Thursday, November 04, 2004

Does the Economy Fare Better or Worse under Republicans?

Part of the bad news of Tuesday's election of George W. Bush is that, based on historical data, we can expect the economy to do quite a bit more poorly during the next four years than it would have under John F. Kerry. This will surprise no one who has been monitoring his stock portfolio for the last 4 years. But it goes much deeper than that. Since 1929, by two of the measures that most affect Americans, Democratic presidents have presided over stronger economic growth than Republicans have. Democrats have led in job creation and (this surprises most people) Democrats have lead in stock market growth. Let me lay out the details.

First, from job growth figures (published in the New York Times on August 8th, 2004, "In Elections, It's Not Always About Jobs") and census data (which can be found here), we know that many more new jobs are created during Democratic administrations. Since 1929, the average Democratic administration has seen the creation of 4 new jobs per 100 Americans. The average Republican administration has seen the creation of only 1 new job per 100 Americans. For example, the economy created between 4 and 5 jobs/100 Americans during the 4 years in each of 4 Democratic administrations: Clinton 2, Clinton 1, Carter, and Roosevelt 1. Only one Repulican administration did this well: Reagan 2. That's still less than the best: 2 administrations oversaw the creation of 5-6 new jobs/100 Americans: Roosevelt 3 and Johnson, both Democrats. On the other hand, Republicans have repeatedly turned in very bad jobs performance: outstanding are the Hoover administration, which lost just over 5 jobs/100 Americans, and George W. Bush had, as of August, lost half a job/100 Americans.


Second, let's consider stock market growth figures. For many of us, these figures determine whether our life savings will or will not bring a comfortable retirement. Data are from this paper by Santa-Clara and Valkanov. They show that savings invested in the stock market do much better during Democratic presidential administrations. Since 1929, the average Democratic administration has seen 11% excess value-weighted annualized return on stocks invested in an S&P 500 Index Fund. The average Republican administration has shown 0% annual return by the same measure. Yes, that's right, 0%. To give a few examples, annual returns have been between 10% and 20% during 5 Democratic administrations: Clinton 1, Kennedy/Johnson, Truman, Roosevelt/Truman, and Roosevelt 3. These are average Democratic administrations; again there are a couple that have done better. Again only one Republican administration did this well: Eisenhower 1. But most Republicans have done far worse: during the Hoover administration the famous stock market crash meant a 25% annualized loss in stock value, and during the Nixon/Ford and George W. Bush administrations stocks lost between 5% and 10% per year. No Democrats have done this badly.

In summary, by these two measures, the economy is nearly stagnant when Republicans are in the White House, and grows robustly when Democrats are.

In the past, Republicans have been so successful in spinning this data that it's not even widely known. What does the data mean? It probably means that the president has a great deal of power over the economy and Democratic presidents have done a better job with it than Republicans. But there are a few other possibilities we do have to (and can) set aside.

First of all, it's not just chance or "bad luck". For example Republicans might hope that the economy did badly under their administrations because they had the bad luck of presiding over the Depression, several recessions, oil price spikes, and even terrorist attacks, whereas the Democrats' economies did well because they had the good luck of shepherding the country out of the Depression and presiding over the post-WWII boom, a vital economy in the 1960s, and the internet boom. Common sense tells us that this is a vanishingly unlikely distribution of the luck (and so does a statistical t-test).

Second, it's not the result of the presidents' effect on the economy being delayed by four years. Again, common sense alone tells us this can't be so, because the party of the president doesn't change like clockwork every four years or every eight -- rather, eight years of Clinton followed twelve years of Bush and Reagan which followed four years of Carter and so on. To check this, I have repeated both the jobs and the stocks analyses under the assumption of four, eight, twelve, or sixteen-year delays between the presidents' actions and their effects. With such long delays the differences that you see in the attachment are no longer present. This means that the party of the president in the White House is related to economic performance at that time, but if there is any effect on the economy at a later time it is smaller and therefore can't be measured.

Third, it's not specifics of these measures. If we instead look at the total number of jobs created, the difference is just as striking (and still statistically significant). The stock measure is more complicated, and its details are discussed in the Santa-Clara study, but suffice it to say that T-bill rates have been very modest during G.W. Bush, which should if anything give him a leg up on stock performance. Instead his stock performance has been the second worst.

Finally, knowing that the economy does better with a Democrat in the White House, we might wonder if a poor economy at election time tips the electoral balance to the Democrats' favor, leaving a Democratic president to preside over an improving economy. This explanation hasn't been ruled out yet, though it seems unlikely for a number of reasons, most obviously that the stock market doesn't have a regular clockwork cycle of dips and rebounds -- often when it goes limp, it stays limp for quite a while, as we've seen for the last 3 years.

The bottom line: the economy performs better under a Democratic president. What specific fiscal and regulatory policies have brought this about? We can only speculate. You and I might point out that this president has been reckless with deficit spending and careless in policing corporate crime. It would be no surprise if such policies have harmed the economy.

If you see a reporter or an analyst claiming that the economy is a Republican strong suit, send him an email reminding him of the facts.

One final point. You don't have to be an economist to figure this sort of stuff out. I'm not. I'm just some guy who looks around for facts on the web.


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