Economic Growth by Presidential Administration

A couple of weeks ago I gave a speech in which I anticipated that the audience would like to have some discussion about the potential economic effects of the upcoming presidential election in the U.S.

To support the discussion, I worked with one of our economics students at St. Mary’s  University to create a chart showing the growth in gross domestic product for the U.S. by presidential administration.

growth-by-presidential-administration

As shown in the graph, GDP growth during Democratic administrations averaged 4.13% and during the Republican administrations, growth averaged 1.77% if you include the Great Depression and 2.72% if you do not include the Great Depression. Without going into more in-depth analysis, it is difficult to make too much of these numbers. I do not think it is correct to just attribute strong or weak growth only to the policies passed during any of these administrations. They can certainly have effects on the economy during their times in office, but the strength or weakness of the economy during most presidential administrations is often due to some extent to the policies implemented well before a president takes office.

For example, some of President Hoover’s policies certainly made the Great Depression worse, but I do not think one can attribute the entire Depression to him. President Roosevelt was the beneficiary of the growth after the Great Depression, the massive amount of spending during World War II, and the fact that he was in office for twelve years. President Obama took office as the economy was at or near the depths of the Great Recession, the cause of which I would attribute to policies implemented by Presidents Reagan, Clinton and Bush 43.

There are other studies that go into more depth on growth during the presidential administrations that I may write about in future blog posts. As previously mentioned, while it is difficult to say much about growth during specific presidential administrations based only on the data presented in this chart, there is one fact worth noting. I hear quite a bit that the economy slows or even goes into recession during Democratic administrations, but as shown in the graph, that is clearly not the case.

In fact, it is just the opposite.

 

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Blind Pursuit of the Free Market Does not Lead to Prosperity

While I think the perfectly competitive model as it is presented in economics has some uses in helping us understand economic behavior, I believe the way it is presented in economics classes has lead to a vast misunderstanding of the workings of the economy. The presentation typically gives the impression that government intervention in the economy is only bad, except for instances where market failures exist. The problem, in my opinion, is that very little attention is given to the assumptions necessary to make the model work. Sure, these are most often covered quickly at the beginning of the presentation of the model, but the rest of the course or discussion of this model is spent showing who this leads to equilibrium in the markets and how government intervention pulls the market away from this equilibrium and leads to a loss of welfare. However, if one stops and thinks about it, the assumptions of the model (e.g., economic agents act rationally, perfect information, perfectly mobile resources) mean that the free market really never exists. By its very inherent nature, market failure is always present, and because of this and the fact that markets and the economy are huge complex systems, not the isolated static mechanisms of the perfectly competitive model, they are rarely, if ever, in equilibrium.

I want to stress again that there are still some valuable lessons that can be taken from the perfectly competitive model. It is an elegant model that lead to some intoxicating conclusions, but because of this and the lack of emphasis of the assumptions underlying the model, it has lead to a lot of misguided economic policy. This is especially the case with respect to macroeconomic policy, which has been misguided by the absurd dynamic stochastic general equilibrium model. This has lead to the belief by many that all regulations and government intervention are bad and that if we would only get rid of almost all regulations, cut taxes, and minimize the size of government, markets would be able to operate freely leading to more prosperity and a better society.

To be clear, I am not arguing that government is the answer to everything, nor am I arguing that we should raise taxes to exorbitant levels. But, this blind pursuit of the free market based on the misapplication of economic theory or just bad economic theory does not lead to prosperity either. There has to be a balance between the two. Even Adam Smith (one of the greatest, if not the greatest, political economists, to have ever lived), whose Wealth of Nations is the standard bearer for all those in blind pursuit of the free market, recognized the need for balance, as he thoroughly discussed in his Theory of Moral Sentiments.

This has lead to the belief that the ideas of cutting taxes (mostly for those in the upper income strata and the wealthy) and shrinking the government will lead to prosperity and improved social outcomes. Two articles recently published in the New York Times provide even more evidence that this is not the case. One of the articles was written by two political science professors, Jacob S. Hacker of Yale University and Paul Pierson at the University of California, Berkeley. The article, “The Path to Prosperity Is Blue,” is a brief summary of their book, American Amnesia: How the War on Government Led Us to Forget What Made America ProsperI think the following quote from the article summarizes their argument.

Mr. Trump and House Speaker Paul Ryan are united by the conviction that cutting taxes – especially on corporations and the wealthy – is what drives growth.

A look at the states, however, suggests that they’re wrong. Red states dominated by Republicans embrace cut and extract. Blue states dominated by Democrats do much more to maintain their investments in education, infrastructure, urban quality of life and human services – investments typically financed through more progressive state and local taxes. And despite what you have heard, blue states are generally doing better.

Work by Jon Bakija, Lane Kenworthy, Peter Lindert, and Jeff Madrick in their book, How Big Should Our Government Be?provides some evidence against the argument that small government facilitates economic growth. They show evidence that there is a direct relationship between the growth of government and economic growth. Over the past fifty years, those countries where governments have grown the largest over the  past fifty years have also experienced some of the fastest economic growth (see the chart here).

While governments are certainly not perfect, and as I have already mentioned, government is not the answer to every issue or problem, but it seems clear to me that government has an important role to play in the proper functioning of an economy and society. Blind pursuit of the neoclassical notion of the free market with the wildly unrealistic assumptions at its foundation can be very appealing, but it leads to bad economic policy in many cases.

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