Previewing Blinder and Watson (2015)
by Mike Kimel
Previewing Blinder and Watson (2015)
Via James Hamilton at Econbrowser, I read about this paper by Blinder and Watson. From their abstract:
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:
Figure 2.
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:
Figure 3.
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.
I especially liked that they attribute the above normal growth in the 90’s to the emergence of big box stores.
No – really.
Cheers!
JzB
I think you mixed up something Hamilton wrote with the paper itself. Unless I missed it, they didn’t mention big box retailing – that was Hamilton’s example of TFP growth.
Without sounding underly modest, I was particularly interested in this paper since most of the Blinder and Watson paper is stuff I wrote in blog posts from 2006 to 2010, including looking at the effect of monetary policy and Fed appointments. (They did miss one important thing, stating this: “Of course, such an empirical finding does not imply that the Fed is “playing politics” to favor Republicans.” Of course, that’s because they didn’t look at what happened to the expansion of MS leading to elections.)
That’s why I feel so confident in stating what they’ll be writing about two years from now: I know what was I was writing from 2008 to 2012.
The data and theory presented by Kimel (over the years) suggest that economic growth has in the past been spurred by businesses using receipts to grow themselves rather than using these receipts for high pay and dividends that faced high tax rates. Shouldn’t we also consider the incentive side of the equation? Businesses likely also saw more potential demand and growth when customer (and potential customer) real income growth roughly matched productivity growth. When businesses faced this combination of incentives and disincentives, were owners encouraged to accumulate more of their wealth in the form of expanding company value, translating eventually into long-term capital gains, which would face lower tax rates?
IF so, owners were less “free” to use business receipts outside the company–something economists would generally favor theoretically as more efficient resource allocation. But owners also were less free to use the receipts for more conspicuous consumption and non-productive speculation (and bubble-making), along with purchases of political influence. Also, probably a smaller cut for Wall Street. On balance, I’d expect higher taxes on high incomes (including dividends), combined with higher wages, to lead to greater economic prosperity for the country as a whole.
Mike
glad to see someone is reading your stuff.
PJR i never made enough money in business to have to worry about tax incentives, so I just assume Mike is right. But I think policies that curb fraud and abuse and give the workers a fair deal would also encourage “growth” if for no other reason because the workers have more money. While up to a point the rich having more money would lead to more investment directly (as opposed to indirectly because the workers are spending more, so it pays to invest in something they want to buy), past that point there is nothing worth investing in, so the extra money the rich have goes into gambling (the stock market) and pure economic waste (rolexes and cocaine)…. basically the king’s courtesans.
PJR,
Consumption, conspicuous and otherwise, certainly is a piece of the testable implications of my little story. What is cool about the story: a bit of thrift and less consumption (as a percentage of what is possible to consume) today leads to more production and potentially more absolute consumption tomorrow, even if one is still being thrifty tomorrow. It’s a very Republican explanation for the benefit of higher taxes.
Coberly,
No idea if these guys are reading what I was writing. I tend to doubt they stray very far from other academics… which explains why they are writing about things that are no surprise to many in the blogosphere despite as if they were novel insights.
And you do put the finger on why higher taxes are better only applies up to a certain point. Remember all the posts I had over the years showing that there is a quadratic relationship between growth and tax rates. If tax rates (or tax burdens for that matter) get too high, it pays to reinvest in any crazy thing. But the old posts I had suggest the top of the curve seems to be somewhere around top marginal tax rates of about 65%.
mike
thanks, i remember and agree.
with respect to you reply to pjr, i suspect that is true also… as far as it goes. but i had another contributor to AB the other day telling me i was some kind of social criminal because instead of buying a new car on time, i saved my money for retirement, lending it at interest and thereby becoming a rentier… and deserving of no consideration (from Krugman too) on the matter of negative interest rates… you see, they help the consumer, that is the poor. but no need to help the saver, that is, the rich.
like me.
http://economistsview.typepad.com/economistsview/2013/12/links-for-12-02-2013.html