Category Archives: conservatives and liberals

Does the Economy Really Do Better Under Democratic Presidents?

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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 a bit better if the Democrats have appointed the Federal Reserve chairman or 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.


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.  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.  (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.

[A shorter version of this column appears in Project Syndicate.  Comments can be posted there or at Econbrowser.]

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TPP Critics’ Nighttime Fears Fade by Light of Day

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The TPP (Trans Pacific Partnership) that was finally agreed among trade negotiators of 12 Pacific countries on October 5 came as a triumph over long odds.  Tremendous political obstacles, domestic and international, had to be overcome over the last five years.  Now each country has to decide whether to ratify the agreement.

Many of the issues are commonly framed as “Left” versus “Right.”  The unremitting hostility to the negotiations up until now from the Left – often in protest at being kept in the dark regarding the text of the agreement — has carried two dangers.  One danger was that opponents would succeed in blocking negotiations altogether.  Indeed, when Democrats in Congress voted against giving President Obama the necessary authority in June, the entire negotiations were widely declared to be dead. This would have been a shame — at least in the view of most economists — because the resulting trade liberalization was very likely in the end to turn out beneficial overall.

The second danger was that the Administration would be forced at the margin to move to the “Right” in order to pick up votes from Congressmen who said they would support the outcome if (and only if) it contained provisions that were sufficiently generous to American corporations.  Those concerned about labor and the environment risked hurting their own cause by seeming to say that they would oppose the agreement no matter how well it did at including provisions to their liking, which could have undermined the White House incentive to pursue their issues.

In this light, this month’s outcome is a pleasant surprise.  In the first place, the agreement gives the pharmaceutical firms, tobacco companies, and other corporations substantially less than they had asked for — so much so that Senator Orrin Hatch (Utah) and some other Republicans now threaten to oppose ratification in the final up-or-down vote.   In the second place, the agreement gives the environmentalists more than most of them had bothered to ask for.  I don’t know the extent to which what we are seeing was the result of hard bargaining by other trading partners such as Australia.  Regardless, it is a good outcome.  The domestic critics might consider now taking a fresh look with an open mind.

The issues that are the most controversial in the US are sometimes classified as “deep integration,” because they go beyond the traditional negotiated liberalization in trade tariffs and quotas.  Two categories are of positive interest to the Left: labor and the environment. Two categories are of “negative interest” to the Left in the sense that it has feared excessive benefits for corporations:  protection of the intellectual property of pharmaceutical and other corporations and mechanisms to settle disputes between investors and states.

Now that the long-delayed agreement is completed, what turns out to be in it?  Two good things in the TPP’s environment chapter are especially noteworthy.  First, it takes substantial steps to enforce prohibition of trade in endangered wildlife — banned under CITES (Convention on International Trade in Endangered Species) but insufficiently enforced.  Second, it also takes substantial steps to limit subsidies for fishing fleets — which in many countries waste taxpayer money in pursuit of the overfishing of our oceans.  For the first time, apparently, these environmental measures will be backed up by trade sanctions.

I wish that certain environmental groups had spent half as much time ascertaining the specific possibility of good outcomes like these as they spent in sweeping condemnations of the process.  The agreement on fishing subsidies was reached in Maui in July; but critics were too busy to take notice.   Fortunately it is not too late for them to climb on board now.

Some NGOs might still worry that these provisions will not be enforced strongly enough.  But trade penalties are among the most powerful tools for enforcement of international agreements that exist; for that reason environmental groups in the past have asked that such measures be placed in the service of environmental goals.   There is no denying that the TPP provisions on endangered species and fishing are steps forward.

A variety of provisions in the area of labor practices, particularly in Southeast Asia, should also be of interest. They include steps to promote union rights in Vietnam and steps to crack down on human trafficking in Malaysia.

The greatest uncertainties were over the extent to which big US corporations would get what they wanted in the areas of investor-government dispute settlement and intellectual property protection.   On the one hand, critics often neglected to acknowledge that international dispute settlement mechanisms could ever serve a valid useful purpose.  Similarly, they often neglected to acknowledge that some degree of patent protection is indeed needed if pharmaceutical companies are to have an adequate incentive to invest in research and development of new drugs.  But, on the other hand, there was indeed a possible danger that such protections for corporations could have gone too far.

