American Gerontocracy

Generational Warfare In Our Time

Better Economic Growth under the Democrats?

This recent blog post describes a chart from lifted from an upcoming book by Princeton political scientist (note — not economist) Larry Bartels. It purports to show that American economic performance under Democratic administrations has been superior to performance under Republicans, across all income categories.

Apparently, this chart has a lot of liberals very excited. Too bad that it is complete nonsense.

The chart is a gross oversimplification of how economic policy actually impacts economic performance. The root of its problem lies in the inane assumption that the effect of policy on economic growth manifests itself with a one year lag. In other words, the chart gives a political party credit for economic performance starting the year following it takes over the Presidency.

Let’s explore this assumption. A president comes into power. By the time his first budget goes into effect, it is already October of that year. Does anyone really think that that initial budget has any signifiant impact on economic performance of the following year? And that only the budget is responsible for that economic performance?

Just to show the arbitrary nature (and impact) of the one year lag assumption, I ran growth numbers for a two year lag based on Bureau of Economic Analysis data, from 1945 to 2007. In that time period, average economic growth (for all income categories, to keep it simple) resulting under Democratic adminstrations was 2.02%. From Republican administrations, 2.08%.

The other major assumption that the study ignores is that it is Congress, not the Presidency, that holds the power of the budget. Asking who controlled Congress and what those policies were has just as much (or more) bearing on economic outcomes as who was in the White House. Similarly, the Fed controls monetary policy, which potentially has a greater economic impact that fiscal policy. Who has appointed the Federal Reserve Chairman and its Board of Governors? Are they employing a conservative or liberal ideological approach to monetary policy?

Additionally, Bartels’ “analysis” just completely ignores history, again by making foolish assumptions about the data lag. For example, it’s pretty widely accepted that the economic downturn and stagflation of the early 1970s was proximately caused by the financial demands of the Great Society and the Vietnam War, coupled with exogenous shocks to oil prices. Both the Great Society and America’s deep involvement in Vietnam came courtesy of LBJ. So you can’tgive Nixon credit for bad economic performanceon his watch – the causes of rampant inflation and low growth at the time weren’t his fault.

In the final analysis, the success of economic policy of respective Democratic and Republican administrations must be evaluated based on their long term impact. This is very difficult to measure because there are so many dfferent factors at work — fiscla policy, monetary policy, technological innovation and impact on productivity, population and demographic change, commodities avilability, trade, etc.

Behind this complexity, however, the fact remains that basic economics tells us smaller government, lower taxes, and less wealth redistribution results in a larger pie for everyone. Nothing in the Bartels’ “analysis” as should cause a rational observer to doubt that simple fact. If there’s any doubt of this, compare the long term growth rates of the US versus Europe. Freer markets, smaller government, and lower taxes inevitably produce higher growth, lower unemployment, and lower inflation in the long run. If there’s any doubt, here’s a link to a recent speech from the President of the European Central Bank, Jean-Claude Trichet:

“Since 1996, the annual growth rate for the euro area has averaged 2.1% per year compared to 3.3% in the US.”

The speech goes on to propose structural reforms in Europe to increase competition and promote innovation (including tax reform and labor market reform) — the fundamentals of conservative economic doctrine.

April 5, 2008 Posted by | Taxes, Trade | Leave a comment

   

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