Presidents as Economic Managers

Presidents as Economic Managers

 

Brian Riedl

National Affairs No. 51, Spring 2022

 

 

 

It has become a regular theme of op-eds and news analysis: Democratic presidents create economic booms and job gains, while Republican presidents bring recessions and job losses.

 

In 2016, economists Alan Blinder and Mark Watson released a study indicating higher average economic-growth rates under Democratic presidents. More recently, David Leonhardt of the New York Times wrote a column that ranked the last 14 presidents by jobs and economic growth during their administrations, with Democrats generally ranking higher than Republicans. Political commentators frequently post colorful charts on social media showing that Democrats Bill Clinton and Barack Obama oversaw faster job and economic growth than did Republicans George H. W. Bush, George W. Bush, and Donald Trump. They are already pointing to the 5.7% economic-growth rate in 2021 under President Joe Biden — coming on the heels of the previous year's 3.4% contraction under Trump — as yet more evidence that Democratic presidents have superior economic policies. Most succinctly, critics note that 10 of the 11 recessions since 1950 began during a Republican presidency.

 

So is the case closed? Are Democratic presidents really better managers of the economy than their Republican counterparts?

 

The short answer is no. We're all taught never to confuse correlation with causation, especially when small data sets are involved. After all, the past 125 years have shown a strong correlation between short-term stock-market performance and the position of Mars in the sky. There is also a strong yearly correlation between the number of accidental swimming-pool drownings and the number of movies featuring actor Nicolas Cage. Empty correlations represent the beginning of an investigation, not the conclusion.

 

And of course, misleading partisan correlations can go in both directions. For instance, more than 97% of America's war deaths over the past 150 years have come from four wars (World War I, World War II, the Korean War, and the Vietnam War) that either took place or saw America's role heavily escalated under Democratic presidents. Yet it would be partisan nonsense to conclude that this figure somehow reflects a systematic failure of Democratic foreign policy, or that the party cannot be trusted on international affairs today. Presidents respond to the unique challenges of their times; they cannot control external events.

 

Along those same lines, several recessions during Republican terms have been driven by events beyond the reach of presidential policy, such as the Covid-19 pandemic. Other recessions were the product of timing. Perhaps most surprisingly, recent recessions have in part resulted from a relatively unexplored phenomenon that effectively flips the popular narrative on its head.

 

At bottom, the assertion that Democratic presidents bring booms and Republican presidents create recessions not only overinterprets a correlation from a small data set, it is rooted in a flawed view of the chief executive's capacity to influence a complex world.

 

 

THE INHERITED ECONOMY

 

The best way to begin to consider partisan differences in presidential economic performance is to examine the five recessions that began between 1953 and 1976, all of which took place under Republican presidents.

 

Much of this GOP tilt is the natural result of Republicans holding the White House for 16 of these 23 years. And while the 1961-1968 Democratic presidencies were recession-free, the economic overheating toward the end of that period played a major role in the light recession that followed in 1969 — Richard Nixon's first year in office. Other recessions of the era were largely driven by factors outside the president's control, such as Federal Reserve policy and the OPEC oil embargo. These "Republican recessions" were also bookended by "Democratic recessions" in 1948 and 1980 under presidents Harry Truman and Jimmy Carter, respectively. In short, there is no real evidence that presidential policies significantly drove the recessions that took place during this period.

 

The post-1976 era is even more interesting. President Carter, a Democrat, oversaw a recession in 1980. The subsequent five recessions took place under Republican presidents. Again, some of these downturns were caused by discrete events lying largely outside of the president's control — such as the housing-market crash and the global pandemic. Others were the product of timing. Ronald Reagan, for instance, found himself in a recession within six months of entering office following a Democratic term — well before his own policies could have been enacted, implemented, and caused a recession. Similarly, the recession that occurred during the first year of George W. Bush's presidency began just weeks after Clinton's term came to a close. Both of these recessions were driven by events that had taken shape before those presidents took office; they could have easily occurred a few months earlier under their Democratic predecessors. (In fact, the 1981 Reagan recession was in many ways a continuation of the 1980 recession under Carter.)

 

Indeed, Republican and Democratic presidents have entered office under vastly different economic circumstances — often at opposite ends of the business cycle — since the 1980s. More precisely, Republican presidents during this period have typically inherited economic booms, while Democrats have always entered the White House during or shortly after recessions. This pattern all but guarantees that Republicans will hold the White House when booms turn to recessions, while Democrats will hold office during recoveries.

