Presidents, parties, and the business cycle, 1949-2009.

Author:Comiskey, Michael
Position::Report
 
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A small body of research since the 1970s has reported that Democratic presidents have compiled better economic records than their Republican counterparts in the post-World War II era (Alesina and Rosenthal 1995; Barrels 2008; Hibbs 1977, 1987). Barrels' 2008 book Unequal Democracy has understandably been the most prominent of these works. In a seeming tour de force in political economy, Barrels finds that under Democratic presidents U.S. gross national product (GNP) and family incomes have grown faster, unemployment has been lower, and economic inequality has fallen, while the opposite and less favorable outcomes have characterized Republican administrations (Chapter 2). If correct, these results pose a conundrum for theories of retrospective voting by rational voters in presidential elections: if the economy has performed better under Democratic presidents, why have Republicans won nine of the 15 U.S. presidential elections since 1952? Barrels' provocative and disturbing response is that Republicans have fared so well because structural factors and failures by American voters to behave rationally have produced "partisan biases" that permit Republican presidential candidates to escape accountability for their party's relatively poor record of economic management (Chapter 4).

More recently, however, Campbell (2011) has vigorously challenged the finding that Democratic presidents have overseen better economic performances than Republicans. Taking particular exception to Bartels' work, Campbell has argued that every new Republican administration in the years from 1948 to 2005 (the period of his and Bartels' studies) had to contend with a recession left to it by the preceding Democratic administration, while each new Democratic administration in that period inherited a healthy, growing economy from its Republican predecessor. He also claims that previous studies have failed to control adequately for the considerable inertia of the U.S. economy, with economic performance in a year depending heavily on economic performance in the period leading into that year. Once these factors are properly controlled for, Campbell contends that "party differences in economic performance are shown to be the effects of economic conditions inherited from the previous president and not the consequence of real policy differences" between the parties (Campbell 2011, 1). If so, Bartels' conundrum disappears: Republicans have succeeded in presidential elections because they have managed the economy at least as well as the Democrats.

We agree with Campbell that studies of the relationship between the president's party and economic performance must control for the portion of the business cycle that is, or may well be, outside the president's control, but we have reservations about Bartels' and especially Campbell's methods for doing so. We therefore analyze the impact of presidential partisanship on economic output, income, and unemployment while controlling for the phase of economic activity with new methods and measures.

The next section explores the Bartels-Campbell controversy in more detail. It also discusses some difficulties that arise when attempting to identify the impact of presidents on the economy while simultaneously controlling statistically for the portion of the business cycle that presidents cannot be expected to influence. The following section presents our preferred methods and the penultimate section provides our results, which generally confirm the findings of Bartels and others that economic output and its growth were higher, and unemployment lower, under Democratic administrations. The final section analyzes the implications of these findings and suggests alternative hypotheses for the Democrats' difficulties in presidential elections.

Controlling for the Business Cycle

Barrels' (2008) principal finding was that annual growth in the real incomes of most American families was significantly higher under Democratic presidents than during Republican administrations between 1948 and 2005. The positive relationship between income growth and Democratic presidencies held for both pre- and posttax incomes and after controlling for exogenous factors such as changes in oil prices and labor force participation rates (Chapter 2).

Of particular interest was the distributional pattern of income gains under Democratic presidents. The biggest gains from a Democratic presidency accrued to the lower income strata, with families at the 20th percentile of the income distribution gaining a whopping 2 to 3% more income annually from having a Democrat in the White House; families at the 80th percentile gained an additional 1 to 1.5% per year from a Democratic presidency. Only for incomes at the 95th percentile was the variable for Democratic control of the White House insignificant in a statistical sense, though even families at that high level appeared to gain about 0.5% more income annually under the Democrats. This differential pattern of income growth implies that income inequality fell during Democratic administrations (when the poor gain income faster than the affluent, inequality falls) and that inequality rose during Republican administrations (nearly everyone's income rose more slowly under the Republicans, but low-income families did especially poorly).

If incomes rose faster across the board or very nearly so during Democratic administrations, the economy must have grown faster under the Democrats as well, and so Barrels found: after controlling for other factors the real per capita GNP rose about 1.1 percentage points faster each year under Democratic presidents, and the unemployment rate was lower by about 1.4 percentage points (Bartels 2008, 50, 48). And finally, there was no clear evidence that Democratic presidents engendered any more price inflation than their Republican counterparts, despite coaxing more growth from the economy. (1) The obvious upshot of these results is that the U.S. economy performed much better during Democratic administrations, whose economic policies Bartels infers to have been superior to those of Republican administrations.

Bartels derived these results by employing two different types of lags. First, he assumes that a new president cannot significantly influence the economy in his first year in office because it takes time for new policies to be enacted and exert their effects on the economy. His presidential partisanship variable is therefore measured "from one year following [a new president's] inauguration to one year following [the] subsequent inauguration" (Bartels 2008 32, 37, etc.) Second, Barrels' models include among the regressors the dependent variable lagged one period (one year), presumably in the belief that the economy displays inertia and that economic performance in one year is partly a function of economic performance in the previous year.

Campbell (2011) likewise excuses presidents from responsibility for the economy in their first year in office. But he claims that for later years, the proper control for economic inertia is not performance in the prior year, but rather performance in the last two quarters of the prior year. He notes by way of example that the correlations between real GNP growth in a year and real GNP growth in the third and fourth quarters of the prior year are .58 and .56, while the correlation is much weaker (.35) between annual GNP growth and the same variable in the first two quarters of the prior year. Campbell therefore concludes that "Perhaps what happened a full year ago or nine months ago does not matter to economic growth today, but economic conditions in the preceding couple of quarters might well be important to current economic conditions" (Campbell 2011, 11). And his statistical analyses show that "once the lagged effects of the economy in the six months leading into a year are taken into account, there are no significant differences in the records of Democratic and Republican presidents with respect to economic growth, unemployment, or income inequality" (Campbell 2011, 15).

We agree with Campbell that the analysis must include some control for the phase of economic activity. For the eight transitions from one party to the other in the years 1949-2009, Table 1 presents data on consumer price inflation in the election year, the unemployment rate on election day, and the number of quarters between the last trough of economic activity (the end of the most recent recession) and the new president's inauguration. The bottom line shows that unemployment averaged 5.8% annually, and inflation averaged 3.7% per year over the entire 1949-2009 period, while the average economic expansion in the period lasted 20.2 quarters.

While generalizations are normally hazardous with such a small n, two striking patterns emerge. First, the nation switches from Republican to Democratic presidents at times of above-average unemployment (7.0%) and below-average inflation (2.4%), and from Democratic to Republican presidents at times of high inflation (5.7%) and low unemployment (4.4%). Second, the nation inaugurated new Democratic presidents early in economic expansions--an average of four quarters into an expansion--when the economy was on an upswing. (2) New Republican presidents, by contrast, took office an average of 22 months into an economic expansion. With the average economic expansion in this period lasting 20.2 quarters (National Bureau of Economic Research [NBER] 2011), the average new Republican president took office just when a recession might be expected. And each of the four new Republican administrations in the upper panel of Table 1 did in fact experience a recession during its first year in office (NBER 2011).

If "most economists" are correct in their belief that the monetary policies of the Federal Reserve Board exert a powerful influence over the peaks and valleys of economic activity (Romer 2008, 50) and that monetary policy works with a...

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