Gary J Carter
2008-10-21 15:11:15 UTC
Your Salary in 2016 -- The Big Difference Between a McCain or Obama
Administration
By Kevin Drum, Washington Monthly. Posted October 21, 2008.
Middle-class families will earn about $13,000 more in eight years if
Obama wins and $5,000 if McCain wins.
During his acceptance speech at Invesco Field in August, Barack Obama
earned big applause for a line that compared Democratic and Republican
economic policies. "We measure progress," he told the partisan crowd,
"in the twenty-three million new jobs that were created when Bill
Clinton was president -- when the average American family saw its
income go up $7,500, instead of go down $2,000, like it has under
George Bush."
As rhetoric, it was effective. But was it a fair point, or a cheap
shot? It's true that the Bush expansion was one of the weakest
economic recoveries in postwar history, but can you really lay the
blame for that at the feet of the president? Isn't it the case that,
ritual campaign promises to the contrary, presidents actually have
very little influence on the economy?
The conventional wisdom among economists says yes, but a growing
mountain of historical data suggests that they may be wrong. In the
postwar era, it turns out, Democratic presidents consistently produce
higher growth rates, lower unemployment, better stock market growth,
and less income inequality than Republican presidents. Nobody quite
knows why, but the results are surprisingly robust.
Within the economics profession this topic is known as the study of
"political business cycles," and I first became interested in it ten
years ago, before the dot-com boom of the Clinton era and the weak
recovery of the Bush era. Even back then the data was clear. Add up
growth rates under Democratic administrations, and you get a higher
number than under Republican administrations. Ditto for employment
levels. Inflation rates are about the same. Do it again with lag
times, since presidents inherit economies from their predecessors, and
you get the same result. Change the lag time from one year to two, or
three, or four, and you still get the same result. Fast-forward to
2008, and the results become even more dramatic. We've now had eleven
presidents since World War II, with over sixty years of data points to
draw from, and no matter how you slice the results, Democratic
presidents are better for the economy.
Why? The answer is complicated, not least because it's a subject
that's inherently partisan and most economists probably prefer to
stick to more neutral ground. Nonetheless, it's been a small but
active area of interest among academic economists for more than thirty
years, and it's one that recently got some time in the limelight
thanks to the publication of Unequal Democracy, a book about political
business cycles by Princeton political scientist Larry Bartels that's
accessible to professionals and laymen alike.
To begin with, Bartels lays out the basic evidence for partisan
economic differences since World War II. Annual economic growth is
over a point higher under Democrats than Republicans. Unemployment is
more than a point lower. Income growth among poor families is two
points higher, among the middle class a point higher, and even among
the rich about 0.2 percent higher. And growth is spread more evenly
under Democrats too: income inequality stays about the same under
Democratic administrations but grows consistently under Republicans.
Inflation rates, meanwhile, which conventional wisdom suggests should
be a Republican strong point, are about the same no matter who's in
power. What's more, none of this is a coincidence. It's not just that
Republican presidents are unlucky. The results stay robust even under
a wide range of statistical tests.
Still, not everyone is convinced. Princeton economist and New York
Times columnist Paul Krugman, for example, said recently that he had
not written about Bartels's results before now because he couldn't
figure out a "plausible mechanism" that might account for them. But
then he went on to draw an intriguing parallel to Alfred Wegener, the
German geologist who first proposed the theory of continental drift in
1912 but was roundly ignored during his lifetime. Why? Because even
though Wegener had accumulated plenty of evidence in favor of his
theory, there was no plausible mechanism to explain it. Continents are
big pieces of rock, after all. How can they drift?
Well, we all know how that story ended: thirty years after Wegener's
death, scientists discovered that continents sit on top of a hot,
viscous layer of earth that does indeed allow them to move over
geologic timescales. The resulting theory of plate tectonics is what
explains both California earthquakes and the reason that South America
and Africa look like matching pieces of a jigsaw puzzle. It turned out
there was a plausible mechanism for Wegener's theory after all, which
leads Krugman to ask, "So is Larry Bartels the Wegener of income
distribution?"
Maybe. Bartels's mechanism is twofold. First, he demonstrates an odd
regularity in the data -- although Republicans on average are worse
for the economy than Democrats, there's one specific period when
they're better: during election years. And ever since the pioneering
work of Ray Fair in the late 1970s we've known that voters don't
respond to average economic conditions. They respond almost
exclusively to economic conditions during election years.
But this just pushes the question back a step: Why is there such a
partisan difference in economic performance during election years?
Bartels's answer reaches back to the "honeymoon period," the first
year after an election, during which presidents have the maximum
leverage to implement their economic program. Democrats tend to focus
on employment and middle-class wage growth, which is reflected in
things like job creation programs, increases in the minimum wage, more
generous EITC benefits, worker-friendly appointments to the National
Labor Relations Board, pro-unionization policies, and so forth. The
result is a spike in economic activity, but it's a spike that has
mostly worn off by the fourth year of their term.
