The President's Party and the Economy: A Guest Post

Here’s an interesting guest post courtesy of a blog reader named Dmitri Leybman, who has just graduated from the University of Chicago with degrees in political science and English literature; his focus is on political economics, particularly the impact of politics on macroeconomic outcomes. (He was also the winner of this contest.) I think you will find it interesting, particularly the “partisan presidential economic cycle” notion in the last paragraph.

What Does the President’s Party Affiliation Have to Do With the Economy?
A Guest Post
By Dmitri Leybman

A couple of months ago, some Freakonomics readers wondered whether the president really had any discernible impact on the economy. This question has actually received a lot attention from political scientists and political economists. Although these scholars still dispute precisely how presidents influence the macroeconomy, few would deny that the impact is real. The following are three macroeconomic phenomena that have been attributed to a president’s party affiliation.

First, according to research conducted by Princeton political scientist Larry Bartels, there has been a persistent pattern of income inequality under different types of presidential administrations. Since 1949, Democratic presidents almost always presided over a decreasing or flattening of income inequality. During that same time period, Republican presidents have always presided over increasing income inequality. As to why this occurs, nobody really knows, but the effect persists even when holding constant such exogenous variables as the price of oil and the percentage of individuals participating in the labor force. Additionally, real per-capita G.D.P. growth for all income strata is consistently higher under Democratic presidents. Individuals in the 95th percentile, however, do well under both Democratic and Republican presidents, but growth for the rich still tends to be higher when a Republican is in office.

Second, Democrats and Republicans respond differently to inflation and unemployment. Democrats preside over lower levels of unemployment while their Republican counterparts have historically presided over lower levels of inflation. The most accepted explanation for this phenomenon is the existence of a short-run Philips Curve in which inflation and unemployment are inversely related. An increase in inflation results in less unemployment, while a reduction in inflation results in more people without jobs. Politicians exploit this curve to achieve different macroeconomic outcomes depending on which constituents they represent. Republicans, who disproportionately represent the wealthy, tend to pay more attention to controlling inflation, while Democratic presidents, who receive much of their support form lower- and working-class voters, focus their attention on reducing unemployment during their presidential terms.

The last pattern of partisan presidential impact on economy is probably the most unusual and consequently has not been persuasively explained by economists or political scientists. This unusual phenomenon is the partisan presidential economic cycle. In the first two years of a Democratic president’s term, the economic growth accelerates. During the third and fourth years, however, the economic growth decreases. The opposite effect is seen with Republican presidents, who preside over decreasing overall growth during the first two years of their term only to have it followed by increased economic growth as re-election looms. This tendency of Republican presidents to preside over growth that occurs so close to re-election has been cited by Bartels as the main reason why Republican presidents have been so successful in achieving two-term presidencies in the post-World War II era. Voters, Bartels believes, are economic myopists, paying attention only to the most recent economic outcomes and not the overall outcomes experienced under a president’s rule.