 

Understanding this phenomenon requires abandoning the presumption that each new president inherits a steady-state economy that is expected to continue on its current rate of growth. This perspective leads many voters to blame presidents for declining economies and hail them as heroes for generating growth. It also leads to poor economic analysis that simply ranks presidents by economic growth or employment rates — which, again, are largely outside executive control.

 

A more rigorous analysis of the correlation would take into account the fact that new presidents inherit a spot in the business cycle. Traditional business-cycle analysis holds that economic expansions eventually overheat, slow down, or hit an exogenous shock that brings about a recession. These recessions then typically self-correct, transforming back into an economic expansion after a period of six to 18 months. Although the Federal Reserve can influence the business cycle (more so than stimulus legislation, which is often implemented after a recession has already ended), this cycle occurs largely independent of political actions.

 

A new president, therefore, inherits either an expanding economy that is likely to eventually slow down or a recessionary economy that is likely to recover relatively soon unless sabotaged by destructive policies. This points toward a paradoxical conclusion: While each presidency and each business cycle is different, history suggests that we should expect presidents who enter office during or shortly following a recession to oversee more job creation and economic growth than those who enter office well into a mature economic boom.

 

The job numbers bear this out. Since 1977, there have been 11 four-year presidential terms. Six of those terms began during a weak economy (with an unemployment rate between 7.3% and 8.0%), while five began during a strong economy (with an unemployment rate between 4.2% and 5.4%). Sure enough, the terms that inherited a weak economy saw an average of 7.7 million new jobs created, while the terms that inherited a strong economy saw an average of just 2.8 million.

 

This finding makes intuitive sense: Presidents who inherit a weak economy typically ride the natural recovery upward as millions of unemployed workers eagerly return to work, while presidents who inherit a strong economy have effectively run out of unemployed people to employ. In fact, an economy that has reached its peak may soon begin decelerating and shedding jobs of its own accord.

 

 

In a similar vein, the terms that inherited a weak economy saw an average of 2.8% economic growth annually, versus 2.4% for the terms that inherited a strong economy. This growth gap would be nearly three times as large if not for two outliers: Clinton's second term, which overachieved with fast economic growth despite inheriting a strong economy, and Obama's first term, which underachieved with slow economic growth despite inheriting a weak economy (more on these later).

 

Voters, of course, tend to valorize the presidents elected during a recession, who subsequently oversee the more or less inevitable recoveries, and look down on those elected during economic booms, who are held hostage to the inevitable deceleration. In reality, they are not judging presidential performance as much as they are judging the business cycle.

 

 

PARTISAN INHERITANCES

 

Why do Republican presidents typically inherit stronger economies while Democrats tend to inherit weaker ones?

As it turns out, over the past several decades, voters have consistently elected and re-elected Republican presidents during economic booms, then swapped in Democratic presidents during downturns. In other words, the causation described by the prevailing wisdom is at least partially reversed: Presidential parties do not drive economic performance; rather, economic performance appears to play a role in determining which party holds the presidency. The actions of the presidents themselves, meanwhile, have had surprisingly little to do with the economy's performance.

 

Consider, for instance, Ronald Reagan's 1980 election, which represents the last time a Republican president was elected shortly after a recession. Following a second downturn from 1981 to 1982, he oversaw the recovery that unfolded over his two terms in office. Republicans managed to hold the presidency for four additional years of strong economic performance until a slight recession likely played a part in motivating voters to elect Bill Clinton, a Democrat, in 1992.

 

Clinton subsequently presided over the economic recovery that occurred over the succeeding eight years. Then, as the 2000 economy boomed, voters elected Republican George W. Bush in the next open-seat election. Bush overcame a small recession in early 2001 to keep the presidency in Republican hands until another Democrat, Barack Obama, rode the deep 2008 recession into office.

 

Like Clinton and Reagan before him, Obama oversaw the recovery that occurred over the course of his two terms in office. Then, as the economy boomed through 2016, voters elected Republican Donald Trump in the next open-seat election. Trump inherited this economic boom but, in the midst of the pandemic-driven 2020 recession, was replaced by Democrat Joe Biden after only one term. As the pandemic has receded — albeit unevenly — the economy has largely rebounded.

