The President's Party and the Economy: A Guest Post

Here’s an interesting guest post courtesy of a blog reader named Dmitri Leybman, who has just graduated from the University of Chicago with degrees in political science and English literature; his focus is on political economics, particularly the impact of politics on macroeconomic outcomes. (He was also the winner of this contest.) I think you will find it interesting, particularly the “partisan presidential economic cycle” notion in the last paragraph.

What Does the President’s Party Affiliation Have to Do With the Economy?
A Guest Post
By Dmitri Leybman

A couple of months ago, some Freakonomics readers wondered whether the president really had any discernible impact on the economy. This question has actually received a lot attention from political scientists and political economists. Although these scholars still dispute precisely how presidents influence the macroeconomy, few would deny that the impact is real. The following are three macroeconomic phenomena that have been attributed to a president’s party affiliation.

First, according to research conducted by Princeton political scientist Larry Bartels, there has been a persistent pattern of income inequality under different types of presidential administrations. Since 1949, Democratic presidents almost always presided over a decreasing or flattening of income inequality. During that same time period, Republican presidents have always presided over increasing income inequality. As to why this occurs, nobody really knows, but the effect persists even when holding constant such exogenous variables as the price of oil and the percentage of individuals participating in the labor force. Additionally, real per-capita G.D.P. growth for all income strata is consistently higher under Democratic presidents. Individuals in the 95th percentile, however, do well under both Democratic and Republican presidents, but growth for the rich still tends to be higher when a Republican is in office.

Second, Democrats and Republicans respond differently to inflation and unemployment. Democrats preside over lower levels of unemployment while their Republican counterparts have historically presided over lower levels of inflation. The most accepted explanation for this phenomenon is the existence of a short-run Philips Curve in which inflation and unemployment are inversely related. An increase in inflation results in less unemployment, while a reduction in inflation results in more people without jobs. Politicians exploit this curve to achieve different macroeconomic outcomes depending on which constituents they represent. Republicans, who disproportionately represent the wealthy, tend to pay more attention to controlling inflation, while Democratic presidents, who receive much of their support form lower- and working-class voters, focus their attention on reducing unemployment during their presidential terms.

The last pattern of partisan presidential impact on economy is probably the most unusual and consequently has not been persuasively explained by economists or political scientists. This unusual phenomenon is the partisan presidential economic cycle. In the first two years of a Democratic president’s term, the economic growth accelerates. During the third and fourth years, however, the economic growth decreases. The opposite effect is seen with Republican presidents, who preside over decreasing overall growth during the first two years of their term only to have it followed by increased economic growth as re-election looms. This tendency of Republican presidents to preside over growth that occurs so close to re-election has been cited by Bartels as the main reason why Republican presidents have been so successful in achieving two-term presidencies in the post-World War II era. Voters, Bartels believes, are economic myopists, paying attention only to the most recent economic outcomes and not the overall outcomes experienced under a president’s rule.


frankenduf

don't forget the intra-administration cycle: repubs throw a party for the rich and dems have to clean up the mess

Raj Pandravada

"...Republican presidents have been so successful in achieving two-term presidencies in the post-World War II era"

You mean as opposed to Democratic presidents? In the post-WWII era, only two presidents had one-term presidencies - Carter and Bush 41. The others, of course, had curtailed presidencies due to assassination or scandal.

While the phenomenon being described might be true, it is quite specious to attribute causality to something as easily verifiable as the term-lengths of modern presidents.

JimBob

You're kidding right? This whole issue assumes that somehow the economy changes on a dime when a new president takes over. Policies initiated by one administration (interesting this study did not mention who controlled congress) take months to years for the full effect to be felt. It is said that a Fed Funds rate cut takes 6-9 months to be effective. The Obama Administration's stimulus, for all its pomp and circumstance, has only seen $44B out of almost $800B spend YTD. How can one assume that the effect of these things are immediate? Fix that basic flaw in your thesis and come back with some real results.

earlsofsandwich

Or maybe the last trend is inexplicable because it's just a coincidence. The sample size is too small to make real conclusions.

