It’s a Democratic campaign consultant’s dream: a study from two respected academic economists concluding that, since the late 1940s, the economy has consistently performed better under Democratic presidents than under Republican ones. The gap is huge. From 1949 to 2013 — a period when the White House was roughly split between parties — the economy grew at an average annual rate of 3.33 percent, but growth under Democratic presidents averaged 4.35 percent and under Republicans, 2.54 percent. Jobs, stocks and living standards all advanced faster under Democrats.
Not surprisingly, one of the report’s authors is a well-known Democratic economist, Alan Blinder, a former vice chairman of the Federal Reserve now at Princeton University; the other author, Mark Watson, also at Princeton, is a highly regarded scholar of economic statistics who describes himself as nonpartisan. More interesting, Blinder and Watson don’t credit the Democratic advantage to superior policies.
“Democrats would no doubt like to attribute the large [Democratic-Republican] growth gap to macroeconomic policy choices, but the data do not support such a claim,” they write. Most economists, they note, doubt presidents can control the economy.
So if presidents didn’t do it, who or what did? Blinder and Watson march through economic studies. Their conclusion: About half of the Democrats’ advantage reflected “good luck” — favorable outside events or trends. Three dominate.
Global “oil shocks” — steep increases in prices, which depressed economic growth — were the largest, because they hurt Republicans more than Democrats. They occurred in 1973 (Richard Nixon and Gerald Ford), 1979 (Jimmy Carter but affecting Ronald Reagan’s first term) and 2008 (George W. Bush). Statistically, they explain slightly more than a quarter of the Democratic-Republican gap.
Productivity — efficiency — was the next largest contributor. But presidents can’t magically raise productivity; it reflects too many forces: research, improved schools, better management, entrepreneurs. Although Bill Clinton benefited from an Internet boom, he didn’t invent the Internet. Productivity gains occurred disproportionately under Democratic presidents and accounted for nearly a fifth of the gap, report Blinder and Watson.
War was the final factor. Military buildups for the Korean and Vietnam wars boosted growth in the Truman and Johnson presidencies, respectively. Since the late 1940s, inflation-adjusted defense spending rose 5.9 percent annually under Democrats and only 0.8 percent under Republicans. The buildups accounted for about an eighth of the Democratic advantage.
As for the rest of the gap, Blinder and Watson say it’s a “mystery.” Actually, the explanation is staring them in the face.
The parties have philosophical differences that affect the economy. To simplify slightly: Democrats focus more on jobs; Republicans more on inflation. What resulted was a cycle in which Democratic presidents tended to preside over expansions (usually worsening inflation) and Republicans suffered recessions (usually dampening inflation).
Students of the post-World War II economy know these cycles. The best examples include the 1960s Kennedy-Johnson boom, which lowered unemployment to 3.5 percent in 1969 and raised inflation (virtually nonexistent in 1960) to almost 6 percent. This was followed by two recessions in the Nixon-Ford years. Under Carter, the economy revived — but inflation spurted to 13 percent in 1980. Carter’s inflation bred the devastating 1981-1982 recession under Reagan. It pushed unemployment to 10.8 percent in late 1982 but ended double-digit inflation.
The implication is clear: If Republican presidents were saddled with most recessions, their growth and job creation records would naturally be worse. And that’s what the Blinder-Watson study shows. Since the late 1940s, the economy has spent about 12 years in recession. But 10 of those 12 years occurred under Republican presidents; only two occurred under Democrats. On average, the economy spent slightly more than a year in recession for each Republican term and only three months for each Democratic term.
The Federal Reserve — influencing interest rates and credit conditions — was the main agent driving this cycle. The Fed may be “independent,” but it doesn’t ignore the prevailing political and intellectual climate. Its policies have been more permissive under Democratic presidents than Republican ones.
There’s a larger lesson here. The Blinder-Watson study implies that the economy’s performance during a president’s term is a good test of the soundness of policies. Not so. There’s often a long lag between the adoption of policies and their true effects.
Economic policies pleasurable in the present can be disastrous for the future — for example, the inflationary policies of the 1960s. Similarly, the policies that fed the economic booms of the 1990s and the early 2000s spawned overconfidence that fostered the financial crisis. The reverse also applies: Policies painful in the present can reap long-term dividends. The hurtful suppression of double-digit inflation in the 1980s is an obvious case.
It will be interesting to see whether this study is misrepresented for political gain, obscuring the harder task: finding policies acceptable in the present and beneficial for the future.
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