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.