanwhile, we have evidence that firms’ capital spending decisions are relatively insensitive to changes in inflation expectations (which tend to be backward-looking, implying that investment decisions may also be insensitive to realized inflation), reducing the argument for maintaining high interest rates.
Reality 2, Johnny 0.
We show that firms’ nominal required returns to capital (i.e., their discount rates) are sticky with respect to expected inflation. Such nominally sticky discount rates imply that increases in expected inflation directly lower firms’ real discount rates and thereby raise real investment. We analyze the macroeconomic implications of sticky discount rates using a New Keynesian model. The model naturally generates investment-consumption comovement in response to household demand shocks and higher investment in response to government spending. Sticky discount rates imply that inflation has real effects, even absent other nominal rigidities, making them a distinct source of monetary non-neutrality. At the same time, sticky discount rates make the short-term interest rate less effective at stimulating investment. Optimal monetary policy focuses on inflation expectations and permanently lowers the long-run inflation target in response to expansionary shocks, even when shocks are temporary.
More solid economics which flies WAY over Jonny boy’s little pea brain.
Gee Jonny boy – your own graph shows that over the past 1.5 years, nominal profits have risen by less than 0,3%. Now we get you just make up data re inflation but come on man – even a lying moron like you has to know real profits have declined. But do keep up contradicting yourself! It is your only talent.
No, actually, I don’t. I mainly remember you bleating about how lowering interest rates wouldn’t affect unemployment rates, about how the Russian invasion of Ukraine and the fact that those moronic dupes in Ukraine were resisting was the fault of U.S. corporate interests, and a lot of other nonsensical stuff.
You have one more step to take before you become “ltr v2.0”: tell us about Russia’s 3,000-year-old civilization, how wonderfully peaceful and benign it is, and how proud you are to be able to say that.
“It remains a puzzle.” Let’s accept that the difference is, in fact, beyond explanation. It is still the case that Republicans have no claim to better economic stewardship, while Democrats can make that claim.
Similarly, claims that tax cuts boost growth or boost employment or boost wages do not stand up to examination. Certainly, self-funding tax cuts are a myth at any tax rate seen in the U.S. in the past 60 years or so.
So one party has the superior record, even if we can’t figure out why. The other party promotes economic policies which are demonstrably wrong. (Maybe the problem is that Republicans waste their policy opportunities on things that don’t work.) The choice for voters should be clear, even if we can’t figure out why Democratic leadership works out so much better.
One argument could be made that there is a lag effect. And after 4 years of Republican policy, when the Democrat takes office he reaps the benefits of a growing economy. And vice versa, when a Democrat holds office for 4 years, the Republican has to clean up the mess that resulted. If we look at two term presidents, then the second term should follow that outcome. Not sure if that is the case. Prof. Frankel, do you have any thoughts on this scenario? And thank you for putting this into concrete writing-the narrative must change in the media.
To Baffling:
You are right; there are no doubt cases where policies adopted by a president of one political party have their maximum effects (good or bad) during a subsequent term of a president of the other party. But given the variety of timing of the two parties’ terms in office — sometimes a single term (like Carter, GHW Bush, or Trump), sometimes two terms (Eisenhower, Kennedy-Johnson, Nixon-Ford, Clinton, GW Bush, Obama), and sometimes three terms (Reagan-Bush), it doesn’t seem that lags can explain the statistically significant pattern of outcomes. — JF
As a partial answer:
Eisenhower II: Recession
Kennedy – LBJ II: No recession
Nixon – Ford II: Recession
Reagan II: No recession
Reagan – Bush III: Recession
Clinton II: No recession
Bush II : Recession
Obama II: No recession
Second-term and third-term Republican administrations have 4 recessions out of 5.
Second-term Democrats have no recessions out of 3.
If we assume independence (uhhh….) there’s about a 7% chance that all 4 recessions would occur in the 5 Republican second and third terms by chance.
There is a hint in the fact that growth under Republican presidents is low on average; Republican presidencies end in recession. That has meant the the Obama and Clinton presidencies began in either recession or early recovery. As a result, Obama’s second term GDP growth averaged 2.3% per year while his first term average was 1.3%. Clinton’s second term average growth was 4.5% vs 3.3% in his first. Bush Jr., on the other hand, had book-end recessions, with growth in his second term averaging 2.1% against 2.4% in his first. For Reagan, average growth was 3.9% insisted second term vs 4.0% in his first.
So if we take acceleration of growth into a President’s second term as a sign of good economic governance – which seems as reasonable an assumption as any, if we credit presidents with economic performance – Democrats come out ahead again.
so the case is even stronger that economic performance is better under democratic presidents than republican presidents. unless one does not believe in data. thank you.
Russian propaganda network busted.
https://www.bbc.com/news/world-europe-68685604
They actually paid politicians in the EU parliament. Only a matter of time before we find out who and how much was paid in US political and news organizations.
Distributing money to the consumer class should always be expected to give better growth than giving it to the investor class. Consumption is directly linked to (and constitutes about 70% of) GDP. The consumer class don’t let the money sit idle anywhere, they immediately get it back to work, by spending it. The investor class will place extra money in savings/investments, which only can help grow GDP if there is an actual need for additional productive investments (that is if consumption demand more products/services). If you give the investor class money and there is no unfulfilled need for investments, then you just get bubbles – which usually ends bad. There is actually a rationale for saying that all demands for productive investments will be fulfilled – because they will create stock market opportunities that takes that money from one (relatively overvalued) stock and put it into another (undervalued) stock. So if there is no “new” money the markets will still send (old) money into a productive investment as needed.