Dan

Good work, roommate. Just one question - is the number of individuals participating in the labor force an entirely exogenous variable? Could it also be a function of discrimination laws, minimum age requirements, immigration regulation and maternity benefits that push people in and out of the workforce? These factors could be regulated by law and thus be influenced by presidential ideology. Key to this distinction is the understanding that there are different types of unemployment, and that a change in labor market opportunities causes some people to decide to enter the work force who were not previously considered to be "unemployed" as they were voluntarily unemployed - they chose to be a housemaker or to retire early or to be a student, for example. I guess what I'm getting at is that there is not a static number of people looking for jobs, and your model might underestimate the positive effect on the economy of expanding the number of people seeking employment. This is something that is lost by merely looking at the percentage of people who are seeking jobs but cannot find them. There are obviously many demographic drivers that are beyond the president's control, but again I think that the importance of immigration policy on the economy and unemployment should not be overlooked.

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Kevin H

What if we turn this on it's head. Fluctuating economic conditions could strongly effect how various issues are perceived and weighed by the public. How would we be sure we have the right direction in this causal relationship?

Kitt Hirasaki

Does Larry Bartels' work suggest causation between reducing income inequality and increasing GDP? The two are put together in your first point, I'm wondering how tight the connection really is.

irshah

The argument that the thesis doesn't hold because of the initiation period needed presidential parties to really have an effect isn't entirely relevant considering presidents have four years in office, and even if as mentioned it takes months for policy changes to have tangible effects, an initiation period of 4 or even 10 months isn't comparable to the following 3 years or so during which the behavior holds true.

I may have read this incorrectly, but I believe that Mr. Leybman is really just pointing out some very interesting correlations in empirical data. He doesn't really say "these things happen and THIS is why" it is more of "these things happen, this is an idea as to why"

Good find, Dmitri, this is definitely something that logically makes sense but was a little difficult to pinpoint empirically. But we are starting to see the beginnings of more solid proof as to the influence presidents have on the economy.

That is to say, if there was no difference between parties and the state of the economy, there wouldn't be a need for parties to begin with.

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Silence Dogood

Interesting questions to be sure, but what exactly is income inequality? Do you mean the poor get poorer? If so, I doubt that you can substantiate this factoid to be true in a two year switch of political power. Income shifts take years to manifest themselves; they are not speed bumps in a road. To look for simplistic colorations in a complex economic structure is not reasonable. Instead, look for the time delay for monetary policies to go into effect; look for congressional party control, look for cooperation of parties between the Executive Branch and Congress.

Regarding democrats and low unemployment, I remember the late 70's under Carter; only one word to say, Stagflation. I fear our current Chief Executive will be Jimmy Carter Part Deux, a compassionate man with the executive skills of sixth grader.

gator80

There is so much wrong with this it is hard to know where to start. It is reminiscent of the Super Bowl indicator, which identifies that the stock market goes up when a team from the original NFL wins the Super Bowl.

Is there an actual theory of causation? Did Bartels take into account which party controlled congress? Which parties controlled the governorships and the state legislatures? Is there any statistical significance to any of this? Were rates of economic growth considered? Were reductions in inequality taking place in a stagnant economy? Were increases in inequality taking place in a booming economy? And how was inequality defined, anyway? Does it include benefits, government transfers?

Obviously I haven't read the study, but the summary provided is not very illuminating. (On the other hand, I don't mean to take shots at our young graduate - keep at it but don't be afraid to ask tough questions.)

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Raquel

Post 7 asks about causation between inequality and per capita gdp...
Isn't this a standard trade-off on Mirrlees theory of incentives under asymmetric information? Or what is also known as the efficiency-inequality trade-off?
I was astonished there was no reference to that in the text...

Johan Urh

The last point is a serious candidate for data-mining consideration. If you are desperately trying to find a pattern, you can make the data give you one.

Matthew R.

This reminds me about the relationship between the stock market and skirt hemlines.

Since 1949, the Democrats controlled one or both houses of Congress for the majority of the time. Since Congress passes laws and controls taxes and spending, wouldn't control of Congress have a greater impact on economic issues than the president?

Apok

Interesting post - nicely written. But it isn't obvious to me how the President can influence inflation, if inflation is a monetary phenomenon, and the Fed is (mostly) politically independent.

TD

In Australia, it rains more when we have a Labor Government.

Luke

I'm not sure the post ever tries to push a thesis or even an explanation. He merely reports the trends (which are facts) and then lists the common explanation if there is one. If you're trying to discredit the post by questioning the causation, you're simply building a straw-man argument.

politics that work

You can find a more recent depiction of how GDP growth correlates to political parties here- http://politicsthatwork.com/graphs/gdp-growth-by-party