Exploding Myths
Summary:
A surprising analysis of economic data calls into question the widely accepted idea that Republicans are better stewards of the economy than Democrats.
The data shows that:
Because most people do not have the time to read through the many original posts, I have taken the liberty to compile and write this summary.
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Fiscal conservatives have accepted the gospel-like assumption that Republicans manage the U.S. economy better. But is this fact or fiction?
Turns out there is evidence that it is fiction. According to the following analysis, there is no evidence that Republican Presidents or Republican Congresses are better for economic growth. In fact, if anything the data points the other way.
The National Debt:
Lets start by looking at the National Debt as a function of Republican and Democratic presidential terms. This graph clearly shows that the National Debt as a percentage of GDP decreases when a Democratic President is in the Oval Office. By contrast the National Debt rose significantly under the two Republican Presidents that fully implemented Supply-Side economic theory.
The fact that Democrats have been better recently at reducing the National Debt is not surprising, so lets look at which party is better for the growth of the nation's Gross Domestic Product (GDP)? GDP is a measure of national income and industrial output and as such is a major indicator of the strength of the economy.
The table below shows the annualized percentage change in real GDP per capita associated with recent Presidential administrations. Also shown is the change in real GDP per capita when an administrations' best and worst year are left out.
Contrary to popular belief, growth rates in real GDP per capita tend to be higher under Democrats than under Republicans. The three Democrat administrations are all in the top four with Reagan the only Republican to crack the top half. All four of the slowest growing administrations were Republican. Perhaps that is why Reagan is so idolized by Republicans, because he is the only one to perform as well as Democrats (growing the debt not withstanding).
GDP Growth Minus Debt And the effect of Monetary Policy:
Perhaps the Democrats were merely the beneficiaries of an expansionary monetary policy. To find out this next series will examine the assumption that monetary policy has an effect on GDP growth as well as which administrations benefited from such policy. This analysis looks at the change in the real Money Supply per capita and the change in the amount of M1 or M2 per person above and beyond inflation. In economics M1 and M2 are measures of money supply. M1 is the physical currency circulating in the economy plus demand deposits. M2 is M1 plus time deposits, saving deposits and non-institutional money market funds.
The table below shows the annualized percentage growth in real GDP ( less debt) per capita, the annualized percentage change in real M1 per capita, and the annualized percentage change in real M2 per capita for the various administrations beginning in the sample. It also shows the correlation between the growth rates in Money and the growth rate in the economy:
This data shows that (with the exception of George W. Bush) the more beneficial the monetary policy, the better the growth rate for both Republican and Democratic Presidents. But what is again surprising is that the Democrats still did better growing the economy even though the the Republicans were operating with a more favorable monetary policy. (Its another question as to why the Fed was biased towards giving Republicans a more favorable policy).
Considering Congress:
Astute readers have no doubt by now questioned the role of Congress in GDP growth. After all, Presidents often have to work with a Congress controlled by the opposite party.
To address this question, the following chart shows the GDP per capita for all the combinations of Presidents and Congresses. The number of observations is the number of times that particular combination has occurred. The table also shows the effect of just Congress itself:
Another possibility is that Republican administrations were victims of recessions due to business cycle reasons out of their control. Fair question, but what does the data show?
The following table shows GDP growth performance for each administration with recessions removed and the eight quarters past the recession removed:
And remember the whole point of this chart is to effectively cherry pick the Republican's best economic periods. This makes Clinton look a bit worse, but that’s because his entire term (fully recession free) is now going up against only the best four quarters of the Nixon administration and only about 75% of the Reagan administration's term. Nevertheless Clinton’s entire term still beats a cherry-picked George W. Bush term.
The same analysis was repeated without excluding the eight quarters after the recession, but the results were the same.
Size of the Federal Government:
Repeated analysis demonstrates that the Democrats are better at growing the economy. But what about the size of government? It is an undisputed fact that Republicans prefer a smaller government that the Democrats. But do they achieve that goal?