The dispute settlement provisions might have interfered unreasonably with member countries’ anti-smoking campaigns, for example.  In the end, the tobacco companies did not get what they had been demanding.  Australia is now free to ban brand name logos on cigarette packets.  TPP sets a number of other new safeguards against misuse of the investor-state dispute settlement (ISDS) mechanism as well.  For example there is a provision for rapid dismissal of frivolous suits.  The rest of the details are publically available in clear bullet point form, from USTR, if one takes the trouble to read them.

The intellectual property protections might have extended to other TPP member markets a 12-year period of protection for the data that US pharmaceutical and bio-technology companies compile on new drugs (biologic medical products, in particular), and might have made it too hard for generics to eventually bring the benefits to the public at lower costs.  In the end, these companies too did not get much of what they had wanted. The TPP agreement assures protection of their data for only 8 years in some places and 5 years in others and instead relies on the latter countries to use other measures to constrain the appropriation of the firms’ intellectual property.

The focus on new areas of deep integration should not obscure the old-fashioned free-trade benefits that are also part of TPP: reducing thousands of existing tariff and non-tariff barriers that inhibit trade.  Many of these reductions benefit US exports.   (Most US barriers against imports were already very low.)  Liberalization in manufacturing includes the auto industry, for example. Liberalization in services includes the internet.

The liberalization of agriculture is noteworthy; this sector has long been a stubborn holdout in international trade negotiations.   Countries like Japan have agreed to let in more sugar, beef, pork, rice and dairy products, from more efficient producer countries like Australia and New Zealand. In all these areas and more, traditional textbook arguments about the gains from trade apply: new export opportunities, higher wages, and a lower cost of living.

Many citizens and politicians made up their minds about TPP some time ago, based on having read seemingly devastating critiques of what was feared would emerge from the trade negotiations.   When the text of the agreement is released is the time for the critics to read the specifics that they have so long hungered to see and to decide whether they can support it after all.  They just might discover that their nighttime fears are much diminished by the light of day.

[A shorter version appeared at Project SyndicateComments can be posted there or at Econbrowser.]

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Only Tsipras Can “Go to China”

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Alexis Tsipras, the Greek prime minister, has the chance to play a role for his country analogous to the roles played by Korean President Kim Dae Jung in 1997 and Brazilian President Luiz Inácio Lula da Silva in 2002.  Both of those presidential candidates had been long-time men of the left, with strong ties to labor, and were believed to place little priority on fiscal responsibility or free markets.  Both were elected at a time of economic crisis in their respective countries. Both confronted financial and international constraints in office that had not been especially salient in their minds when they were opposition politicians.  Both were able soon to make the mental and political adjustment to the realities faced by debtor economies.  This flexibility helped both to lead their countries more effectively.

The two new presidents launched needed reforms.  Some of these were “conservative” reforms (or “neo-liberal”) that might not have been possible under more mainstream or conservative politicians.

But Kim and Lula were also able to implement other reforms consistent with their lifetime commitment to reducing income inequality.  South Korea under Kim began to rein in the chaebols, the country’s huge family-owned conglomerates. Brazil under Lula expanded Bolsa Familia, a system of direct cash payments to households that is credited with lifting millions out of poverty.

Mr. Tsipras and his Syriza party, by contrast, spent their first six months in office still mentally blinkered against financial and international realities.  A career as a political party apparatchik is probably not the best training for being able to see things from the perspective of other points on the political spectrum, other segments of the economy, or other countries.  This is true of a career in any political party in any country but especially one on the far left or far right.

The Greek Prime Minister seemed to think that calling the July 5 referendum on whether to accept terms that had been demanded previously by Germany and the other creditor countries would strengthen his bargaining position.  If he were reading from a normal script, he would logically have been asking the Greek people to vote “yes” on the referendum.   But he was asking them to vote “no”, of course, which they did in surprisingly large numbers.   As a result – and contrary to his apparent expectations — the only people’s whose bargaining position was strengthened by this referendum were those Germans who felt the time had come to let Greece drop out of the euro.

