Goosing the Economy

GOOSING THE ECONOMY….Larry Bartels says that Democratic presidents produce higher economic growth than Republican presidents, and that the differences in average growth rates for middle-class and poor families (but not affluent families, apparently, who do well under both parties) are statistically significant by conventional social-scientific standards. Charts here.

So what’s going on? Paul Krugman says he’s uncertain about Bartels’s results because he can’t figure out a “plausible mechanism” for them — a common reaction among economists, who generally don’t believe that presidents influence the economy enough to produce the kinds of differences Bartels documents. Bartels himself isn’t sure what causes the effect either, but takes a crack at an explanation here:

One of my aims in writing Unequal Democracy was to prod economists and policy analysts to devote more attention to precisely that question. Douglas Hibbs did important work along these lines in the 1980s, documenting significant partisan differences in post-war macroeconomic policies. He found that Democrats favored expansionary policies producing substantially higher employment and growth rates, while Republicans endured and sometimes prolonged recessions in order to keep inflation in check. (Not coincidentally, unemployment mostly affects income growth among relatively poor people, while inflation mostly affects income growth among relatively affluent people.)

In recent decades taxes and transfers have probably been more important. Social spending. Business regulation or lack thereof. And don’t forget the minimum wage. Over the past 60 years, the real value of the minimum wage has increased by 16 cents per year under Democratic presidents and declined by 6 cents per year under Republican presidents; that’s a 3% difference in average income growth for minimum wage workers, with ramifications for many more workers higher up the wage scale. So, while I don’t pretend to understand all the ways in which presidents’ policy choices shape the income distribution, I see little reason to doubt that the effects are real and substantial.

Tyler Cowen, noting that the biggest changes in inequality come in the second year of a president’s term, suggests that anti-inflationary zeal is the causal mechanism:

Republicans are more willing to break the back of inflation and risk an immediate recession. Alternatively, it could be said that central bankers expect enough support for tough, anti-inflation decisions only from Republican Presidents….Other plausible channels for income inequality effects, such as tax and regulatory decisions, would not be concentrated in the second year of each administration.

….Inflation is good for the poor in the short run, since many poor are debtors. But inflation is bad for the poor in the long run. Just ask anyone who lived through the New Zealand inflation of the 1970s. So Bartels could have entitled his key graph: “Democratic Presidents live for the short run and we need a Republican President every now and then.”

It’s worth noting that there’s a fair amount of agreement between these two views. The low-inflation environment of the past decade or two may have broken the link, but before that Democrats were certainly more oriented toward wage growth than Republicans, who were generally more obsessed with keeping a check on budget deficits and inflation.

But policy almost certainly matters too, and I’m not sure Tyler is right about this being inconsistent with the observation that growth differences are highest in the second year of an administration. Presidents tend to be at the peak of their power in their first year, and that’s when they’re most able to pass major economic reforms: think of Bush and Reagan’s tax cuts, Clinton’s economic plan, and LBJ’s Great Society. It’s not implausible that, on average, the biggest changes come in the first year of a new administration and show their biggest effect in the second year.

In any case, the evidence that Democratic administrations provide higher growth is surprisingly robust. And it’s not just growth: Democratic presidents also provide lower inflation, lower unemployment, higher stock market growth, and lower inequality — and they do so regardless of whether you build a lag time into the analysis to account for the time it takes for economic policies to have an effect. It’s true that, by all accounts, nobody believes presidents have enough impact on the economy to be responsible for this, but there are now enough postwar data points to make coincidence an unlikely explanation. Something seems to be going on. It’s well worth some serious investigation.

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