 

In sum, whenever the economy has been booming in an open-seat presidential election (1988, 2000, 2016), voters elected Republicans, and continued re-electing them until a recession hit, at which point they elected Democrats (1992, 2008, 2020). Those Democrats were re-elected to a second term largely due to their overseeing the recovery, then Republicans won the next open seat.

 

Voters, of course, have not acted purely on the basis of their assessments of the economy; other factors have played significant roles in driving these elections as well. The point of highlighting the pattern is not to propose an alternative mode of economic determinism to explain recent elections, but to suggest that the familiar story underplays the significance of the business cycle.

 

Beyond that, this pattern has several implications. The first is that Democrats have generally benefitted from being elected at the point where the business cycle is about to turn upward. Thanks in part to this accident of timing, they are re-elected to a second term as a reward for the (largely inevitable) economic recovery.

 

The second, as noted above, is that if Republican presidents are elected during economic expansions (especially in the later stages), then by extension, they will be in office when the boom turns to recession, even if it takes a decade or more. Being elected in an economy that has reached the top of the business cycle and is poised to decelerate leads to a comparatively negative economic record.

 

Critics may still insist that Republican mismanagement, not the business cycle, drove the recessions, but they would be hard-pressed to match correlation with causation. The 1980s Reagan-Bush economy produced a historically strong recovery after the Carter recession before running out of gas in 1990, as the natural business cycle would predict was inevitable. Despite a short recession in early 2001, the economy held steady under George W. Bush until the housing market crashed — an event that was not rooted in any presidential act. (In fact, between 2001 and 2007, the Bush administration repeatedly implored Congress to rein in Fannie Mae and Freddie Mac before they contributed to a mortgage meltdown.) The Trump economy thrived until a global pandemic caused a largely unavoidable worldwide recession during his final year in office. None of these three recessions (or four, if one includes the 2001 downturn that occurred early in Bush's term) were triggered by the policies of the president who happened to be in office at the time.

 

On the flip side, Biden is the third consecutive Democratic president to take office during or in the immediate aftermath of a recession. And like the previous two, he will likely ride the natural business cycle back up and receive credit for the recovery (aided by the fact that the vaccine required to disrupt the pandemic had been produced and was being distributed when he took office). By that point, the Federal Reserve and the Congressional Budget Office (CBO) were already projecting significant economic growth through 2021. The Biden economy has not performed markedly different from those original expectations.

 

In sum, it appears the best way to judge the economy under a given president is to consider its performance relative to the economic trajectory that president inherited. Over the past 44 years, there have been just three notable outliers — Clinton's overachievement, Obama's underachievement, and Trump's overachievement, all relative to their inherited trajectories.

 

Clinton's second term began with a booming economy and a 5.3% unemployment rate. But instead of decelerating, the economy added 9.5 million more jobs to further reduce the jobless rate to 4.2%. No other presidential term in the last 44 years that began with a strong economy saw even 2.5 million jobs created. And of the five presidential terms since 1976 that began with a sub-5.5% unemployment rate, Clinton's second term was the only one that escaped a recession. In fact, the average annual economic-growth rate of 4.5% in those years was the highest of any presidential term during that era.

 

Obama's first term was an outlier in the other direction. Since 1976, every presidential term that began with an unemployment rate between 7% and 8% ended up seeing the economy add between 6 and 10 million new jobs over the course of those four years. The only exception was Obama's first term, during which just 1 million jobs were added; in fact, the unemployment rate rose slightly, from 7.8% to 8.0%. Even adjusting for the severity of the 2007-2008 recession, this was the weakest economic recovery since the Great Depression, widely missing the jobs and economic-growth benchmarks set by the White House as well as the CBO, Federal Reserve, and blue-chip forecasts. The economy grew at an average annual rate of just 1% over those four years, peaking at 2.6% in 2010.

 

Trump, meanwhile, inherited the second-lowest unemployment rate of any president since 1976. Yet his term saw that already low 4.7% rate plummet further, to a 50-year low of 3.5%, as 6.6 million jobs were created during his first three years in office. This performance blew away the projections of the CBO and economic forecasters, which had merely hoped for a "soft landing" rather than a full recession at that point in the business cycle. The pandemic, of course, caused the bottom to fall out in 2020. Though Trump arguably mishandled the response, even the most competent policy could not have kept America's economy out of the attendant global recession.