The Greek leadership discovered that its euro partners, predictably, are not prepared to offer easier terms than they had been in June, and in fact are asking for more extensive concessions as the price of a third bailout.  Only then, a week after the referendum, did Mr. Tsipras finally begin to face up to reality.

The only possible silver lining to this sorry history is that some of his supporters at home may – paradoxically – now be willing to swallow the bitter medicine that they had opposed in the referendum.  One should not underestimate the opposition that reforms will continue to face among Greeks, in light of the economic hardship already suffered.  But like Kim dae Jung and Lula, he may be able to bring political support of some on the left who figure, “If my leader now says these unpalatable measures are necessary, then it must be true”.  As they say, Only Nixon can go to China.

None of this is to say that the financial and international realities are necessarily always reasonable.  Sometimes global financial markets indulge in unreasonable booms in their eagerness to lend, followed by abrupt reversals.  That describes the large capital inflows into Greece and other European periphery countries in the first ten years after the euro’s 1999 birth.  It also describes the sudden stop in lending to Korea and other emerging market countries in the late 1990s.

Foreign creditor governments can be unreasonable as well.   The misperceptions and errors on the part of leaders in Germany and other creditor countries have been as bad as the misperceptions and errors on the part of the less-experienced Greek leaders.   For example the belief that fiscal austerity raises income rather than lowering it, even in the short run, was a mistaken perception.  The refusal to write down the debt especially in 2010, when most of it was still in the hands of private creditors, was a mistaken policy.  These mistakes explain why the Greek debt/GDP ratio is so much higher today than in 2010 — much higher than was forecast.

A stubborn clinging to wrong propositions on each side has reinforced the stubbornness on the other side.  The Germans would have done better to understand and admit explicitly that fiscal austerity is contractionary in the short run.  The Greeks would have done better to understand and admit explicitly that the preeminence of democracy does not mean that one country’s people can democratically vote for other countries to give them money.

In terms of game theory, the fact that the Greeks and Germans have different economic interests is not enough to explain the very poor outcome of negotiations to date.  The difference in perceptions has been central.  “Getting to yes” in a bargaining situation requires not just that the negotiators have a clear idea of their own top priorities, but also a good idea of what is the top priority of the other side.   We may now be facing a “bad bargain” in which each side is called upon to give up its top priorities.  On one side, Greece shouldn’t expect the ECB and the IMF to be willing explicitly to write down the debt they hold.  On the other side, the creditors shouldn’t expect Greece to run a substantial primary budget surplus.  A “good bargain” would have the creditors stretch out lending terms even further so that Greece doesn’t have to pay over the next few  years and would have the Greeks committing to structural reforms that would raise growth.

One hopes that the awful experience of the recent past has led both sides to clearer perceptions of economic realities and of  top priorities.   Such evolution is necessary if the two sides are to arrive at a good bargain rather than either a bad bargain or a failure of cooperation altogether. The non-cooperative equilibrium is that Greek banks fail and Greece effectively drops out of the euro. This may be even worse than a bad bargain, although I am not sure.

Admittedly, both Kim and Lula had their flaws.  Moreover, Korea and Brazil had some advantages that Greece lacks, beyond Syriza’s delay in adapting to realities.  They had their own currencies. They were able to boost exports in the years following their currency crises.

But a recurrent theme of the Greek crisis ever since it erupted in late 2009 is that both the Greeks and the Euro creditor countries have been reluctant to realize that lessons from previous emerging market crises might apply to their situation.  After all, they said, Greece was not a developing country but rather a member of the euro.   (This is the reason, for example, why Frankfurt and Brussels at first did not want Greece to go to the IMF and did not want to write down the Greek debt.)  But the emerging market crises do have useful lessons for Europe.  If Tsipras were able to shift gears in the way that Kim dae Jung did in Korea and Lula did in Brazil, he would better serve his country.

[An earlier version appeared in Project Syndicatecomments are welcome there.]



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