Update of the Impact of Current Policy on Concurrent Growth

In this post, I update the November 24, 2018, “Current Policy and Concurrent Economic Performance.” Economists overwhelmingly believe that current economic policy has little to do with concurrent economic performance, yet voters look to current economic performance as a metric of the success or failure of an administration’s policies. For evidence of my claim, see the European IGM Economics Expert Panel’s response to the statement, “Voters overestimate the effect that current governments have on their economies.” Sixty-four percent of the respondents strongly agreed or agreed whereas only 4% strongly disagreed or disagreed. Six percent were uncertain, while 4% held no opinion, and the remaining 22% did not answer the question. Expressed slightly differently, 82% of economists responding to the statement believe that voters overestimate the effect. Politicians certainly tie positive outcomes to their policies. As an example, President Trump trumpets his economic successes (“Trump Says U.S. Economy is ‘Best It Has Ever Been,’ But Facts Tell a Different Story”), while blaming others for failures, or even possible failures (“'Crazy Inverted Yield Curve!'—Trump rips 'clueless Jay Powell' and the Fed as the market slides”).

To check claims of the “best economy every,” I have used a single metric, real GDP growth by quarter beginning with the first quarter of 1981 under President Reagan and continuing through the second quarter of 2019 under President Trump. The data is presented as a bar chart in the first graph. Republican presidents are in red, and Democrats in blue. Second terms are represented by light red or light blue. Fluctuations in growth appear to have moderated. The U.S. has not experienced a quarter of economic decline during the Trump presidency, nor has it experienced a quarter of high growth.

I present the data as unconnected points in the second graph. Republican presidencies, with the exception of the Trump presidency are shown in red, and Trump in purple while Democratic presidencies are shown in blue. I have also added three horizontal lines that represent average growth (black), two standard deviations above average growth (purple), and two standard deviations below average growth (blue). Average growth for all presidents is 2.74%. Average growth for all Republicans is 2.64 and for Democrats is 2.86. Average growth under Trump is 2.64%, the mean level of growth for all Republicans, and the economy has not experience a quarter of exceptionally high (two standard deviations above the mean) or low (two standard deviations below the mean) growth during his presidency. Observing that current policies and concurrent economic performance are exaggerated by voters does not imply that current policy does not have an impact on economic performance. It does imply that the impact is difficult to disentangle the impact of a policy from all other influences. Without offering evidence, I believe that the most important contributors to current economic performance are individual economic agents each maximizing their own welfare through markets.
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Capitalism and Democracy

Pete Buttigieg, a presidential candidate for the Democratic Party, appeared recently on CNN’s “New Day” with Poppy Harlow and John Avlon. He commented on socialism, capitalism, capitalism’s relationship with democracy, and criticized Stephen Moore, a Trump administration nominee for the Federal Reserve Board of Governors, for a comment he made on the same subject. I attempt to bring more context to both men’s statements. Please note that I am not digging into other statements on this subject that might give additional context. Although the interview was with CNN, Tom Boggioni, in RAWSTORY, provided the best transcript that I found. I edited Boggioni transcript a bit, eliminating editorial comments that bridged sentences, and one error in transcription. Harlow asked if Democratic office holders have vilified capitalism to a dangerous level given that most Democratic voters view socialism more favorable than capitalism. Buttigieg said,

“I think the reason we’re having this argument over socialism and capitalism is that capitalism has let a lot of people down. I guess what I’m out there to say is it doesn’t have to be so.” “I believe in democratic capitalism, the democratic part is extremely important. There was this assumption that capitalism and democracy were almost the same thing — if you were for capitalism, you were also for democracy. Right now, we see democracy and capitalism coming into tension.”

Overall, Buttigieg gave a good answer, much better than I expect from a presidential candidate, but there were a few problems with it. First off, he did exercise discretion, and discretion is generally good, by not criticizing fellow Democrats, but he evaded the question, not responding to directly to whether Democrats in office have excessively vilified business and capitalism giving rise to a preference for socialism among Democrat voters. He did say that capitalism “has let a lot of people down.” This is true, but so has socialism. Comparatively speaking, competitive capitalism has a much better record than socialism. As noted by Milton Friedman in an interview with Phil Donohue,

“In the only cases in which the masses have escaped from the kind of grinding poverty you’re talking about, the only cases in recorded history are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it’s exactly in the kinds of societies that depart from that. So that the record of history is absolutely crystal clear that there is no alternative way, so far discovered, of improving the lot of the ordinary people that can hold a candle to the productive activities that are unleashed by a free enterprise system.”

Buttigieg is correct to limit his praise to democratic capitalism. The success of capitalism to create long-run prosperity seems to be limited to those countries that combined democratic and market institutions. The two can work to strengthen each other. Economists have emphasized this relationship in their empirical findings after Friedman made his statement. While I disagree with Buttigieg’s wording, “we see democracy and capitalism coming into tension,” he certainly captures the mood of many voters. To be clear, democracy and capitalism are not people; they don’t make decisions and they don’t experience tension. Focusing on economic agents is more productive than ascribing human characteristics to institutions. Politicians from both parties, combined with politically empowered businesspersons, have designed law to benefit each other to the detriment of large groups of voters. Buttigieg brought one of President Donald Trump’s advisors, Stephen Moore, into the fray.

“It was alarming to hear recently one of the president’s economic advisers [Fed nominee Stephen Moore] said between capitalism and democracy, he’d choose capitalism.”

It is easy to pick out part of a quote and criticize the originator for it. As best I can tell, the quote is from Michael Moore’s documentary, Capitalism: a Love Story. The full quote reads,

“Capitalism is a lot more important than democracy. I’m not even a big believer in democracy. I always say that democracy can be two wolves and a sheep deciding on what to have for dinner. Look, I’m in favor of people having the right to vote and things like that. But there are a lot of countries that have the right to vote that are still poor. Democracy doesn’t always lead to a good economy or even a good political system.”

Just as Buttigieg focuses almost exclusively on the weakness of capitalism in its interaction with democracy, Moore almost exclusively focuses on the weakness of democracy. Sure, there are a lot of countries with some democratic institutions that are poor, but all wealthy countries have successfully combined democratic and market institutions to become so. Unlike Bittigieg, in this particular quote Moore does not recognize the positive outcomes when they two types of institutions operate together.
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