Smart Economists doing Stupid Things

Princeton Professor and former Fed vice chairman Alan Blinder recently published a piece in the New York Times called Is History Siding with Obama’s Economic Plan? One of his main conclusions is that Democratic presidents are better for economic growth:

“Data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats.”

Blinder is presumably saying you should vote for Obama because Democratic presidents implement policies that cause higher growth.  When professional economists make statements like this they typically exercise alot of care.  Why?  First, because of the danger this is simply a correlation and not cause and effect.  An example is the Super Bowl Stock Market Theory which states that when an old NFL team wins the Super Bowl, the stock market will rise that year, and when an old AFL team wins, it will fall.  This has been right a stunning 85% of the time.  But would we go so far as to say an NFL team winning causes the stock market to go up?

Presidents definitely affect economic growth, but when and how much?  It is likely that economic growth is affected not only by the current president, but by his predecessors, especially in his first years in office.  The dot-com bust, for instance, had already begun when Bush assumed office.  Was the slower economic growth it caused his fault?  I looked at a GDP series and if you assumed the predecessor was responsible for the first two years of economic growth under his successor, then the result reverses and Republicans look better.  Which proves as little as Blinder’s result.

How much does an administration affect the economy?  As Professor Blinder admits:

“Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. Most economists will tell you that Federal Reserve policy and oil prices, to name just two influences, are far more powerful than fiscal policy. Furthermore, as those mutual fund prospectuses constantly warn us, past results are no guarantee of future performance. But statistical regularities, like facts, are stubborn things. You bet against them at your peril.”

Usually when an economist knows there are other factors such as Federal Reserve policy and oil prices, they try to control for them.  You might also want to look at which party controls Congress, since this affects policy as well.  Professor Blinder makes no such attempt.  Statistical regularities may be stubborn things.  But without controls they are likely to be biased.  And like the NFL Stock Market Theory they may not indicate much.

One might also question how meaningful the Democratic and Republican labels are for the policies that affect growth.  We often associate freer trade with Republicans.  Yet Bill Clinton pushed NAFTA and W. Bush implemented the protectionist steel safeguards.  We often associate Republicans with less social spending.  Yet under W. Bush we’ve had extremely profligate farm bills and handout to anyone and everyone, whereas Clinton and Gingrich sought to phase out farm subsidies and promote welfare reform.  If we label Clinton Democrat and Bush Republican, how should we label Obama?  He consistently trashes trade and every vote on a trade bill he’s cast has been against.  He is a staunch supporter of ethanol and farm subsidies.  With the exception of tax policy, his policies are alot closer to what we’ve seen under Bush than under Clinton.  I think history will eventually side with Clinton and Gringrich, but not with Obama.

And not with Professor Blinder’s analysis, which has more holes than swiss cheese. It is a sad day for economics when someone so smart and lucid (see his piece on free trade) gets so blinded by politics as to allow himself to publish something like this.