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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Current Policy and Concurrent Economic Performance

Among people interested in politics, there is a natural desire to discover a positive relationship between their favorite party and good economic performance. I shared this belief, and it only faded slowly after many years of studying and teaching economics. Why shouldn’t many people share this belief? Our politicians certainly encourage it, taking credit for positive outcomes, and blaming opponents for negative outcomes. I have accumulated data on quarterly real GDP growth from the Reagan administration through the first two years of the Trump administration, and presented the data in a series of graphs to informally test the hypothesis that current policy influences current economic performance. As a note, fourth quarter 2018 growth during the Trump was estimated by the Atlanta Federal Reserve.

The first graph shows the quarterly growth of real GDP by administration from 1981 to the present. The data in red demarks the first term of a Republican president, and the data in blue, a Democrat president. Likewise, the light red reflects the second administration of a Republican president, and the light blue, a Democrat president. I could not visibly determine a difference in outcomes by party. Other readers may pick up trends that I missed.

The first histogram displays real GDP growth 88 quarters (22 years) of Republican administration and 64 quarters (16 years) of Democrat administrations. The red is the Republican, the blue, the democrat, and the purple, the overlap between the two parties. There are differences in the performance between the two parties. Republican administrations seem to have weathered the most severe downturns, and enjoyed the highest levels of economic growth. More striking is the overlap. The red represents the histogram of Republicans and the blue and purple, the Democrats. The distribution of growth between the two parties center around the same mean, 2.7 for the Republicans and 2.9 for the Democrats.

Picking on President Trump because he is the current president, and because he recently asserted that second quarter 2018 growth is “an economic turnaround of historic proportion,” the second histogram separates the Trump administration figures from the other Republican administrations. Growth to date for his administration averages 2.8%, splitting the difference between Democrats and other Republicans.

The final graph places real GDP quarterly growth by administration along with the average level of growth, and both a two standard deviations upper and lower band. Growth during the Trump administration is nothing out of the ordinary. It centers around the mean and does not approach the two standard deviation threshold. While disproving President Trump’s claim of historic growth, it also dispels the notion that Trump’s policies have already ruined the economy. 

The fact that current policies do not seem to immediately influence economic outcomes is not my belief alone. The European IGM Economic Experts Panel was recently asked to respond to the statement, “Voters overestimate the effect that current governments have on their economies’ concurrent economic performance.” 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. As an aside, several of the economists surveyed offered valuable comments. 

There are many reasons why policy seems to have no immediate impact. We participate in a market economy, and the independent actions of economic agents attempting to maximize their outcomes might overwhelm the actions of any president or party. Perhaps policy of both parties is more similar than different. Autonomous agencies, like the Federal Reserve, might have more impact than presidential administration. Professional bureaucracies that span administrations may act as a ballast to policies that deviate from norms. Finally, both good and bad policies might take time before their impact is realized, and might not be easily associated with a past administration, suggesting that policy is important, but its impacts are often not immediate.

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What Do Economists Think about Immigration

 

When I speak to friends about the impact of immigration, legal and illegal on the United States, they typically argue that the influx of workers causes a drop in wages.  The equilibrium wage drops as the supply of labor shifts outward. 

Increasing supply of labor is only a first step.  Immigrants also buy goods and services, leading to an increase in labor demand.  Wages rise as the demand for labor increases.  Which labor effect is the greatest determines if wages fall or increase with immigration. 

The impact of immigration on wages is only one question economists ask when studying immigration.  Given that they are our countries experts on the economy, it might be wise to learn what they have concluded.

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Subsidiarity and Textbooks in Texas

The State of Texas approves school textbooks.  At best, it is a costly but meaningless exercise.  According to Fox News, “A 2011 state law allows school districts to buy books both on and off the board list.” 
At worst, it limits the democratic process by centralizing decision making at an unnecessarily concentrated level.  According to the Merriam-Webster Dictionary, subsidiarity is “a principle in social organization: functions which subordinate or local organizations perform effectively belong more properly to them than to a dominant central organization.” 
It is a principle that most conservatives accept.  It is a principle that politicians beyond the local level often ignore.  Governor elect Abbot show your conservative principles and dismantle this committee!


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The U.S. behind Romania in Press Freedom

A fall in freedom of any kind should be a big story in the United States.  From Meghan Drake of the Washington Times, “Survey: U.S. press freedom plunges under Obama to 46th in world, after Romania.”

The U.S. fell from 32nd to 46th in the 2014 World Press Freedom Index, a drop of 13 slots. The index, compiled by the press advocacy group Reporters Without Borders, analyzes 180 countries on criteria such as official abuse, media independence and infrastructure to determine how free journalists are to report…

“Journalists are being caught up in what is, I think, fairly characterized as a rapidly growing surveillance apparatus, and this is happening all over the world,” said Geoffrey King, Internet advocacy coordinator for the Committee to Protect Journalists.

The Huffington Post reports the same.  See Josh Stearns, “U.S. Plummets in Global Press Freedom Rankings.”

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Market Income, Transfers and Taxes

I am indebted to Greg Mankiw for his recent post “The Progressivity of Taxes and Transfers” for two reasons.  First, it citied a CBO report that I had not seen and enjoyed reading.  Second, his post reports transfers as a percentage of market income, and this is the fifth column of my table.

A current political debate focuses on the “fairness” of federal taxes.  Fairness means something different for everybody, but a clear view of a presentation of data should clear up some misunderstandings or data cherry picking on one side of the political aisle or the other. 

The income data is broken into quintiles, or fifths of the country’s households.  The highest quintile is further divided into smaller groupings.  Market income is the sum of labor income, business income, capital gains, capital income, income received in retirement for past services, and other sources of income.  Labor income includes in-kind payments such as health insurance. 

2009	Market Income	Transfers	Taxes	Effective Tax Rate
First Quintile	$7,600	$22,900	$0	-301.3
Second Quintile	30,100	14,800	2,200	-41.9
Third Quintile	54,200	10,400	7,700	-5.0
Fourth Quintile	86,400	7,100	15,400	9.6
Highest Quintile	218,800	6,000	53,400	21.7
Breakdown of Highest Quintile
81st-90th	125,800	5,800	25,800	15.9
91st-95th	169,800	5,700	38,300	19.2
96th-99th	266,200	6,200	66,800	22.8
Top 1 Percent	1,219,600	9,000	356,300	28.5

Transfer are are cash payments and in-kind benefits from social insurance and other government assistance programs.  Taxes include the federal income tax, social insurance taxes, corporate income tax, and excise taxes.

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