This section examines the size of the government, a topic of critical importance to conservatives and libertarians. At this point in the original series, the author provided a warning to Republican readers. I repeat it here because of its humor value, not as an indication of endorsement:
"Before we go on, I would like to warn those few Angry Bears that worship at the Church of the Holiest St. Ronald the Reagan to avert your eyes for what follows must be the work of the Democrat, er, the Devil (Clinton)"
This chart shows the change in the number of Federal Employees per thousand of the U.S. population:
But what about total government, not just Federal employees? Here is chart showing all government employees:
Now we come to the holy grail of conservative economic philosophy - government spending. Again, I must include the original author's warning solely for its humor value:
"Yesterday I warned our more sensitive readers to avert their eyes, for the data was not kind to the Holiest St. Ronald the Reagan, and in fact showed the Devil himself to be the President who went the furthest toward reducing the size of the Federal workforce. For those who were too careless to heed my admonition yesterday, I beseech you today. Avert your eyes or you imperil your soul."
The following table shows Federal Spending growth as a share of GDP minus Social Security which is outside the control of any given administration:
Again, Clinton trumps all Republicans and even Jimmy Carter trumps both Bush presidencies. What makes this more remarkable is that a small government is not a stated goal of Democrats. Democrats believe that large government is OK if it can solve certain problems. Small government is very clearly a goal of Republicans, but it doesn't translate into reality.
Furthermore Clinton's annualized shrinkage from 1992 to 1994 was 3.26%. From 1994 to 2000 it was 2.37%. This means that Gingrich's Republican Revolution and subsequent control of Congress actually interfered with Clinton's ability to reduce Federal Spending. One counter argument is that Clinton would have spent more if his Health Care plan had not been defeated by Republicans (but again small government wasn't necessarily a goal for him).
Some arguments speculate that Republican spending looks worse because of defense spending. These tables look at federal spending deltas minus defense spending both as a share of GDP and in real dollars.
This data shows that every single President increased spending on non-Social Security and non-defense items per capita. Clinton increased spending the least, but he was actually cutting spending per capita before the Republican Congress took over. Reagan increased this type of spending by more than three times Clinton. Carter actually came in third increasing spending per capita at half the rate that George W. Bush did.
Tax Cutting:
Finally, we come to a metric where Republicans perform as advertised. This table shows the total taxes per capita other than social security collected plus changes in the national debt held by the public, all as a percentage of GDP. This measure of taxes takes into account the fact that a run-up on debt has to be paid off at some point.
Here all the Democrats are at the bottom of the table as one might suspect. But interestingly all the administrations with the best GDP growth are at the bottom of the table including Ronald Reagan.
This would seem to indicate that while the Democrats and Reagan had the higher taxes they were on the correct side of the Laffer curve. The Laffer Curve illustrates the idea that increases in tax rates will eventually lead to a decrease in tax revenue because high taxes will dis-incentivize business and job growth. This is the central idea of supply side economic theory. Similarly, the table suggests that the Bush tax cuts are too deep, lowering revenues and increasing debt.
Further analysis of the data revealed an optimal growth point. Based on that analysis, the following Presidents moved tax rates in the direction most likely to lead to faster growth in real GDP per capita: Eisenhower, JFK/LBJ, Carter and Clinton. The following Presidents favored policies that moved the country away from this faster growth point: Nixon/Ford, Reagan, Bush I and Bush II.
Finally, lower taxes are a powerful attraction, but is it enough a reason to vote Republican? Historically, the data would seem to suggest not as when taxes are too low (or perhaps too regressive) the result is a sluggish economy, median income loss and skyrocketing debt. This is a question of short term vs. long term interests. If this analysis is to believed the trade off is not worth it.
Job Growth:
The last metric is job growth. This graphic shows job growth index for all administrations beginning in 1921:
Only Reagan produced significant job growth among Republicans.
