September 18, 2008
Presidents and the EconomyBy Randall Hoven
We are in the season of evaluating a President’s impact on the economy. I crunched some numbers so you don’t have to. I looked at real GDP growth for every 4-year Presidential term since World War II. The data lead to interesting insights.
Matching Presidents to Economic Data
An interesting question is determining exactly which quarters should be assigned to which Presidents. I’m sure this sounds wonkish, but as you will see below, the answer makes a big difference. I evaluated three different ways of doing that. (My data source was the Federal Reserve Bank of St. Louis. I specifically looked at real, annualized GDP growth at each quarter.)
The first way was to go strictly by when that President was in office. Thus, George W. Bush’s first economic term started with the first quarter of 2001 and ended with the fourth quarter of 2004. (I therefore assign the first 20 days of January to a President’s first term, before he’s really in office.)
The second way was to match GDP growth numbers with the fiscal quarters corresponding to that President’s budgets. Thus, George W. Bush’s first economic term would start with the fourth quarter (October) of 2001 and end with the third quarter of 2005 (September).
The third way was the same as the second way, but with an extra year lag. Thus George W. Bush’s first economic term would start with the fourth quarter of 2002 and end with the third quarter of 2006. Justification for such a lag would be that the real economy does not respond immediately to the government’s fiscal policy, but lags by some amount -- in this case, a full year beyond each budget. (More on this later.)
Presidents and Economic Growth
The results are summarized in the table below, corresponding to the 15 Presidential terms since World War II (including the results to date on George W. Bush’s second term).
Average Real GDP Growth for Presidential 4-Year Terms
Ranking the Presidents
If we rank Presidents by the economic performance corresponding exactly to their time in office, we obtain the following result
Ranked by Exact Term
1 Truman (5.4)
2 JFK/LBJ (5.2)
3 LBJ (5.0)
4 Clinton 2 (3.9)
5 Reagan 2 (3.8)
6 Nixon, Clinton 1 (3.3)
8 Carter, Reagan 1 (3.2)
10 Ike 1 (2.9)
11 Nixon/Ford, W. Bush 1 (2.2)
13 H. W. Bush, W. Bush 2* (2.1)
15 Ike 2 (2.0)
(* George W. Bush’s second term is not yet over, so his corresponding GDP growth value is not comparable to the others.)
By this method, the top four spots go to Democrats and the bottom six spots go to Republicans. I’m sure Democrats like this method.
However, if we rank the Presidents by economic performance over the fiscal budgets plus the 1-year lag, we obtain the following.
Ranked by FY + 1 Yr Lag
1 JFK/LBJ (5.7)
2 Reagan 1 (5.0)
3 Ike 2 (4.5)
4 Nixon/Ford (4.2)
5 Clinton 1 (3.7)
6 Truman (3.3)
7 Nixon, Reagan 2 (3.2)
9 W. Bush 1 (2.9)
10 LBJ (2.8)
11 Ike 1 (2.7)
12 Clinton 2 (2.6)
13 H. W. Bush, (2.5)
14 W. Bush 2* (1.5)
15 Carter (0.6)
By this method, three of the top four spots go to Republicans and the bottom six slots are evenly split between the parties.
The method of matching up the data is obviously important. Between these latter two methods, President Truman, for example, drops from first place to sixth and President Carter drops from being tied for 8th place to being dead last among the 15. On the other hand, Eisenhower’s second term rises from dead last to third place!
I’m inclined to buy the lag effect. Whether it is exactly one year post-fiscal budget, I do not know. Maybe it’s two years, who knows? But it makes total sense that measurable economic outputs would lag the policy inputs by some amount; that’s how complex systems work. It’s even how simple systems work. Try steering a boat, for example. The boat does not turn the instant you turn the wheel. I’ve steered a large Navy ship, and it takes some experience for the helmsman to learn the lag between turning the helm and the actual ship turning. They don’t call it the “ship of state” for nothing.
I’m sure Democrats would accuse me of fishing for Republican sweet spots in the data for using the lag method. But at least this accounting is consistent: each President is measured exactly the same way. And a lag makes sense, even if we do not know the exact amount of lag. It makes little sense that a President can influence an economy, apparently with his psychic powers, before he even gets a budget approved.