 

The economic performances of the other eight presidential terms since 1977 were generally in line with the pattern described earlier. When the inherited jobless rate was 7% or above, the rate eventually rebounded, and the economy posted a strong recovery. When it was 5.4% or below, job creation slowed down and the unemployment rate rose, with an 80% chance of a recession at some point during the term. Both economics and history, therefore, suggest that the recession inherited by President Biden should transform into a healthy economic recovery, almost regardless of any decision his administration makes. Nevertheless, the president will surely be given credit for the strong recovery, contributing to the narrative that Democratic presidents have some sort of Midas touch when it comes to economic policy.

 

In reality, the Democrats' touch appears to be a matter of timing: The public elects Republican presidents during the latter stages of economic expansions, waits however long it takes for the next recession, and then hands the White House to a Democrat just in time for the economy to recover. And in politics, as in show business, timing is everything.

 

 

DEFICIT TRENDS

 

Along with growth and jobs, political observers like to compare presidential economic records by pointing to budget deficits as measures of fiscal responsibility. In reality, just as with jobs and economic growth, the largest determinant of a president's budget-deficit record is what he inherits from his predecessor.

 

Each president inherits a 10-year budget baseline showing the default annual projected levels of tax revenues, spending, and deficits. Over the past two decades, these baselines have ranged from a cumulative $5.6 trillion surplus to a $12.3 trillion deficit.

 

Presidents have limited power to significantly alter spending, revenue, and deficit levels from these baselines, as fully two-thirds of all spending, along with nearly the entire tax code, are on long-term autopilot; they can be changed only to the extent that Congress acts to alter programs and rates. The remaining third of spending (so-called "discretionary" appropriations) are negotiated annually between the White House and Congress, but they rarely shift enough to drastically alter budget deficits. Even the budget-deficit baseline itself is filled with false expirations and unrealistic assumptions that make it a flawed starting point for analysis. And of course, significant events like wars and recessions require some presidents to spend more than others. The natural business cycle described above plays a large role in automatically increasing and reducing deficits as well. Thus, total budget deficits during a presidential term — or even their trajectory — tell us little about a president's commitment to fiscal responsibility.

 

In fact, much of the narrative claiming that Democrats tend to reduce the deficit more so than Republicans reflects the same economic story described above, with national-security developments sprinkled in. The rising budget deficits under George H. W. Bush, for instance, were largely a function of the 1990-1991 recession that was driven by Middle East conflicts and American corporate restructuring. The fiscal improvement that followed was largely unrelated to the policies of President Clinton (or House Speaker Newt Gingrich). Between 1992 and 2000, the federal budget improved from a deficit of 4.5% to a surplus of 2.3% of GDP. More than 80% of this fiscal improvement was directly attributable to either the end of the 1991 recession and the late 1990s economic bubble or the defense-budget savings from the end of the Cold War.

 

The remaining 20% is more attributable to policy choices, most notably Clinton's 1993 tax increases and the spending cuts championed by the Republican Congress to which Clinton agreed. While these choices mattered, crediting Clinton for the historic budget improvement would require also giving him credit for America's victory over the Soviet Union, an economic recovery that began before he took office, and a technological boom that few would argue was driven by his administration's policies. Both economically and in terms of national security, Clinton was in the right place at the right time.

 

The same factors that drove the late 1990s budget surpluses — a bubble economy and significantly reduced defense costs — reversed in 2000-2001, plunging Washington back into deficit as George W. Bush's presidency was gearing up in 2002. No reasonable analyst would blame Bush for the technological bubble bursting in 2000, the 9/11 attacks the following year, or the housing crash and recession of 2007-2008. Yet those factors drove much of the budget decline during his presidency.

 

To be sure, Bush owns the 2001 and 2003 tax cuts, as well as the increased defense spending on the War on Terror. Yet without the bubble bursting and the housing crash, the budget would have remained roughly balanced, even with the Bush tax cuts and the war. None of this is to suggest that Bush's fiscal policies were particularly responsible, only that much of the fiscal decline was driven by developments beyond his control.

 

While Bush presided over the declining business cycle, Obama caught the rebound. Those who highlight the budget deficit falling from $1.4 trillion to $585 billion between 2009 and 2016 overlook the fact that Obama's own stimulus law inflated the 2009 starting point. Additionally, by January 2009, the CBO had already projected that even if the new president were to do nothing, the recession economy would recover and drive the deficit back down to $264 billion by 2012. Instead, Obama signed legislation cumulatively adding $5 trillion in debt over the decade, inflating annual deficits well above the long-term baseline levels that the CBO projected in January 2009 and slowing the deficit reduction that should have come from the economic recovery.