Republicans, by contrast, tend to focus their honeymoon period on tax
cuts for high earners and inflation-fighting measures. This may
produce poor economic results on average, but it turns out to be timed
to briefly produce a spike in activity three years in the future. Add
in some extra generous spending just before election years and a
possible partisan boost from the Fed (research by University of Texas
economist James K. Galbraith suggests that, controlling for economic
conditions, the Fed's monetary policy during election years is looser
for Republican presidents than for Democrats), and you get
consistently great economic performance during campaign seasons.
Bartels's model accomplishes two things. First, it's a start at
proposing a plausible mechanism for partisan differences in economic
performance: it turns out that it really is due to substantive
differences in economic preferences between the parties, mostly
focused on what they get done in the first year of each presidential
term. Second, it answers the obvious objection to this theory: If
Republicans really are consistently worse for the economy, how could
they ever get elected? The answer is that while they may not perform
well on average, they do perform well during the one year in four when
it counts.
There are more twists and turns to the story, but this is the gist:
Democrats really are better for the economy than Republicans, and it
really does seem to be related to differences in their economic
programs. Given that, then, I'll make this prediction: If Barack Obama
is elected president, the economy over the next eight years will be
better than if John McCain is elected. In fact, I'll go further and
put some hard numbers to that prediction. Here they are:
If Obama wins, unemployment will average about 5 percent. If McCain
wins it will average about 6 percent.
If Obama wins, real GDP growth will average about 3 percent per year.
If McCain wins it will average less than 2 percent per year.
If Obama wins, poor families will see their incomes grow by more than
$6,000 during the next eight years. If McCain wins their incomes will
grow by less than $1,000.
If Obama wins, middle-class families will see their incomes grow by
about $13,000 during the next eight years. If McCain wins their
incomes will grow by about $5,000.
If Obama wins (hold on to your hats for this one), rich families will
see their incomes grow by about $36,000 during the next eight years.
If McCain wins their incomes will grow by about $32,000.
If Obama wins (hold on to your hats again), the stock market will
perform better: the average return on stocks compared to Treasury
bills will be about 9 percent. If McCain wins it will be about 4
percent.
If Obama wins, the national debt will grow about $150 billion per
year. If McCain wins it will grow $400 billion per year. (For more,
see Gregg Easterbrook, page 15.)
And no matter who wins, average annual inflation will be around 4
percent.
So that's that. Look me up in 2016 and let me know how good my crystal
ball is.
Administration
By Kevin Drum, Washington Monthly. Posted October 21, 2008.
Middle-class families will earn about $13,000 more in eight years if
Obama wins and $5,000 if McCain wins.
During his acceptance speech at Invesco Field in August, Barack Obama
earned big applause for a line that compared Democratic and Republican
economic policies. "We measure progress," he told the partisan crowd,
"in the twenty-three million new jobs that were created when Bill
Clinton was president -- when the average American family saw its
income go up $7,500, instead of go down $2,000, like it has under
George Bush."
As rhetoric, it was effective. But was it a fair point, or a cheap
shot? It's true that the Bush expansion was one of the weakest
economic recoveries in postwar history, but can you really lay the
blame for that at the feet of the president? Isn't it the case that,
ritual campaign promises to the contrary, presidents actually have
very little influence on the economy?
The conventional wisdom among economists says yes, but a growing
mountain of historical data suggests that they may be wrong. In the
postwar era, it turns out, Democratic presidents consistently produce
higher growth rates, lower unemployment, better stock market growth,
and less income inequality than Republican presidents. Nobody quite
knows why, but the results are surprisingly robust.
Within the economics profession this topic is known as the study of
"political business cycles," and I first became interested in it ten
years ago, before the dot-com boom of the Clinton era and the weak
recovery of the Bush era. Even back then the data was clear. Add up
growth rates under Democratic administrations, and you get a higher
number than under Republican administrations. Ditto for employment
levels. Inflation rates are about the same. Do it again with lag
times, since presidents inherit economies from their predecessors, and
you get the same result. Change the lag time from one year to two, or
three, or four, and you still get the same result. Fast-forward to
2008, and the results become even more dramatic. We've now had eleven
presidents since World War II, with over sixty years of data points to
draw from, and no matter how you slice the results, Democratic
presidents are better for the economy.
Why? The answer is complicated, not least because it's a subject
that's inherently partisan and most economists probably prefer to
stick to more neutral ground. Nonetheless, it's been a small but
active area of interest among academic economists for more than thirty
years, and it's one that recently got some time in the limelight
thanks to the publication of Unequal Democracy, a book about political
business cycles by Princeton political scientist Larry Bartels that's
accessible to professionals and laymen alike.
