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.