by Mike Kimel
Previewing Blinder and Watson (2015)
The U.S. economy has performed better when the President of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance. For many measures, including real GDP growth (on which we concentrate), the performance gap is both large and statistically significant, despite the fact that postwar history includes only 16 presidential terms. This paper asks why. We find that the answer is not found in technical time series matters (such as differential trends or mean reversion), nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior TFP performance, and more optimistic consumer expectations about the near-term future. Many other potential explanations are examined, but they fail to explain the partisan growth gap.
Having co-authored a book on how Presidents performed on a wide range of issues, including the economy, it’s nice to see some high-powered academics stumbling on some of the same relationships we found. However, attributing very much to oil shocks doesn’t make sense. See, if oil shocks are a big driver, then depending on how one chooses to define an oil shock and the lags one selects, we should either have seen rapid growth during the tail end of the GW and start of the Obama administration (the price of oil was about $1.70 per gallon at the end of 2008 and start of 2009), or we should be seeing it now several years into our wonderful world of fracking. Since even Larry Kudlow stopped bleating about the goldilocks economy in December of 2008, I’m guessing it won’t come as a shock to anyone that the economy was pretty dismal in 2008 and 2009, and hasn’t been anything beyond mediocre at any point since.
So here’s what’s going to happen. Blinder and Watson are going to write another paper in which they tell us what is really driving economic growth. If I had to guess, it will come out November 2015. Let me give you a preview of that paper because it’s going to be one of the pivotal papers of the decade. The most important table in the paper Blinder and Watson will write in November 2015 will look kinda like this:
The table shows a few bits of data for each presidential term going back as far as official data is available. (The BEA has computed GDP and Federal Receipts going back to 1929.) The third column of data shows the Federal government’s receipts as a share of GDP the year before an administration took office. Thus, for Reagan, who took the oath of office in January 1981, the third column shows Federal Receipts / GDP in 1980, Carter’s last year. The fourth column shows Federal Receipts / GDP in an administration’s second year in office. The fifth column shows the change in Federal Receipts / GDP from the year before an administration took office to it’s second year in office.
Every Republican administration reduced revenues collected by the Federal government (read: cut taxes) right from the beginning. Note that this doesn’t have to be done directly with changes in the tax laws and marginal tax rates. Simply by appointing a different crowd to the IRS with different views on enforcement is enough.
Democrats are more likely to collect raise revenue collections (read: raise taxes) right from the start. FDR raised collections in the teeth of the Great Depression, and later with the start of WW2. Carter and Clinton both raised collections in their first two years. JFK’s first two years were marked by a tiny decrease in collections. On the other hand, Truman cut taxes as a percentage of GDP by about half a percent in his first year. Obama (as wouldn’t surprise anyone in a world in which Fox News didn’t exist) actually cut Federal tax collections as a share of GDP by more than most Republican Presidents did in a comparable point in their administrations. (Before you blurt out a sentence that ends with “because of the Great Recession” go back and take a second look at FDR.)
Blinder and Watson could follow up the previous table with this:
This table shows that the correlation between the change in Federal gov’t collections in an administration’s first two years in office with the real GDP growth during that administration beginning in the second year. (Thus, for Ronald Reagan, we look at the change in collections from 1980 to 1982, and compare that to the growth in real GDP from 1982 to 1988). The correlation is quite high. It is particularly high when we only consider administrations which served eight year terms, which is to say, those that have had the longest amount of time to implement their policies. Yes, correlations don’t imply causality, but when they’re up in the 90s there better be a damn good reason for giving the benefit of the doubt to oil shocks.
Now, when Blinder and Watson write this paper, you’ll hear plenty of this: “It doesn’t make sense that raising taxes can lead to faster economic growth.” That will come mostly from academics, libertarians, and people who have never had to run a business. Nonacademic, non-libertarian business owners can tell you straight off the bat why a stricter IRS leads to faster economic growth: taxes are paid on profits, and the higher the tax burden, the more incentive a business owner has to simply reinvest what would otherwise be profits to avoid paying those high taxes. Reinvesting in the business today = faster economic growth over the next few years. It also means that Blinder and Watson will disavow this statement from the paper they just wrote: “Utilization-adjusted TFP shocks are a bit of a black box. As with oil shocks, we consider them as mainly reflecting luck.”
One interesting thing about previewing Blinder and Watson’s paper two years before it comes out is that it gives us a bit of insight into Obama’s performance for the rest of his term. One of the tables that won’t make it into the paper Blinder and Watson will write, but which one could derive from the data they will provide in their appendix, will look like this:
If you’re wondering, in the first data column, Obama would fall below Nixon/Ford and above Ike.
Tune in again in November 2015 when I review the Blinder and Watson paper after it comes out and preview their November 2017 paper. But in the meanwhile, if you want the data they’re going to use, drop me a line at “mike” period “kimel” at gmail and I’ll send you my spreadsheet.