Comparing Presidents – Fairness

Bill Polley sent me some e-mail, and we’ve been having a bit of an exchange. I want to focus on what I think is an important point he made that has not been discussed on Angry Bear. He suggested (I hope I’m not mischaracterizing his point) that my measure of growth: growth in real (GDP per capita less change in debt) per capita may be misleading, and in fact, any measure with debt in it would be misleading.

Here’s the idea… say you’re you have a pre-existing national debt – which has been true for every President in our series. Now, say a President takes office when inflation is low, but leaves with high inflation. There will be a few effects of that:

1. The real value of each bond will shrink as it is inflated away… thus, much of the debt is inflated away. (If the dollar loses half of its value, a bond worth $50 (2000 base year) is worth $25 (2000 base year) a few years later.)
2. The real cost of the interest on each bond will be inflated away.

Thus, Presidents who started with low inflation and ended with high inflation – and if you look at this graph both Nixon and Carter qualify, will benefit. Similarly, those under whom inflation fell, think Reagan and to a lesser extent GW, will be penalized – they will be stuck with a lot of debt that was obtained cheaply but now costs dearly.

Actually, this post also shows real interest rates. Reagan may well have been penalized… (To a lesser extent, GHW and Clinton would also have been stuck with some of those bonds) GW… actually probably benefited, given the interest rates were negative throughout much of his term. They were also (very) negative for the last few years of the Nixon/Ford administration.

So how does one take these factors into account in a fair way? Is it even possible? I don’t know – especially since these aren’t the only factors that matter. We know Real M1 per capita correlates with growth – and the big beneficiaries for that were JFK/LBJ, Reagan, and GW. How do we take that into account?

My guess – its not entirely possible. We can conclude that Reagan got hosed by one measure, and made off very well by another. The same is true of Carter (look what happened to real M1 per capita in his term!). And GW seems to have benefited many different ways by Fed actions (it pays to play hardball, apparently) and still hasn’t done all that well.

But is there one fair measure? I don’t know. In the end, there is some luck out there…