Economic Catastrophes – Another Look at Economic Performance by Presidential Party
Economic Catastrophes – Another Look at Economic Performance by Presidential Party
Since we’re in a period of economic crisis, I started thinking about crises of the past. Its not always easy to define whether a moment in time is more than just part of ups and downs in a run-of-the-mill business cycle or is a genuine crisis, but in general, a situation in which the lives of most Americans are changed for the (much) worse, and there is a wide-ranging threat that some event will sweep away some integral part of the American way of life probably qualifies.
With that loose definition in mind, off the top of my head, here’s what I come up with as a list of American economic crises beginning with the Big One – or at least, the Big One from the last century:
1. The Great Depression
2. The 1970s
3. The S&L Crisis
4. The Current Mess
Not too many, but then we should all be grateful that a crisis is not a common thing. For what its worth, I did a quick search online and Wikipedia has a list of financial crises since 1980 and the only American ones on their list are numbers 3 and 4 on mine.
The Great Depression started with the Crash of 1929 – in Hoover’s first year. Hoover was the third Republican President in a row following Harding and Coolidge, so the Crash occurred after eight consecutive years of Republican control of the White House.
The 1970s are usually blamed on Jimmeh Carter, but he only took office in 1977, long after the mess started. From inflation to the oil crisis, I can’t think of any part of the mess that was the 70s that actually began during the Carter administration other than the Village People. Even the Bee Gees started long before Carter arrived on the scene. If there was a defining “economic moment” in the 1970s, it was the collapse of the Bretton Woods System (i.e., the Gold Standard) in 1973.
The S&L Crisis is harder to date precisely. The big events according to Wikipedia were the collapse of Home Savings, Lincoln Savings (of Keating Five fame), and Silverado Savings and Loan (of Neil Bush fame). Regardless of how its sliced, the crisis occurred several years into the Reagan administration, and continued well into the succeeding Bush administration.
The current mess dates to late 2007 or 2008 – again, there isn’t a precise event. But clearly, it began after a number of years of Republican control of the White House. Of course, events don’t happen in isolation. The economy is path dependent, and some of the factors that helped cause these event happened as much as decades earlier. As an obvious example – the fixed exchange rate built into the Bretton Woods system was an accident waiting to happen, and it caused periodic problems which were dealt with by whoever happened to be in office at the time. Nixon, however, was the only one to decide on price and wage controls and closing the gold window, much less shutting down the system altogether. If you believe the system should have been abandoned (as do I) – it could have been done in a smoother and more orderly process, one that didn’t cause the same degree of harm to the US and world economies. If you feel, on the other hand, that the Bretton Woods system should have been saved, its pretty clear that while he was trying to do it, the effect on the US economy could only be described as damaging.
So… why is it that we’ve seen more of these, er, catastrophic events under Republican Presidents than under Democratic Presidents? To pre-empt one of the usual responses, note that each of the crises happened at least four years into Republican control of the White House. Four or eight years into Republican rule should be more than enough time to undo any damage inherited from Democrats. To pre-empt another, sure I started with the Great Depression, but I could easily have gone back to the Panic of 1907. And to pre-empt a dumb comment that comes up all the time: if you’re going to insist that FDR prolonged the Great Depression, please be sure to explain why the Depression lasted longer in countries that adopted a more laissez-faire approach than in countries that followed a more New Deal type approach. I’m not Amity Shlaes, thank you very much.
So the options are as follows:
1. I’ve been quite selective in picking only economic disasters that occurred under Republican administrations and ignoring those that occurred Democratic administrations, or otherwise misrepresenting the timing. (I often get accused of the latter misrepresentation, particularly when I insist that the tax cuts of 1964 occurred after JFK died rather than at the start of his term, so I’m particularly sensitive to that one.)
2. There are roughly an equal number of “potential” economic disasters under Democratic presidents than under Republican presidents, but under Democratic presidents we manage to dodge the bullet.
3. The are a lot more potential economic disasters under Republicans than under Democrats, and under Republican presidents we’ve managed to avoid most of them, while Democrats go untested.
4. We’re no more likely to get stuck with an economic mess under Reps than under Dems and vice versa, and its all just random chance.
I’m obviously the wrong person to comment on option 1 – if I’m Sowellizing I wouldn’t admit to it, would I? So I’ll let you as the reader decide on that one.
I also think most reasonable, and even a few of the folks at the National Review are unlikely to seriously argue that a preponderance of economic disasters under Republican administrations is a clear sign that Republicans have better economic policies.
Which leaves option 4 – its all random chance v. 2, we’re dodging bullets under Dem administrations that we aren’t dodging under Rep administrations. Interestingly enough, we seem to spend more time in run of the mill recessions under Republican administrations too, so we’re not just randomly hitting the big disasters when Republicans are in office – we’re hitting the small ones too.
But let’s look put some percentages on this. Assuming that there are four economic disasters to be distributed amongst the 13 administrations, and assuming that spacing considerations preclude two consecutive administrations from both being the starting point of an economic mess, by my count, there are 204 ways in which the starting point of an economic mess could be distributed among those 13 administrations. Of those 204 combinations, 16 of them, or about 7.8%, involve only Republican administrations. (This result and others below in this Google spreadsheet.) The four disasters we had spent a lot of effort trying to land on a relative small target-space, didn’t they?
How about looking at growth rates? Since 1929, the first year for which data is available, the growth rate of real GDP per capita under Republican Presidents was 0.68% a year. Under Dems, 3.84%. Excel provides us with a cool little function called “ttest” – essentially, it runs a two sample t-test to see if two series come from the same underlying distribution. (To the numbers jockeys in the audience – I ran the least restrictive version of the test, which does not assume that the variance of the two samples is the same.) The probability that the Democrats and Republicans essentially behave the same is 0.45%. (Again, results are in this Google spreadsheet.)
One common defense of the right is that maybe growth is faster under Dems, but that’s only because they leave behind a mess for Republicans to clean up. So rerunning the above test, leaving out the first year in which party in the White House changes, we find that the Republican growth rate is 0.58%, and the Democratic growth rate is 4.17%. The probability that the two parties produce the same growth rate falls to 0.34%. So there really is something to the “cleaning up the mess” argument, just not what its proponents claim. (Once more, results are in this Google spreadsheet. OK – I’m gonna stop repeating this now.)
A better critique would be that the world is different now than it was in the pre- and early post-WW2 era. So if we start in 1953, the first year of the Ike administration which came after the Depression, after WW2, after Korea, we get an average yearly increase in real GDP per capita of 1.6% under Reps, and 2.83% under Dems, and only a 2.6% probability that the two groups turned in an equivalent performance. Leaving out the first year again exacerbates the difference. (Results in the spreadsheet.)
So… there is a difference between the economic performance of the two parties. (And because I don’t have the time to once more go through a litany of the likely reasons, here here are a few. Here is another. And here’s one more, straight from a variety of headlines on a variety of topics we’ve seen since GW took office: those who profess that government has no useful role in the economy tend to run government poorly, especially in those situations when they realize that something has gone wrong and the only thing left to do is use the government to “do something.”)
(A last reminder – results mentioned in this post are here.)