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March 16, 2008

Fiscally Conservative

No doubt, as this political season progresses, we will hear all sorts of dire warnings about the terrible things that will happen to the Economy, if a Democrat is elected to the Presidency. Surely, he (and, yes, it will be a he) will follow in the footsteps of his predecessors, raise taxes, boost spending, and drive the Economy into the ground. If you want good stewardship of the Economy, vote for the Republican, as they are — after all – the party of business.

Back in 2000, in my pre-blog era, I decided to compile a few statistics to test out these assertions. Now that 2008 has rolled around, I’ve updated my spreadsheet to include the George W Bush era, and answer a few of the objections to the previous, not-widely-circulated, version.

I decided to look at two items: budget deficits and real GDP growth. The historical data goes back to 1930. And I did the simplest possible thing: separate out the time-series into Republican and Democratic Administrations, computing the average annual budget deficit, and the average annual real GDP growth for each.

Now, there are several immediate objections you could raise.

  • There are, to be sure, lots of exogenous factors which influence economic performance. In any given year, one can ascribe performance to something other than who occupies the White House. But that’s where the law of large number comes into play. If you average over many years, these exogenous factors should cancel out. The longer the historical baseline, the more likely it is that you’re seeing a real “inter-party” effect.
  • That said, the Great Depression and World War II were truly singular events with a dramatic effect on these averages. In 1932, real GDP contracted 13%. Perhaps it’s unfair to blame the Great Depression on the Republicans. By the same token, real GDP contracted 11% in 1946, in the great post-War contraction. It would be equally unfair to blame that on the Democrats. On the deficit side, the cost of waging WWII was extraordinary. The On-Budget Deficit in 1943 was an eye-popping 30.8% of GDP. For both of these reason, you might not want to take the first two rows, in each of the tables below, too seriously.
  • Less obvious, but equally salient, you probably should assign the performance during the first year of each Administration to the previous one. Arguably, the economic policies of the Administration only really begin to kick in its second year. I’ve presented the data both ways.

First, let’s look at the Deficit. The data comes from the OMB historical tables accompanying the FY 2008 Budget. I tallied the On-Budget Deficit, in constant (FY 2000) dollars, and as a percentage of GDP. The deflators, needed for the former, are only available for 1940-2007.

So, how did the fiscally-prudent Republicans do?

Annual On-Budget Deficit under Republican and Democratic Administrations
Republican Democratic
FY 2000 $billion % of GDP FY 2000 $billion % of GDP
1930-present 2.6% 4.1%
1940-present 196 2.7% 139 4.1%
1950-present 196 2.7% 85 1.5%
1960-present 239 3.2% 97 1.6%
1970-present 258 3.4% 134 2.0%

Setting aside the huge (as a percentage of GDP) outlays during WWII, the Democrats beat them like a drum. In any of the three postwar periods tabulated, the Republicans consistently show themselves to be the party of fiscal irresponsibility, racking up deficits which dwarf those of the Democrats, both in absolute terms and as a fraction of GDP.

Ascribing the first year of each Administration to the previous one changes the numbers only a little, tipping them ever-so-slightly further in favour of the Democrats.

Annual On-Budget Deficit, Crediting the First Year to the Previous Administration
Republican Democratic
FY 2000 $billion % of GDP FY 2000 $billion % of GDP
1930-present 2.8% 3.9%
1940-present 210 2.9% 127 3.9%
1950-present 201 2.9% 71 1.3%
1960-present 251 3.4% 81 1.4%
1970-present 270 3.6% 109 1.6%

But what about economic growth? Surely, the “party of business” is better at stimulating economic growth. This time, the statistics come from the Commerce Department’s Bureau of Economic Analysis. I tabulated real GDP growth during Republican and Democratic Administrations, and annualized the results.

Annual Real GDP Growth under Republican and Democratic Administrations
Republican Democratic
1930-present 1.8% 4.9%
1940-present 2.8% 4.7%
1950-present 2.8% 4.2%
1960-present 2.8% 4.1%
1970-present 2.7% 3.6%

Again, Democratic Adminstrations outstrip their Republican counterparts by 1%/year or more. It’s an astonishing, and astonishingly persistent difference.

But, hey, as my Republican friends like to point out, Bill Clinton really should get full blame for the 2001 recession. So let’s tabulate the same numbers, but ascribing the first year of each Administration’s performance to the previous Administration.

Annual Real GDP Growth, Crediting Performance in First Year to the Previous Administration
Republican Democratic
1930-present 1.7% 5.0%
1940-present 2.8% 4.7%
1950-present 2.8% 4.3%
1960-present 2.9% 4.0%
1970-present 2.9% 3.2%

Only in the 1970-2007 period does the gap narrow much, but even there, the Democrats retain their lead.

My recommendation to John McCain: lay off the arguments about economic stewardship. You’re sure to lose that fight. Stick to your strongest argument: that Obama is a crypto-Muslim terrorist-lover, who hates America. That’s sure to win in November.

Update (3/18/2008):

Adam Rice, below, asks about income inequality during Republican and Democratic Administrations. It turns out that Larry Bartels has studied household income growth, as a function of income level, under postwar Democratic and Republican Administrations. His conclusion will be no surprise to anyone who’s read this far. Under Republican Administrations, whatever income growth there is, is concentrated mostly in the top 5%. The bottom 95% do much better under Democrats.

