Canada too! Part two
by Mike Kimel
Canada too! Part two
Cross posted at the Presimetrics blog.
In response to my post commenting on Frances Woolley’s post, Frances Woolley left the following comment:
On WCI, one of the commentators suggested that the Liberal/Conservative growth differential is partly due to differences in military spending. In Canada where we don’t have a large defence industry, money spent on “guns and bombs” probably has a low multiplier. So the spending story could well be part of it.
There’s also differences in monetary policy (Liberals are more expansionary) and immigration policy (Liberals are more pro-immigration) – though in general anti-immigrant sentiment rises in economic downturns so it’s hard to figure out what the causal mechanism is there. On the other hand, a lot of commentators on WCI have argued that, because political platforms change so much over time, it’s hard to identify any political party with any particular policy stance.
I figured I probably needed at least one graph to respond properly, so its easier to do it in a post. I would note first – I am not that familiar with Canadian data and I don’t have the time right now to plunk down some cash at Statistics Canada, so I’ll stick to the US side of things.
1. Guns and Butter. For the US, using data from 1929 to the present, this doesn’t work. Yes, in recent decades, Republicans have been more military oriented than Democrats. However, FDR was president during WW2, Truman was president during Korea, and the bulk of Vietnam occurred under LBJ. (FDR and LBJ had monster growth, Truman had crummy growth.)
2. Monetary policy doesn’t work at all in the US. First, monetary policy is the prerogative of the Fed in the US, and Figure 1-10 in Presimetrics (available in the free download of Chapter One) shows you that Republicans benefited more from the expansion of the real money supply. And I was playing with the graphing tools at the FRED site (Federal Reserve Economic Database of St. Louis) and spit out this:
The curves show the percentage increase in nominal M1 over the length of each administration since the start of that administration. Blue curves are Democratic administrations, Red are Republican. Its pretty clear that in general, the expansion of nominal money was greater under Republicans too.
3. Immigration. Could be. I haven’t checked.
4. Policy changes over time. In the US, at least, there has been one thing that has differentiated both parties since 1929, with two exception – Truman, the worst performing Democrat thus far, and Obama, in his first two years, also no great prize, have both behaved in a Republican way by this standards: the change in the tax burden. As I’ve noted time and again, you can change the tax burden two ways – one is through the law (by cutting or raising marginal rates or what income gets taxed, etc.). The other is through enforcement. And we find that among Democrats barring Truman and Obama, they all raised the tax burden, even LBJ who drastically cut marginal rates. On the flip side, every Republican, even Bush 1, who famously raised marginal rates, lowered the tax burden.
See figure 2 from this post.
You can’t look at just M1 since it isn’t a necessarily exogenous variable. And despite monetarists screaming from the rooftops, quantity doesn’t matter because velocity isn’t constant and what matter is what the Fed targets, real rates. Now everything that has been looked at has shown that the Fed does try to goose Republicans especially since Volker lost his job because he displeased them.
Comparing war-time economic results to non-war-time results is tricky, so comparing GOP vs Democratic tendencies to spend on the military, as they relate to economic performance, might be tough. Democrats have tended to fight wars, and in at least the case of WWII, that meant putting a great deal of unused capacity to work. The results in terms of GDP were good, though if one were to make allowances for debt accumulation, they might be a whole lot less good.
The GOP, on the other hand, seems to like spending on the military without regard to whether we are at war. If the military spending multiplier is low in normal times, higher when there is lots of slack (as I’d guess would be the case for most kinds of spending), then a tendency to expand the military in good times and bad would be bad for the broader economy.