It’s The Economy, Stupid: How Economics Defines Presidencies & Elections

Presidents & Economics

Hillary Clinton made some headlines recently by claiming that Republicans have tarnished Democratic economic success, specifically pointing to George W. Bush’s alleged squandering of a record budget surplus. Her argument was that Republicans can’t be trusted and, by strong implication, that electing one of the many candidates on that side of the aisle, Americans would essentially be voting to wipe out the relatively modest progress of the past few years.

The Washington Post’s Fact Checker, Glenn Kessler, gave her argument “two Pinnochios,” citing the difficulty in connecting presidential policy to economic realities but still acknowledging that, yes, Bill Clinton did leave office with a surplus and George W. Bush did not. Ergo, Bush, in this case, and Republicans as a general proposition, could not be trusted as economic stewards.

As Kessler noted, Clinton was both right and wrong. The facts are there to make a case. Bush did sign off on a tax cut that basically spent the surplus. Because of a recession, two wars, and financial crisis of 2008, the government also needed to spend some unanticipated dollars. Given all of that, the surplus was elimated pretty quickly and definitely gone by 2009 when Bush left office.

It’s important to note one big caveat. While Bill Clinton had a reputation as a “New Democrat” moderate, that was partly due to necessity: the GOP rout in 1994 forced him to the center and he ended up passing some legislation he might have avoided with a continued Democratic majority (although that’s theoretical rather than certain given dynamics of the old Democratic coalition; if it held through the 1990s, the conservative/moderate faction would have been strong). And Bush, of course, had to confront situations requiring spending, whether he wanted to or not. Hindsight makes one wonder whether either had to go along to the extent they did, but history worries not about such things.

But Hillary Clinton’s statement wasn’t really wrong because she oversimplified her husband’s achievements and Bush’s failures. It was wrong because of the very incorrect implication that presidents have a substantial influence – or any influence, really – on the nation’s economy. This isn’t unique to Clinton. Every candidate falls prey to this fallacy, and Jeb Bush’s recent promise to achieve a sustained 4% growth rate is one such example.

Presidents and the economy

The myth that presidents control the country’s economic fortunes is a persistent one. The debate now breaking out over who would be better for the economy is little different from those that have been part of presidential elections for years.

Historical patterns have a clear answer — Democrats.

Princeton economists Allen Binder and Mark Watson found a strong correlation between U.S. economic growth and Democratic presidencies, to a degree they call “startlingly large.” For the 64 years between Harry Truman’s first full term and Barack Obama’s first term, growth rates averaged 4.35% under Democratic presidents and only 2.54% under Republicans. The effect wasn’t limited to just growth, though – Binder and Watson found that almost every other economic indicator, from the components of gross domestic product to real wages and labor productivity also grew faster (even if slightly) during Democratic administrations.

So this supports Hillary Clinton’s claim and gives a boost to Democratic talking points that they are superior economic stewards, right?

Not quite:

Democrats would no doubt like to attribute the large D-R growth gap to better macroeconomic policies, but the data do not support such a claim. Fiscal policy reactions seem close to “even” across the two parties, and monetary policy is, if anything, more pro-growth when a Republican is president—even though Federal Reserve chairmen appointed by Democrats outperform Federal Reserve chairmen appointed by Republicans.

It seems we must look instead to several variables that are mostly “good luck.” Specifically, Democratic presidents have experienced, on average, better oil shocks than Republicans, a better legacy of (utilization-adjusted) productivity shocks, and more optimistic consumer expectations (as measured by the Michigan ICE).

In fact, presidents generally have few policy levers that directly affect economic performance. As with everything else, they are constrained by Congress and the policy preferences of 535 very different representatives and senators when it comes to spending and most fiscal policy measures. Presidents appoint Federal Reserve governors and chairmen, but they remain nominally independent. States, of course, can do their own thing too (within reason, anyway – they don’t have the power to, say, devalue the currency). And just because you cut taxes does not necessarily mean that businesses and individuals will go on spending sprees (i.e., contributing to growth), just as increasing taxes does not mean a de facto strategy of hoarding cash under the nation’s collective mattress.

There may be a strong correlation between Democratic presidencies and economic growth, but causation is pretty difficult to disentangle.

So why do they go together?

Because we want to believe that our leaders have more control than they really do.

Presidential approval, for example, is largely dependent on economic conditions. Sure, other factors play a part but the economy makes a big difference. If things are going well, people tend to downplay deficiencies that become more pronounced during poor economic times.

Unsurprisingly, economics also plays a big role in presidential elections. Political scientists have had some success predicting election outcomes by relying heavily on economic indicators in their models. As Nate Silver wrote for his FiveThirtyEight blog in the middle of the 2012 campaign:

The historical evidence is robust enough to say that economic performance almost certainly matters at least somewhat, and that poorer economic performance tends to hurt the incumbent party’s presidential candidate. Likewise, it seems clear that the trend in performance matters more than the absolute level — otherwise, Franklin D. Roosevelt would not have been re-elected easily with an unemployment rate well into the double digits (although rapidly declining) in 1936.

That’s also why Barack Obama ended up winning re-election in 2012 despite the lack of anything resembling an economic boom.

What does this mean for 2016?

Good news for Hillary, or whoever the Democratic candidate ends up being.

While, as Silver pointed out, the economic variables that make the largest impact are hard to pinpoint, there is a good chance that many of them will be in better shape on Election Day 2016 than not. The Times’ Neil Irwin reported that a surveyed group of 17 “leading forecasters from economic consultancies, financial firms, and universities” predict relatively low unemployment, low chance of another recession by November 2016, and interest rates, inflation and gasoline prices that are “low by historical standards” even if they are higher relative to today.

If economic conditions do, in fact, boost incumbents and incumbent parties, then Democrats are in for a happy November. Whether or not they can claim responsibility is less certain. But what is (fairly) certain is that while economic success may not be caused by politicians, political success can be caused by economics.

Written by Gene Giannotta

Gene Giannotta is a writer based in Washington, D.C. He reports on economic policy, finance and business news.