On average, families at the 95th percentile of the income distribution have experienced identical income growth under Democratic and Republican presidents, while those at the 20th percentile have experienced more than four times as much income growth under Democrats as they have under Republicans. These differences are attributable to partisan differences in unemployment (which has been 30 percent lower under Democratic presidents, on average) and GDP growth (which has been 30 percent higher under Democratic presidents, on average); both unemployment and GDP growth have much stronger effects on income growth at the bottom of the income distribution than at the top

Bottom line: unless your annual household income is greater that $174,000 (top 5%, in 2006), don’t even think about voting Republican.

Posted by distler at March 16, 2008 4:27 PM

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10 Comments & 2 Trackbacks

Re: Fiscally Conservative

“Less obvious, but equally salient, you probably should assign the performance during the first year of each Administration to the previous one. Arguably, the economic policies of the Administration only really begin to kick in its second year.”

No, no, no, Jacques, this doesn’t go far enough. The way it works is, the totally awesome economic plans of Republican administrations are so forward-thinking that they only kick in by the time their Democratic successors take over. Conversely, the profligate Democrats just spend their time partying it up, and the bill for their reckless behavior doesn’t come due until right when the Republicans take over.

The amazing thing is that this pattern magically happens no matter how many consecutive Republican or Democratic administrations appear in the cycle. If one didn’t know any better, one would suspect some kind of liberal conspiracy.

Posted by: Evan Goer on March 17, 2008 1:33 AM | Permalink | Reply to this

Re: Fiscally Conservative

The damned thing is that this is exactly what some people believe. So, before one of them shows up to express his agreement with you, let me make really clear that

Evan… Is… Joking.

If you don’t find the existence of such people scary, in and of itself, perhaps the consequence of their having been in charge these past 7 years will scare you.

Posted by: Jacques Distler on March 17, 2008 2:19 AM | Permalink | PGP Sig | Reply to this

Re: Fiscally Conservative

It would be interesting to track whether income disparities widen or narrow under Rep and Dem administrations as well. It’s quite possible that those trends take longer to manifest, so any alignments would be misleading, but it could be interesting.

Posted by: Adam Rice on March 17, 2008 11:39 AM | Permalink | Reply to this

What measure?

There are lots of measures of economic well-being one could look at. I chose to focus on the ones that Republicans pay lip service to. (They could care less about income inequality.)

Posted by: Jacques Distler on March 17, 2008 11:52 AM | Permalink | PGP Sig | Reply to this

Re: What measure?

On the contrary, I think income inequality gets at the very nub of what they care about.

(Also, I can’t resist tweaking you for using the popular but illogical “could care less” construction”.)

Posted by: Adam Rice on March 17, 2008 2:43 PM | Permalink | Reply to this

Re: What measure?

It’s illogical, but valid. Kind of like “flammable” and “inflammable”.

Posted by: Evan Goer on March 21, 2008 10:58 PM | Permalink | Reply to this

Re: Fiscally Conservative

Its not clear how much the executive branch has control over how budgets are done. Its often the case that D’s have an easier time inputting a lot of spending into a R administration (usually as a concession to lowering taxes–see eg Reagan). Perhaps it would be worthwhile to eyeball congressional statistics (though this would be difficult since the Dems have historically had a much larger presence relatively).

Anyway, im more interested in whether or not the premise is even valid. That is, whether its a good thing to have low taxes/low budget deficits and low spending vs the converse. One could look at growth/unemployment rate/etc as a measure.

I’d say, in this day and age, most economists would agree with the former policy. But it wasn’t too long ago (circa 30-40 years) where the academic thinking was pretty much the opposite. Still, one finds pretty strong opinions in some circles for the latter policy.

Posted by: haelfix on March 17, 2008 3:31 PM | Permalink | Reply to this

Re: Fiscally Conservative

But it wasn’t too long ago (circa 30-40 years) where the academic thinking was pretty much the opposite. Still, one finds pretty strong opinions in some circles for the latter policy

Umh, no.

Keynsianism was not the proposition that running large budget deficits was “good.” It was the proposition that counter-cyclical spending was a good way to even out the peaks and troughs of the business cycle.

Perhaps it would be worthwhile to eyeball …

Make a concrete proposal and we’ll see what it yields.

Posted by: Jacques Distler on March 17, 2008 4:02 PM | Permalink | PGP Sig | Reply to this

Re: Fiscally Conservative

“Keynsianism was not the proposition that running large budget deficits was “good.””

Of course, so the result for government policy essentially was spending your way out of a recession, and clamping down during a boom. The net result statistically (though of course not necessarily) was some amount of net debt after the whole thing was done.

Back in the day one would always listen to the diehard Keynsians (and ironically later the supply siders) arguing about how little public deficits actually meant and so forth.

Contrast that with the early monetarists who felt that such government intrusion was mostly inconsequential, and it was instead always various aspects of the money supply that mostly controlled how business cycles behave.

Nowdays, economic policy seems to be sort of a hybrid. Even the Fed is returning to a reactionary market policy.

Posted by: haelfix on March 17, 2008 5:08 PM | Permalink | Reply to this
Read the post Fiscally Conservative
Weblog: Musings
Excerpt: Who's really better for the Economy?
Tracked: March 19, 2008 12:54 AM

NYTimes article on this subject

Excellent post.

If you have not seen it already, there is a NY Times article on this subject.
http://www.nytimes.com/2008/08/31/business/31view.html?em

Posted by: BT on September 3, 2008 10:16 PM | Permalink | Reply to this
Read the post Going Galt
Weblog: Musings
Excerpt: Piling on...
Tracked: September 21, 2010 10:45 AM

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