Conclusions:
In repeated metrics the Democrats performed better or equal to Republicans on all of the above economic areas.
What is a fiscally conservative person supposed to make of this?
First this analysis does not prove anything statistically. There were only eigth administrations in the sample and you can't statistically prove anything with a sample size of eight.
However, assuming the analysis is valid given the data (and all of the data is from the OMB or the US Department of Commerce) it is hard to completely dismiss the Democrat's surprising performance as sheer luck or statistical anomaly.
Lets assume that there is enough random variance in the data and analysis to assume a wash between the two parties. A wash still bursts the prevalent idea that Republicans are much better stewards of the economy (which is the original hypothesis).
If over the past 40 years Republicans were indeed superior at growing the economy then I think it would show in the data even given the relatively small sample. Sheer luck would not obscure a dominant trend.
So strong is the prevalence of the theory that Republicans are better on the economy that I had to question why I was skeptical of this data. Then I realized that all these years I have never seen any data that says the Republicans are better.
Could it be just distant memories of the Reagan/Carter transition? Republican hype? Possibly.
But I also think it is the intuitive idea that a smaller government and lower taxes are good. I still believe that a lean government is beneficial and should be a desired goal, but as shown, the Republicans are no better at creating a smaller government than are the Democrats. (And Republicans seem to have forgotten about some of the most important features of small government such as protecting the privacy of its citizens and the adherence to Constitutional principles such as seperation of powers).
As for taxes, it is true that sufficiently high marginal tax rates will dis-incentivize innovation and damage the economy, but despite accustations that Democratic governments are Socialist, their tax rates appear to be well below that threshold. At least that is the case given the government that we have. With a smaller government and a smaller debt, taxes could ideally be much lower.
Lastly, we should remember that conservatism and Republicans are not exactly the same thing. Republicans don't or can't implement policy in the way that conservative theory suggests they should. And in the same vein Democrats don't or can't always implement ideal Liberal policy. In many ways we should be thankful for this.
The larger lesson is that the two major parties respective branding is not always reflected in reality.
A surprising analysis of economic data calls into question the widely accepted idea that Republicans are better stewards of the economy than Democrats.
The data shows that:
- Democrats on average lower the National Debt particularly over the last 30 years.
- Democrats on average presided over periods of larger GDP per capita growth
- Democratic Congresses presided over periods of larger GDP per capita growth especially when working with a Democratic President
- Democrats presided over periods of larger GDP per capita growth despite monetary policy favoring Republicans
- Republicans suffered more recessions and even when the recessions were factored out, Democrats still presided over periods of higer GDP per capita growth
- Democrats shrunk the size of the Federal governments as effectively as Republicans, with Clinton ranking best.
- Democrats were equally as effective in controlling Federal Spending (with and without Defense) as Republicans, with again Clinton ranking most effective.
- As advertised the Republicans are better at cutting taxes, but at the cost of decreased revenue and weaker economic growth.
- Democrats presided over periods of greater job growth
Because most people do not have the time to read through the many original posts, I have taken the liberty to compile and write this summary.
------------------------------------------------------------------------------------------------
Fiscal conservatives have accepted the gospel-like assumption that Republicans manage the U.S. economy better. But is this fact or fiction?
Turns out there is evidence that it is fiction. According to the following analysis, there is no evidence that Republican Presidents or Republican Congresses are better for economic growth. In fact, if anything the data points the other way.
The National Debt:
Lets start by looking at the National Debt as a function of Republican and Democratic presidential terms. This graph clearly shows that the National Debt as a percentage of GDP decreases when a Democratic President is in the Oval Office. By contrast the National Debt rose significantly under the two Republican Presidents that fully implemented Supply-Side economic theory.
