Tuesday 29 March 2016

Do politicians affect economic outcomes?

For the US at least the answer, in one sense, is yes: the US economy has performed better under Democratic presidents than Republican ones.

But why?

A new paper in the American Economic Review (Vol. 106, Issue 4 -- April 2016 ) looks at this question.
Presidents and the US Economy: An Econometric Exploration
Alan S. Blinder and Mark W. Watson

The US economy has performed better when the president of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance. For many measures, including real GDP growth (our focus), the performance gap is large and significant. This paper asks why. The answer is not found in technical time series matters nor in systematically more expansionary monetary or fiscal policy under Democrats. Rather, it appears that the Democratic edge stems mainly from more benign oil shocks, superior total factor productivity (TFP) performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future. (JEL D72, E23, E32, E65, N12, N42)
When you look at the things that drive the Democratic advantage - benign oil shocks, superior total factor productivity (TFP) performance, a more favorable international environment and more optimistic consumer expectations - apart from may be the more optimistic consumer expectations, it is not obvious how the current term president could affect the other drives of economic performance.

So in this sense the answer to the question is no. It looks more like luck than good management on the part of politicians that drives economic success.

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