Presidents and the Economy

There is very little that can make me go non-linear faster than when someone attributes economic growth to a politician, e.g. Reagan's economy or Clinton's economy.  So this post from Kevin Drum on the correlation between economic growth and the flavor of president in the Oval Office is just the kind of thing to make me lose it.  And not because I really care whether Team Coke or Team Pepsi looks better.

Larry Bartels says that Democratic presidents produce higher economic
growth than Republican presidents, and that the differences in average
growth rates for middle-class and poor families (but not affluent
families, apparently, who do well under both parties) are statistically
significant by conventional social-scientific standards.

OK, I have seen the analysis done different ways and accept the statistical conclusion.  You used to be able to get a really tight correlation between Washington Redskin football team performance and presidential election outcomes (via Snopes):

Sometimes one natural phenomenon supposedly
forecasts another, as in the belief that a groundhog's
seeing his shadow on February 2 portends another six weeks of
winter. In other instances the linkage is between affairs of mankind, as in the
superstition that the winner of football's Super
Bowl
augurs that year's stock market performance (or vice-versa).

A recent item of this ilk maintains that the results of the last game
played at home by the NFL's Washington Redskins (a football team based in
the national capital, Washington, D.C.) before the U.S.
presidential
elections has accurately foretold the winner of the last
fifteen of those political contests, going back to 1944. If the Redskins win
their last home game before the election, the party that occupies the White
House continues to hold it; if the Redskins lose that last home game, the
challenging party's candidate unseats the incumbent president. While we don't
presume there is anything more than a random correlation between these factors,
it is the case that the pattern held true even longer than claimed, stretching
back over seventeen presidential elections since 1936

What gets me is not the existence of a correlation, but the explanation:

In recent decades taxes and transfers have probably been more
important. Social spending. Business regulation or lack thereof. And
don't forget the minimum wage. Over the past 60 years, the real value
of the minimum wage has increased by 16 cents per year under Democratic
presidents and declined by 6 cents per year under Republican
presidents; that's a 3% difference in average income growth for minimum
wage workers, with ramifications for many more workers higher up the
wage scale. So, while I don't pretend to understand all the ways in
which presidents' policy choices shape the income distribution, I see
little reason to doubt that the effects are real and substantial.

I have three thoughts, of which the third is what really gets me:

  • It is funny that no one considers that this correlation may work in reverse.  Everyone assumes government drives short-term economic performance.  What if, to some extent, short-term economic performance drives changes in government?  If one assumes that, even without the public spirited and Herculean efforts of our presidents, economies are naturally cyclical, then why try to explain cycles on politics when we know cycles are going to exist anyway.  Why wouldn't a perfectly valid alternate explanation be that one political party tends to be elected if the economy is in one part of the cycle and the other gets elected if the economy is in another place?
  • The political brand names "Republican" and "Democrat" shift in meaning over time vis a vis economic policy recommendations, and individual presidents can diverge quite a ways from their party center line.  One can easily argue that Nixon was the most interventionist and economically ignorant president (think:  wage and price controls), despite the "Republican" brand name.  John Kennedy was more laissez faire than most Republicans are today.   Regulation, as measured by pages added to Federal Register, increased at a far faster pace under George Bush (I) than Bill Clinton.  Bill Clinton passed free market legislation, including NAFTA, that John McCain shys away from today, while George Bush passed an expansion of Medicare that Bill Clinton did not consider.  Oh, and when we discuss regulation and such, Congress sortof matter too.
  • The author's argument boils down to "the more governors and useless loads we add to an engine, the more strongly the engine will run."  It is just absurd.  None of these guys have the first clue what it takes to run a business day to day, nor how much of a business owner's time and effort is aimed not at service customers better, and not at being more productive, and not at making employees happier or better trainined, but at responding to the latest mass of government regulation, paperwork, liscensing, taxes, and other total crap.  Here is just one example I wrote up about what sits on my desk.

To this last point, take just two things on my desk this morning.  The first is a pile of tax returns and some licensing paperwork.  Last year, our company's total tax bill was not that large.  But the problem is that the government takes the taxes in so many bites, and every bite costs time on our part learning the process and filling out paperwork.  For example, if I take all the taxes and licensing fees we pay to federal, local, and state governments, and multiply times the number of months or quarters each requires a report, I get a number of over 400.  Four hundred individual bites, each with its own paperwork and overhead.

The other problem sitting on my desk is a snack bar I inherited on a lease in California at Lake Piru.  The snack bar is a dump.  It is designed wrong, it is set up to cook the wrong kinds of foods, and uses space in the building very inefficiently.  I want to lay the whole thing out differently, as a win-win for everyone.  We could sell more with fewer workers.  The customers would get more selection, including much healthier choices.  The operation would be safer, because we would eliminate most of the heavy cooking  (e.g. deep fat fryers).  And it would be cleaner, with less wastewater and cleaner wastewater because there would be less grease and oil.

