Forgive the lengthy post, but this one is going to cover a lot of turf.
Last week I had a few posts about the differences between elected Republicans and elected Democrats. I noted that for whatever reason, we observe higher growth rates in real real (GDP less increase in national debt) per capita under Democratic Presidents than under Republican Presidents. In fact, looking at complete administrations (i.e., assuming JFK & LBJ form one administration, and Nixon & Ford form another), all three Democratic administrations outperform all five Republican administrations. I noted this discrepancy was true for Congress; real per capita growth less increases in the debt was higher under Democratic Congresses than under Republican Congresses.
I advanced a few guesses as to why this discrepancy might be observable which I hope to test as time permits, but I think perhaps the biggest one is simply that Democrats tend to pursue policies that are less likely to run up the debt.
Today I want to approach this from a different angle… what else determines differences in growth in the various presidencies. I’m going to start with a hypothesis… just as fiscal policy (e.g., attitudes toward debt and taxation) matters, so does monetary policy. But simply looking at a growing or shrinking money supply does not tell us whether monetary policy is expansionary or not. After all, with more people, growth, or inflation, more money is needed just to maintain the same level of, well, lubrication in the economy. Thus, I want to look at the change in the real Money Supply per capita; that is, the increase (or decrease) in the amount of M1 (or M2) per person above and beyond inflation. (Sadly, that data is only available beginning in 1959, so Ike drops out of the analysis.)
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.
As noted in earlier posts, the growth rate in the economy is noticeably faster among all of the Democratic administrations than it is among all of the Republican administrations. There doesn’t seem to be much of a correlation between economic growth rates and increases in the real money supply…
But, as noted in earlier posts, there is a difference between Democratic Presidents and Republican Presidents when it comes to fiscal policy, so perhaps monetary policy will affect the two groups differently. Looking at Democratic Presidents by themselves…
While there are only three observations, table 2 does seem to indicate that perhaps monetary policy is highly correlated with the difference between in growth rates in the economy observed in the three administrations. The loosest monetary policy occurred during the JFK-LBJ years, when the fastest growth was observed. Under Clinton, monetary policy was more mixed (real M1 per capita contracted, but real M2 per capita increased), and growth rate was a bit slower. The slowest growth rates among Democratic Presidents was observed in the Carter administration, when monetary was contractionary by both measures.
What about under Republicans?
As seen in Table 3 above, the correlation between monetary policy (especially M2) and growth is still quite high. What throws a damper on things, not surprisingly, is GW’s incompetence. While he is the beneficiary of a more favorable monetary policy than Nixon & Ford were, growth rates under GW have nevertheless been lower than under the combined Nixon & Ford administration. Leaving GW out of the picture:
The correlation between monetary policy and growth among Republican Presidents, leaving out GW, is very close to 1. Reagan was the beneficiary of the most benevolent monetary policy, and he performed best. Nixon & Ford also had it pretty good (better than all but one Democratic administration, in fact), and growth was next highest. GHW incurred the wrath of the mighty Greenspan, so his growth rates were the lowest.
So… it seems that except for GW who has a penchant for under performing at everything, all else being equal, the more beneficial the monetary policy, the better the growth rate under Republican Presidents, and the better the growth rate under Democratic Presidents. The table below shows how the Presidents rank according to growth rates and monetary policy.
From this we conclude… not only did Democrats do better than Republicans, they did so with less favorable monetary policy.
As to why the Republicans had the Fed’s wind at their backs and the Democrats were dragged back by a Fed anchor… leaving aside Miller who served as Chairman of the Fed for less than a year and a half, it is easy to see the blatant partisanship of the Fed at work. Martin was a Democrat, and he provided very favorable monetary policy toward JFK and LBJ. Burns, Volcker both served in the executive under Republican administrations; presumably, they were Republicans. And its fairly obvious Greenspan, as a Randian, was no Democrat.
Wouldn’t it be nice if Republican Presidents followed more rational policies, and the Fed sided with American public rather than the Chairman’s favorite political party for once? Imagine how much wealthier we’d all be by now.
Debt came from from 1950 to 2005 can be obtained from the Treasury; this data set provides data from 1953 to 1985 for December 31st of each year, and for 1985 to 2005 for September 30th of each year. Data for September 2006 was also obtained from the Treasury.
Real GDP per capita and population came from BEA’s NIPA Table 7.1. However, to match the debt series, this time I used Q4 data through 1985, and Q3 data thereafter.
As always, let me know if you want my spreadsheet.