Passing the Trash
If you buy the 1-year-lag theory, something even more interesting pops out of the data. In looking at the trend over the last year of each term (the right-most column in the previous table), we see that every time an administration changed from Democrat to Republican, the trend was negative. That is, the Democrat left a decelerating economy for the Republican. Every single time: Truman to Eisenhower, LBJ to Nixon, Carter to Reagan, and Clinton to Bush 43.
Conversely, every time an administration changed from Republican to Democrat, the trend was positive. That is, the Republican left an accelerating economy for the Democrat. Every single time: Eisenhower to JFK, Ford to Carter, and Bush 41 to Clinton.
George W. Bush and Clinton
President George W. Bush’s economic performance looks less than stellar. Not a “failure”, but below average. His first term was only 9th best of the last 14 full Presidential terms and his second term so far is tied for second-worst, just above Carter’s single term.
As President Clinton immediately preceded George W. Bush, these two Presidents are often compared economically. By the (lagged) GDP growth numbers, their relative ranking is not all that clear, since President Bush’s first term was better than the term immediately preceding it, President Clinton’s second term, and Bush’s second term is not yet over. By the lag method, his second term is not even half over. Still, President Clinton averaged 3.2% real growth compared to Bush’s 2.2% so far.
I will grant that economic performance was generally better under Clinton than under Bush. Some of that might be luck and some might be policy.
Luck, good or bad, is certainly part of it. President Clinton was lucky by inheriting an accelerating economy from Bush 41, and possibly by having Republican majorities in both houses of Congress his last six years. Bush 43 was unlucky in (1) inheriting a decelerating economy from Clinton, (2) the 9/11 attacks, (3) Hurricane Katrina and some more recent ones, and (4) a hostile Democratic opposition in Congress, especially the Senate, which could and would filibuster just about anything he favored.
Concerning policy, if you were to look only at the budgets they signed into law, you would think Clinton was a Republican and Bush a Democrat.
Clinton championed the NAFTA free-trade agreement and signed it into law.
President Clinton did two “liberal” things. The first was a relatively minor tax increase on those making more than $200,000 per year, accomplished in his first years in office, before he had an all-Republican Congress feeding him his budgets. The second was reducing Defense spending as a fraction of GDP. The 9/11 attacks occurred at an historically low level of Defense spending, a level not seen since Pearl Harbor. (He also tried to nationalize the 15% of the economy that is health care, but the attempt was unsuccessful.)
Bush added prescription drug coverage to Medicare/Medicaid, the largest increase of entitlements since LBJ.
President George W. Bush did two real “conservative” things economically: he cut income taxes modestly in his first term and he increased Defense spending.
It is hard to say we need a Democrat in the White House just because the economy was better under Clinton than Bush. On the other hand, it makes sense to say we need Republican policies in place for a better economy based on those same two Presidents. By all means, feel free to repeat Clintons policies of tax cuts, spending cuts and free trade.
If we were to grant that the economy under President Clinton was good (maybe better than Bush’s, but not as good as several other Presidents’, including Reagan’s), we should also attribute that to his policies, which were essentially Republican, and not to his party affiliation. We should also note that his last six years in office were with a Republican majority in both houses of Congress.
We should also not exaggerate. Clinton averaged 3.2% growth (with the lag). JFK and LBJ averaged 4.3%, Reagan averaged 4.1%, Nixon and Ford averaged 3.7% and Eisenhower averaged 3.6%. On the other hand, President Bush’s first term was better than his father’s, Eisenhower’s and Jimmy Carter’s, as well as LBJ’s and Clinton’s second terms.
Clinton wasn’t great and Bush isn’t terrible. More like a C+ and a C-. We have to wait another two years to get more solid numbers on Bush.
How Much Can a President Do, Really?
It’s also possible that the President just does not have than much impact on the immediate economy. After all, he’s the President of the US, not the Wizard of Oz. In the end, he is just a man behind a curtain. He can give us diplomas, but not brains. On the other hand, he can help bring about institutional changes (e.g., the federal income tax, Social Security and Medicare/Medicaid) that do impact the economy, but over a longer term, making it more difficult to tease the effects from the data.