Unfortunately, it is very clear that Ventura County, California is not going to allow me to make these changes, at least at any cost I can afford.  First, apparently I need to build a new wastewater treatment plant for the snack bar!  But I am reducing the waste water load, I argue.  Does not matter.  New code requires a plant.  So because of this environmental code, I am pushed to continue the current operation which is environmentally worse than my proposed alternative.  We have the exact same problem on fire suppression.  But I am removing the ovens and most of the cooking equipment!  It's safer!  Doesn't matter, if I make any change at all, I have to install a new fire suppression system.  And on and on.  this is the true face of government regulation.  We face this kind of thing ten times a day.   

Anyway, I could go on and on about this stuff, but that is what the blog is about, so I will refer you to my past (and future) posts.

  • Ian Random

    I'd rather see the control of congress versus growth. This guy has a nice analysis of control of senate, congress and the presidency which would be even better. Fortunately, the president can't make-up laws, he can only sign what has been passed by congress and the senate.

    http://arts.bev.net/roperldavid/politics/congress.htm

  • Rob

    Those last few paragraphs remind me of the book:
    The Death of Common Sense by Philip K Howard

    There is an example of nuns wanting to build a homeless shelter (I believe in NYC).
    Unfortunately, they are unable to afford the costs of renovating an old building to bring it "up to code". In their case, they couldn't afford the build an elevator for the handicap. So, instead of potential sheltering 100s of homeless, they decided not to proceed.

  • Larry Sheldon

    Somebody somewhere (a lot smarter than me) taught me about "first level veto". The idea is that the President (or the CEO, or your mother) can the perfect idea with the perfect and fool-proof, fail-proof implementation.

    Theoretically that can all be passed without damage in one or more steps to the person that has to actually do it--the first level.

    Who can do or not do with out limit or bound. (Yes, you can impose draconian punishments after-the-fact, but the first level has the final say-so).

    Now. Consider this. We get a new president in January. Assuming the best, that person will have at most 24 months to work on changing things.

    How long do you think (given Civil Service and all) it will take to swap out the First Level for people who agree with the new President?

  • Garble

    This isn't limited to the government. Anytime you think you can force your 'customer' to do what you want you'll give it a shot.

    For example:

    I'm an engineer responsible for hydraulic steering gears. I'm in a situation where I want (but don't HAVE to make a change cylinder line. My change will have fewer bends (less tooling and cycle time) AND use less material. Should cost less right? Nope, will cost more. Supplier wants a price increase to account for rises in material costs. That's fair but I won't make the change if it costs more money. So I offer to do it for the same price. No way! If I want a new part I have to agree to pay a much higher price for material. So we're not going to do it. It would be better for everyone concerned if we did what I want. But they're not going to open up the contract without a material cost increase.

    Cali probably feels the same way. They want this better fire suppression system. The only way they can get you to put one in is to hold any future changes hostage. So that's what they're going to do. It's stupid and if I lived there I'd be pissed but it's hardly unique to government.

  • Erik The Red

    Oddly enough, every time I read one of these posts I get the desire to send you vodka. I must be projecting...

  • Steve

    If increasing the minimum wages raises unemployment, is it possible that this could actually increase income in the lowest quintile? Are they looking at median income in a quintile, or average income, or what? Because I could see a situation in which everyone in the bottom quintile made $10,000, or $5/hr. times 2,000 hours/year. Now, say the minimum wage went up to $6/hr, but one out of every six people making minimum wage was laid off. Now, average income would still be the same, you'd have 5/6 times $6/hr. x 2,000 hours/year + 1/6 times $0 per person in that quintile. But if they took the median income of people in that quintile would now be $1,200.

    I know this makes a lot of assumptions, and even if this isn't the way income within quintiles is measured there are undoubtedly other issues with the study.

  • mark

    In your example overall income of the bottom quintile remains the same, except for now 1/6 of the workers of the decile are unemployed. WHo will support them?

  • diz

    The basic problems are:

    1) The economy fluctuates regardless of whether the president has a -D or an -R after their name.
    2) Politicians exert limited control over the economy, and presidents are a subset of that.
    3) Economic policies do not have effects that are seen instantly, so you can't assume that the President in office the time an effect is seen is the president that "caused" it.
    4) If you look at the actual policies undertaken, they are not consistently "Democratic" or 'Republican" across or even within administrations. Bush I was far more consistent with Clinton than Reagan. Even Reagan was a tax raiser during parts of his administration. Clinton also shfted between a raiser and a cutter of taxes over time.

    When you take into account all this noise, it's impossible to pull out the signal.

    Partly when in recent years the signal has not been materially changing. (It's easy to see the effect of Mugabe-type policies, but it's not reasonable to expect to see the affects of minor tweaks to the tax rates or a minimum wages that affects very few people.)

    I really think we have seen only one major change in economic policy in the last 30 years. That occurred in 1981-2 when Reagan took over, cut marginal taxes and reigned in inflation.

  • stan

    So the OPEC oil shocks were the fault of the GOP? And the extraordinary boom due to Y2K fears was really because Bill Clinton: 1) set the calendar and 2) forced computer programmers to use two digits for years back when he was a kid?

    If you simply adjust for the OPEC distortions and the Y2K boom and bust, the study's conclusions turn to garbage.