Deficits are incurred when government spending exceeds government revenue. Excessive tax cutting without reducing spending is not fiscally conservative. You will note that the debt starts high on this graph due to WWII, but is steadily decreased by Eisenhower, Kennedy and Lyndon Johnson. Republicans Nixon and Ford did not grow the National Debt. Note that despite that fact that the U.S. was at war in Vietnam for much of 1960's and early 1970's, the National Debt as a percentage of GDP was still reduced. (In absolute dollars the debt has grown from $270 billion in 1946 to almost $10 trillion today)
Funding a war by increasing tax revenue (or reducing spending elsewhere) is fiscally responsible and consistent with conservative economic policy. Not paying for a war while reducing revenues (by implementing the largest regressive tax in history) is not fiscally conservative and places a huge burden on the next generation.
The fact that Democrats have been better recently at reducing the National Debt is not surprising, so lets look at which party is better for the growth of the nation's Gross Domestic Product (GDP)? GDP is a measure of national income and industrial output and as such is a major indicator of the strength of the economy.
The table below shows the annualized percentage change in real GDP per capita associated with recent Presidential administrations. Also shown is the change in real GDP per capita when an administrations' best and worst year are left out.
Contrary to popular belief, growth rates in real GDP per capita tend to be higher under Democrats than under Republicans. The three Democrat administrations are all in the top four with Reagan the only Republican to crack the top half. All four of the slowest growing administrations were Republican. Perhaps that is why Reagan is so idolized by Republicans, because he is the only one to perform as well as Democrats (growing the debt not withstanding).
GDP Growth Minus Debt And the effect of Monetary Policy:
Perhaps the Democrats were merely the beneficiaries of an expansionary monetary policy. To find out this next series will examine the assumption that monetary policy has an effect on GDP growth as well as which administrations benefited from such policy. This analysis looks at the change in the real Money Supply per capita and the change in the amount of M1 or M2 per person above and beyond inflation. In economics M1 and M2 are measures of money supply. M1 is the physical currency circulating in the economy plus demand deposits. M2 is M1 plus time deposits, saving deposits and non-institutional money market funds.
The table below shows the annualized percentage growth in real GDP ( less debt) per capita, the annualized percentage change in real M1 per capita, and the annualized percentage change in real M2 per capita for the various administrations beginning in the sample. It also shows the correlation between the growth rates in Money and the growth rate in the economy:
This data shows that (with the exception of George W. Bush) the more beneficial the monetary policy, the better the growth rate for both Republican and Democratic Presidents. But what is again surprising is that the Democrats still did better growing the economy even though the the Republicans were operating with a more favorable monetary policy. (Its another question as to why the Fed was biased towards giving Republicans a more favorable policy).
Considering Congress:
Astute readers have no doubt by now questioned the role of Congress in GDP growth. After all, Presidents often have to work with a Congress controlled by the opposite party.
To address this question, the following chart shows the GDP per capita for all the combinations of Presidents and Congresses. The number of observations is the number of times that particular combination has occurred. The table also shows the effect of just Congress itself:
Again growth rates of real GDP less real increases in the debt per capita are higher under Democratic Congresses than under Republican Congresses. More striking is that the highest growth is observed when both the President and the Congress has been Democratic. And the lowest growth is observed when the President and the Congress were both controlled by Republicans.
The data is starting to look bad for Republicans. But perhaps there are still other factors that have not yet been considered. One of these is the idea of "lag" - that economic performance lags policy implementation by several years. However, a logical analysis seems to rule this idea out.Another possibility is that Republican administrations were victims of recessions due to business cycle reasons out of their control. Fair question, but what does the data show?
The following table shows GDP growth performance for each administration with recessions removed and the eight quarters past the recession removed:
So what does this reveal?
