Democratic Presidents Might Just Be Luckier
I always laugh when I see stories asking how many jobs the president has created. This language is common in the news media, as well as in the boasts of certain presidents. To be fair, most people understand the phrase as a shorthand for how much employment growth there was during a president’s time on the job. But many people seem to hold the president personally responsible for the ups and downs of the labor market.
But how true is that? There are basically two ways the country’s chief executive can create jobs -- policy and rhetoric. Both of these are very limited tools. Some policies can be implemented with executive orders -- if they pass legal muster. But most of the really significant policy changes have to go through Congress, which is a balky and gridlocked institution. Then, if a policy gets congressional imprimatur, it has to actually have a big influence on the economy.
Most policies probably don’t make much difference by themselves. Most are small regulatory tweaks or minor changes to spending and taxation. Occasionally, something big will get through -- George W. Bush’s tax cuts, Obamacare or the 2009 stimulus. Even then, it may take years for the policy to have an effect.
Even if presidents’ policies do manage to help the economy, it’s hard to quantify their impact. The standard deviation of the net number of jobs added or lost in the U.S. each month since January 2001 is about 226,000. That’s more than three times the average monthly change -- in other words, employment is extremely volatile. That’s a sign that there are plenty of other forces at work in the economy other than presidential policy -- changes in business or consumer sentiment, trade patterns, productivity growth, other government policies or simply the timing of business decisions. Trying to measure the results of a presidential policy would require waiting years just to isolate the signal from the noise. But in those intervening years, other long-term changes happen to the economy.
Even when policy does have an effect, it’s probably not as big as people think. The most optimistic estimates claim that the Bush tax cuts of 2001 increased gross domestic product by a total of 1.5 percent and the Obama stimulus reduced unemployment by 1.8 percent -- good results, but not spectacular. And many estimates place the effects as being even smaller.
The second way presidents could affect the economy is through rhetoric. A president’s confidence could buoy businesses and consumers, causing them to spend more. Or he might threaten to carry out dangerous policies, causing uncertainty among business leaders and damping investment. Some economists have tried to quantify the latter by looking at how much uncertainty gets expressed in news outlets, but except in a few special cases it’s hard to tell why uncertainty rise and fall.
There is evidence that the economy tends to do better when Democratic presidents are in power. Economists Alan Blinder and Mark Watson found this in a 2015 paper:
These numbers show that since World War II, Democratic presidents have presided over stronger economies than Republican ones. The difference exists regardless of which party controlled Congress.
So does this mean that Democrats, either through wise policy or by positive rhetoric, give the economy a giant boost? Maybe not. First of all, this is a small sample, so it could easily all be luck. John F. Kennedy and Lyndon Johnson were president during most of the high-growth 1960s, and Bill Clinton during the technology boom of the 1990s, while Richard Nixon was unlucky enough to be in office during the oil shock of 1973. Blinder and Watson explore a number of these luck-related factors in their paper, concluding that these random events, more than monetary or fiscal policies, helped Democratic presidents.
Second, election results depend on the economy. It could be that recessions cause white working-class voters -- who tend to vote Republican based on cultural and social issues -- to defect to the Democrats. This probably happened in 1992 and 2008. Then, when the economy recovers from the downturn, the Democratic president might reap the political benefit from the bounce-back, winning reelection and staying in office during the rest of the recovery.
That pattern looks to have reversed itself in the most recent election. The Great Recession was so deep, and the recovery from it took so long, that it wasn’t until the end of Obama’s second term that wages and employment really started to look healthy. That allowed Trump to win back many white working-class voters by appealing to racial and cultural issues. But since the post-Great Recession boom is only now getting underway, Trump will probably be able to enjoy a political windfall from a continued strong economy.
In other words, the illusion that the president controls the economy helped Democrats in 1996 and 2012. But in 2020, there’s a good chance that it will be the Republican who gets to take credit for all the jobs he supposedly created.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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James Greiff at email@example.com