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Has the economy performed better under Democratic administrations than Republican ones?
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The claim has been widely made on liberal websites, such as Slate, The Guardian, and MSNBC – but seems to be so widely accepted as truth that even FOX News reported it without much criticism.
Starting with 1947 as our base year and measuring until the second quarter of 2013, the data appears to show that Democrats outperforming Republican presidents in terms of real GDP growth 4.35% to 2.54%, in unemployment (5.6% under Dems vs. 6% under Reps), in the stock market (where returns are 5.4% higher under Dems), and corporate profits share of income (5.6% under Dems vs. 4.7% under Reps).
Is there anything wrong with this claim?
Some have argued that it’s not fair to look at only the party of the President, because the party affiliation of Congress will also effect the policies of the country, and there is some validity to this argument.
From 1948-2008, Republican controlled Congresses averaged stock market returns 7.1% higher than Democrat controlled Congresses. Likewise, during the same time frame, real GDP growth grew 3.7% during Republican congresses and 3.2% during Democratic ones.
Another explanation is that Democratic presidents tend to enact policies beneficial in the short-run but not the long run. Democratic presidents work to benefit the economy during their tenure, but their policies have negative consequences that become apparent when their Republican counterparts take office.
Support for this theory comes from the reported fact that “every Republican president since Warren Harding (1921–1923) has experienced a recession within the first two years of office, perhaps due to the excesses of the prior administration.”
If we assume a two-year lag before a policy effects growth (for example, if Bush had 3% growth in 2008, we’re attributing it to policies enacted in 2006), there is virtually no difference between Republican and Democratic administrations. Applying this lag to the 1948-2008 period yields a virtually identical average of 3.4% GDP growth under Republican presidents, and 3.5% under Democrats.
What really matters is if policy differences are responsible for the alleged gap in Democratic and Republican performance. Liberal economist Alan Blinder looked into causes of the differential between Democratic and Republican performance and concluded that the gap is due to “good luck.”
Blinder’s paper argues that “Democratic presidents have experienced, on average, better oil shocks than Republicans, a better legacy of (utilization-adjusted) productivity shocks, and more optimistic consumer expectations.”
Put simply, an oil shock occurs when there’s a disruption in the supply of oil, which causes fuel prices to increase. Such price increases adversely impact industries where a large portion of operating expenses are due to fuel (the airline and trucking industries, for example). Firms in those industries may respond by increasing the prices of their products to absorb the additional expense. This means consumers will be hit twice because they’re paying more for certain goods, and more at the pump.
As stated in a report published by the Federal Reserve Bank of Dallas regarding oil shocks, “the literature finds such consequences as rising oil prices, slower GDP growth and possible recession, higher unemployment rates, and higher price levels.” Keep in mind that this is a factor well outside of the president’s control.
Think of productivity shocks similar to oil shocks, but the thing being disrupted is productivity. The shocks can be positive and negative. Productivity shocks include the development of new production techniques (positive), changes in the quality of capital, changes in government regulations, or even the weather.
There were positive productivity shocks during the Truman and Kennedy-Johnson administrations, but a large negative shock in Reagan’s first term.
Blinder also looks at the effect war has on GDP. Large military buildups will increase GDP in the short run, while undoing the buildup will depress GDP. It isn’t as clear what party’s performance is impacted by war.
Truman’s economic performance benefited from the Korean War boom, which Eisenhower ended. By contrast, Republican presidents have presided over large military buildups, such as Reagan during the Cold War.
Last on the list of Blinder’s explanation was consumer confidence. He finds no evidence that consumer confidence increases when Democratic presidents take office, so it’s unlikely that the political affiliation of the president is responsible.
After adjusting for oil shocks, productivity shocks, and war, Blinder calculates that the gap in GDP performance by the President’s party shrinks down to 0.54%. Almost a rounding error.
Superior stock market performance under Democratic presidents owes itself more to the Federal Reserve than anything, as stock prices correlate positively with the money supply, and there has been more inflation under Democratic presidents. (See for instance, the charts here, here, and here. )
Sample size for administrations in the post-war era could be a problem. We only have 16 administrations to analyze. Donald Luskin pointed out in the Wall Street Journal that if we measure Presidential performance from 1948-2008 and omit a single president from the data (Richard Nixon), stocks actually perform better under Republicans than Democrats.
If we analyze the pre-WWII economy we actually see a Republican advantage (in terms of average GDP growth) up until the Hoover administration, so there isn’t a clear D-R advantage throughout history.
So there you go: another economic myth busted. The answer as to what Presidential party is better for economic performance isn’t black and white – or in this case, red and blue.