First it reveals that Americans spend much more time in recession (about twice as much) when Republicans are in office than when Democrats are in office. Furthermore, despite leaving out the recessionary periods, growth is still faster, on average, under Democrats than under Republicans.And remember the whole point of this chart is to effectively cherry pick the Republican's best economic periods. This makes Clinton look a bit worse, but that’s because his entire term (fully recession free) is now going up against only the best four quarters of the Nixon administration and only about 75% of the Reagan administration's term. Nevertheless Clinton’s entire term still beats a cherry-picked George W. Bush term.
The same analysis was repeated without excluding the eight quarters after the recession, but the results were the same.
Size of the Federal Government:
Repeated analysis demonstrates that the Democrats are better at growing the economy. But what about the size of government? It is an undisputed fact that Republicans prefer a smaller government that the Democrats. But do they achieve that goal?
This section examines the size of the government, a topic of critical importance to conservatives and libertarians. At this point in the original series, the author provided a warning to Republican readers. I repeat it here because of its humor value, not as an indication of endorsement:
"Before we go on, I would like to warn those few Angry Bears that worship at the Church of the Holiest St. Ronald the Reagan to avert your eyes for what follows must be the work of the Democrat, er, the Devil (Clinton)"
This chart shows the change in the number of Federal Employees per thousand of the U.S. population:
But what about total government, not just Federal employees? Here is chart showing all government employees:
Even taking to account all government at all levels Clinton reduced the number of government employees the most. (Though I'm not sure how fair this metric is as a President has far less control over a State's government than he does over the Federal government.)
Federal Spending:Now we come to the holy grail of conservative economic philosophy - government spending. Again, I must include the original author's warning solely for its humor value:
"Yesterday I warned our more sensitive readers to avert their eyes, for the data was not kind to the Holiest St. Ronald the Reagan, and in fact showed the Devil himself to be the President who went the furthest toward reducing the size of the Federal workforce. For those who were too careless to heed my admonition yesterday, I beseech you today. Avert your eyes or you imperil your soul."
The following table shows Federal Spending growth as a share of GDP minus Social Security which is outside the control of any given administration:
Again, Clinton trumps all Republicans and even Jimmy Carter trumps both Bush presidencies. What makes this more remarkable is that a small government is not a stated goal of Democrats. Democrats believe that large government is OK if it can solve certain problems. Small government is very clearly a goal of Republicans, but it doesn't translate into reality.
Furthermore Clinton's annualized shrinkage from 1992 to 1994 was 3.26%. From 1994 to 2000 it was 2.37%. This means that Gingrich's Republican Revolution and subsequent control of Congress actually interfered with Clinton's ability to reduce Federal Spending. One counter argument is that Clinton would have spent more if his Health Care plan had not been defeated by Republicans (but again small government wasn't necessarily a goal for him).
All this does make one wonder why Republicans hate Clinton so much. He had the second best GDP economic growth in the sample, he was fiscally responsible and he reduced the size of government. These are all things that fiscally conservative Republicans favor.
Federal Spending minus Defense Spending:Some arguments speculate that Republican spending looks worse because of defense spending. These tables look at federal spending deltas minus defense spending both as a share of GDP and in real dollars.
This data shows that every single President increased spending on non-Social Security and non-defense items per capita. Clinton increased spending the least, but he was actually cutting spending per capita before the Republican Congress took over. Reagan increased this type of spending by more than three times Clinton. Carter actually came in third increasing spending per capita at half the rate that George W. Bush did.
Tax Cutting:
Finally, we come to a metric where Republicans perform as advertised. This table shows the total taxes per capita other than social security collected plus changes in the national debt held by the public, all as a percentage of GDP. This measure of taxes takes into account the fact that a run-up on debt has to be paid off at some point.
Here all the Democrats are at the bottom of the table as one might suspect. But interestingly all the administrations with the best GDP growth are at the bottom of the table including Ronald Reagan.
This would seem to indicate that while the Democrats and Reagan had the higher taxes they were on the correct side of the Laffer curve. The Laffer Curve illustrates the idea that increases in tax rates will eventually lead to a decrease in tax revenue because high taxes will dis-incentivize business and job growth. This is the central idea of supply side economic theory. Similarly, the table suggests that the Bush tax cuts are too deep, lowering revenues and increasing debt.
