[These two pages were written for an OMFIF report released Oct. 28. They draw on some of my preceding columns.]
If one judges by the two candidates’ economic policy stances, the 2016 US presidential campaign is not quite as much of a departure from the past as it otherwise appears. Hillary Clinton’s economic plans largely echo Democratic Party orthodoxy, with its focus on progressive tax rates which ease the burden on the lowest earners while raising it for those at the top; on expanding social welfare programmes, especially education and childcare; and on advocating greater regulation of financial institutions. She also has a traditional focus on increasing labour force participation. Donald Trump’s proposals for his part reflect important traditional policies of the Republican Party, including huge tax cuts for the rich and expanded military spending, despite the radical unorthodoxy of many of his statements such as contemplating renegotiation of the government debt.
Economic growth record of Democratic vs. Republican presidents
Analysis of the US economy since 1945 shows that it has performed better under Democratic presidents than Republican ones, judged by a wide variety of indicators. A recent paper by Princeton University economists reports that annual GDP growth has averaged 4.3% during Democratic administrations compared to 2.5% under Republicans, with the performance gap widening even further if the analysis is extended back to Herbert Hoover’s administration in 1929.
The figures are also stark when looking at the occurrence of recessions. Of the 256 quarters covered by post-war presidents from Truman to Obama, the US economy was in recession for an average of 1.1 quarters during Democratic presidencies and 4.6 quarters during the Republican terms. The odds that such a large difference is the result of mere chance are no more than one in 100.
On unemployment the Democrats have also fared better, with the rate falling by 0.8 percentage points on average under Democratic presidents, and rising by 1.1 percentage points under Republicans – a remarkable difference of 1.9 percentage points. The structural budget deficit has averaged 1.5% of GDP under Democratic presidents, against 2.2% for Republicans.
The likelihood that luck alone could have produced such large and consistent differences in economic performance is extremely low. There is only a 100-to-one chance that nine out of the last 10 recessions would have begun under Republican presidents. Yet they did, as confirmed by the data of the NBER Business Cycle Dating Committee. The odds are even steeper – 256-to-one – against the likelihood of GDP growth slowing every time a Republican took office and speeding up every time a Democrat became president; yet this too has happened.
This pattern has continued under President Barack Obama. In January 2009 he inherited an economy in freefall. The nosedive ended almost immediately after he took office (whether measured by job losses, growth rates, or the financial markets). The recession ended in June 2009, aided by such measures as the Obama fiscal stimulus that was enacted in February over Republican opposition. The economy went on to set a record for consecutive months of employment growth. The last pre-election employment report showed that, as of October of this year, the cumulative number of private sector jobs created since early 2010 reached 15 ½ million.
If the total economic pie tends to grow faster under Democrats, what about the way the pie is divided up? Much discussion in this election year has focused on inequality and particularly the role of globalization.
Trump emphasizes negative effects of globalization on low-wage manufacturing employment and wants to reverse the trend. It is true that trade, like technological change and other sources of growth, creates both winners and losers. But a fundamental proposition in economics holds that when individuals are free to engage in trade, total income increases enough that the winners could, in theory, compensate the losers, leaving everyone better off.
Globalization skeptics correctly point out that, in practice, the compensation often remains hypothetical. But no president can undo globalization even if he or she wants to. Fortunately, there is a better option. We can take globalization as a given, and adopt measures to help improve life for those who lose out. The two parties have historically differed on the latter approach and continue to do so.
Democrats have consistently supported policies to help those who have been left behind, such as Trade Adjustment Assistance, an expanded Earned Income Tax Credit, wage insurance, universal health insurance, universal high-quality pre-school education, and a big program for infrastructure investment. Republican politicians have mostly opposed these policies. A few of the policies, such as Obamacare, have managed to get through nonetheless. They may help explain why, according to the annual statistics released on September 13 by the Census Bureau, last year finally saw a big drop in inequality. Real median household income rose 5.2 percent in 2015 — the fastest growth on record — with lower-income groups advancing even more. The poverty rate experienced its largest one-year drop since 1968.
Thus we can expect from a new Clinton administration policies that would help produce both a larger economic pie and more even distribution… if she has the votes in Congress to pass them.
Weighing up Clinton’s plans versus Trump’s
Furthermore Secretary Clinton’s proposals are paid for. Meanwhile, the arithmetic of Trump’s fiscal plans fails to add up. While proposing to cut the corporate tax rate to 15%, from 35% currently, his proposal fails to broaden the tax base, resulting in a significant loss of tax revenue. Trump would also reduce the highest personal income tax rate sharply and abolish the estate tax for the wealthy. He simply asserts that increased economic growth will make up the shortfalls, without offering any good reason to expect it to happen.
His fiscal plans have been so ill-defined and changeable that it is hard to evaluate them. He says different things to different audiences. But independent analysts have estimated that his announced tax policies would lead to $5 – $10 trillion in revenue losses over the course of just one decade (depending which of his “plans” one evaluates.) This fiscal cost goes even beyond the trend of past Republican presidents, who propose large specific tax cuts, without specific spending cuts, and yet claim they will reduce the deficit. Instead, history shows they have produced much larger average budget deficits.
Despite the unconventional nature of much of this election, the underlying issues remain broadly similar to previous campaigns. The Democratic candidate still favours policies like progressive taxation, wage insurance and universal health insurance, and the Republican candidate still opposes them. So American voters on November 6 will still make a choice over the issues that have always divided the two parties. Whether this means the trend of historically stronger economic performance under a Democratic president – and weaker performance under a Republican – will be extended remains to be seen. But history suggests we would do better under a Hillary Clinton administration.