 

Similarly, after Trump was elected in 2016, he added to the deficit with tax cuts and discretionary-spending increases. However, he also confronted a massive 2020 budget deficit brought on by the global pandemic — an event that did not originate with his actions — and the bipartisan legislative response.

 

Republican presidents George H. W. Bush, George W. Bush, and Donald Trump, therefore, each saw massive final-year budget deficits driven by external factors (a recession, a housing crash, and a global pandemic) over which they had essentially no control. Yet those inflated final-year figures fed the misleading narrative that Republican presidents' rising deficits were the result of tax cuts and unjustified defense-spending increases. Meanwhile, Democratic presidents Bill Clinton, Barack Obama, and Joe Biden inherited deficits inflated by these temporary factors. They were then able to claim credit for the deficit reductions that would have occurred on their own.

 

 

To be sure, neither Republican nor Democratic presidents have been particularly responsible on budget issues. Yet the general trend of deficits falling under Democratic presidents and rising under Republican ones has not been a function of partisan differences in economic-policy approaches, but rather of chance events occurring in the final year of Republican administrations, leaving new Democratic administrations to take credit for those short-term events concluding on their own. Measured purely by the cost of legislation signed into law across their presidencies, Obama and George W. Bush had comparable impacts on the deficit. President Biden's spending is on pace to exceed both.

 

Accurately assessing blame for long-term budget deficits requires looking past temporary economic fluctuations, national-security emergencies, and public-health crises that presidents have little control over. The evidence suggests that the growth of the deficit since the mid-1970s has been largely a function of decisions made before these events occurred. Economist Charles Blahous has written that long-term budget deficits have been driven primarily by a series of entitlement creations and expansions enacted between 1965 and 1972, which resulted in social-welfare spending leaping from 5.3% to 13.3% of GDP between 1965 and 2019. Because much of this increase occurred on autopilot as part of the budget baseline, presidents were largely powerless to stop rising costs without congressional action. They could only (partially) control discretionary spending, which fell from 11% to 6.3% of GDP during this period — mostly due to defense cuts following the ends of the Vietnam War, the Cold War, and the wars in Afghanistan and Iraq.

 

Democratic presidents were the strongest opponents of reining in this 8% of GDP growth in entitlements. However, they championed the 4% GDP decline in defense spending. On the opposite side of the ledger, tax revenues generally remained close to the 17.3% of GDP average, as Republican tax cuts every 15 to 20 years offset real bracket creep (the automatic growth in tax revenues as a share of the economy that results from real-income growth pushing families into higher marginal tax brackets). In short, both parties played a key role in expanded structural deficits: Democrats blocked nearly every attempt to prevent the automatic growth of entitlements, while Republicans refused to let tax revenues rise as a share of the economy to finance the higher spending levels.

 

 

PRESIDENTS AND THE ECONOMY

 

Purely partisan narratives are often wrong; the familiar cliché that the economy is stronger when Democrats are elected president is no exception. Pointing to a simple correlation over a small number of presidential terms to assert that Democratic presidents are better stewards of the economy is as lazy as assuming that Democrats are worse on foreign policy because the vast majority of post-1865 war casualties have occurred on their watch.

 

In exploring the question of partisan differences in presidential management of the economy, it is important to emphasize the small degree of control federal policymakers really have in this arena. The U.S. economy is a $23 trillion machine powered by 330 million Americans and influenced by billions of people around the world. The effect of most federal policies on short-term economic performance is, at best, marginal.

 

What's more, presidents do not control the business cycle, even if the business cycle plays a part in the outcomes of presidential elections. Since 1990, their economic records have instead been dominated by four events: the 1990-1991 recession, the late-1990s bubble bursting, the 2007-2008 housing crash, and the 2020 pandemic. None of these events was fundamentally a function of presidential policy, yet all four occurred at times that fed the perception that Democrats bring better economic news than Republicans. With the pandemic economy sure to recede, President Biden is set to become the next beneficiary of this accident of timing.

 

Ultimately, the notion that there is a simple partisan pattern to the health of the economy is an extension of the exaggerated politicization of our understanding of contemporary American life. Presidents are chief executives of the federal government; they are not masters of the universe. They can play a role in setting the direction of public policy, and can shape how our government responds to events. In short, presidents matter, but partisan narratives are no substitute for economic analysis.

Brian Riedl is a senior fellow at the Manhattan Institute.