To begin with, Bartels lays out the basic evidence for partisan
economic differences since World War II. Annual economic growth is
over a point higher under Democrats than Republicans. Unemployment is
more than a point lower. Income growth among poor families is two
points higher, among the middle class a point higher, and even among
the rich about 0.2 percent higher. And growth is spread more evenly
under Democrats too: income inequality stays about the same under
Democratic administrations but grows consistently under Republicans.
Inflation rates, meanwhile, which conventional wisdom suggests should
be a Republican strong point, are about the same no matter who's in
power. What's more, none of this is a coincidence. It's not just that
Republican presidents are unlucky. The results stay robust even under
a wide range of statistical tests.
Still, not everyone is convinced. Princeton economist and New York
Times columnist Paul Krugman, for example, said recently that he had
not written about Bartels's results before now because he couldn't
figure out a "plausible mechanism" that might account for them. But
then he went on to draw an intriguing parallel to Alfred Wegener, the
German geologist who first proposed the theory of continental drift in
1912 but was roundly ignored during his lifetime. Why? Because even
though Wegener had accumulated plenty of evidence in favor of his
theory, there was no plausible mechanism to explain it. Continents are
big pieces of rock, after all. How can they drift?
Well, we all know how that story ended: thirty years after Wegener's
death, scientists discovered that continents sit on top of a hot,
viscous layer of earth that does indeed allow them to move over
geologic timescales. The resulting theory of plate tectonics is what
explains both California earthquakes and the reason that South America
and Africa look like matching pieces of a jigsaw puzzle. It turned out
there was a plausible mechanism for Wegener's theory after all, which
leads Krugman to ask, "So is Larry Bartels the Wegener of income
distribution?"
Maybe. Bartels's mechanism is twofold. First, he demonstrates an odd
regularity in the data -- although Republicans on average are worse
for the economy than Democrats, there's one specific period when
they're better: during election years. And ever since the pioneering
work of Ray Fair in the late 1970s we've known that voters don't
respond to average economic conditions. They respond almost
exclusively to economic conditions during election years.
But this just pushes the question back a step: Why is there such a
partisan difference in economic performance during election years?
Bartels's answer reaches back to the "honeymoon period," the first
year after an election, during which presidents have the maximum
leverage to implement their economic program. Democrats tend to focus
on employment and middle-class wage growth, which is reflected in
things like job creation programs, increases in the minimum wage, more
generous EITC benefits, worker-friendly appointments to the National
Labor Relations Board, pro-unionization policies, and so forth. The
result is a spike in economic activity, but it's a spike that has
mostly worn off by the fourth year of their term.
Republicans, by contrast, tend to focus their honeymoon period on tax
cuts for high earners and inflation-fighting measures. This may
produce poor economic results on average, but it turns out to be timed
to briefly produce a spike in activity three years in the future. Add
in some extra generous spending just before election years and a
possible partisan boost from the Fed (research by University of Texas
economist James K. Galbraith suggests that, controlling for economic
conditions, the Fed's monetary policy during election years is looser
for Republican presidents than for Democrats), and you get
consistently great economic performance during campaign seasons.
Bartels's model accomplishes two things. First, it's a start at
proposing a plausible mechanism for partisan differences in economic
performance: it turns out that it really is due to substantive
differences in economic preferences between the parties, mostly
focused on what they get done in the first year of each presidential
term. Second, it answers the obvious objection to this theory: If
Republicans really are consistently worse for the economy, how could
they ever get elected? The answer is that while they may not perform
well on average, they do perform well during the one year in four when
it counts.
There are more twists and turns to the story, but this is the gist:
Democrats really are better for the economy than Republicans, and it
really does seem to be related to differences in their economic
programs. Given that, then, I'll make this prediction: If Barack Obama
is elected president, the economy over the next eight years will be
better than if John McCain is elected. In fact, I'll go further and
put some hard numbers to that prediction. Here they are:
If Obama wins, unemployment will average about 5 percent. If McCain
wins it will average about 6 percent.
If Obama wins, real GDP growth will average about 3 percent per year.
If McCain wins it will average less than 2 percent per year.
If Obama wins, poor families will see their incomes grow by more than
$6,000 during the next eight years. If McCain wins their incomes will
grow by less than $1,000.
If Obama wins, middle-class families will see their incomes grow by
about $13,000 during the next eight years. If McCain wins their
incomes will grow by about $5,000.
If Obama wins (hold on to your hats for this one), rich families will
see their incomes grow by about $36,000 during the next eight years.
If McCain wins their incomes will grow by about $32,000.
If Obama wins (hold on to your hats again), the stock market will
perform better: the average return on stocks compared to Treasury
bills will be about 9 percent. If McCain wins it will be about 4
percent.
If Obama wins, the national debt will grow about $150 billion per
year. If McCain wins it will grow $400 billion per year. (For more,
see Gregg Easterbrook, page 15.)
And no matter who wins, average annual inflation will be around 4
percent.
So that's that. Look me up in 2016 and let me know how good my crystal
ball is.