Further analysis of the data revealed an optimal growth point. Based on that analysis, the following Presidents moved tax rates in the direction most likely to lead to faster growth in real GDP per capita: Eisenhower, JFK/LBJ, Carter and Clinton. The following Presidents favored policies that moved the country away from this faster growth point: Nixon/Ford, Reagan, Bush I and Bush II.
Finally, lower taxes are a powerful attraction, but is it enough a reason to vote Republican? Historically, the data would seem to suggest not as when taxes are too low (or perhaps too regressive) the result is a sluggish economy, median income loss and skyrocketing debt. This is a question of short term vs. long term interests. If this analysis is to believed the trade off is not worth it.
Job Growth:
The last metric is job growth. This graphic shows job growth index for all administrations beginning in 1921:
Only Reagan produced significant job growth among Republicans.
Conclusions:
In repeated metrics the Democrats performed better or equal to Republicans on all of the above economic areas.
What is a fiscally conservative person supposed to make of this?
First this analysis does not prove anything statistically. There were only eigth administrations in the sample and you can't statistically prove anything with a sample size of eight.
However, assuming the analysis is valid given the data (and all of the data is from the OMB or the US Department of Commerce) it is hard to completely dismiss the Democrat's surprising performance as sheer luck or statistical anomaly.
Lets assume that there is enough random variance in the data and analysis to assume a wash between the two parties. A wash still bursts the prevalent idea that Republicans are much better stewards of the economy (which is the original hypothesis).
If over the past 40 years Republicans were indeed superior at growing the economy then I think it would show in the data even given the relatively small sample. Sheer luck would not obscure a dominant trend.
So strong is the prevalence of the theory that Republicans are better on the economy that I had to question why I was skeptical of this data. Then I realized that all these years I have never seen any data that says the Republicans are better.
Could it be just distant memories of the Reagan/Carter transition? Republican hype? Possibly.
But I also think it is the intuitive idea that a smaller government and lower taxes are good. I still believe that a lean government is beneficial and should be a desired goal, but as shown, the Republicans are no better at creating a smaller government than are the Democrats. (And Republicans seem to have forgotten about some of the most important features of small government such as protecting the privacy of its citizens and the adherence to Constitutional principles such as seperation of powers).
As for taxes, it is true that sufficiently high marginal tax rates will dis-incentivize innovation and damage the economy, but despite accustations that Democratic governments are Socialist, their tax rates appear to be well below that threshold. At least that is the case given the government that we have. With a smaller government and a smaller debt, taxes could ideally be much lower.
Lastly, we should remember that conservatism and Republicans are not exactly the same thing. Republicans don't or can't implement policy in the way that conservative theory suggests they should. And in the same vein Democrats don't or can't always implement ideal Liberal policy. In many ways we should be thankful for this.
The larger lesson is that the two major parties respective branding is not always reflected in reality.
posted by Alan at 8:06 PM | Permalink |
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3 Comments:
There's a quote from Gary Wills in his Reagan biography about a popular misconception regarding Reagan and Carter on the Carter - I can't remember what it is exactly but the basic gist is that while Reagan is remembered as improving the economy in whatever matric Wills mentioned, Carter actually was less bad than Reagan.
I'll find it when I have a chance.
http://krugman.blogs.nytimes.com/2008/07/29/look-whos-talking-2/
I wish he had given a source for his chart.
I checked my copy of Reagan's America ... Wills says that the recession of 81-82 lost more for the economy in two years than Carter did in four, and that Americans were cumulatively better off after 4 years of Carter than they were after the first four years of Reagan but that Carter had a downturn before the election where as Reagan had improvement before the election. The voters memories of the economy were heavily biased by what was going on at the time of the election (duh).
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