Sunday, August 29, 2004

Statistics and misleading information = Democrats' claims of successful economies

The Oyster at Right Hand Thief is my unofficial liberal ombudsman on the 'Net (and he's impossible to dislike because he's a Yankees fan). Today, he points me to the post on his blog linked to in the title to this post. A pile of statistics that "proves" Democratic president = better stock market and better economy than Republican president since 1901. The fact that this is a tremendous overgeneralization (even within the 1960-2002 data subset he also relies upon) and is without context in terms of world and domestic events really should go without saying. But sometimes you need to try to explain the big picture to the left.

I apologize at the top of this because I'm really not going to be able to dig up all the stats I want that will prove that Reagan had the best economy in the history of the US, and Carter and FDR (pre-Pearl Harbor) had two of the worst. Indeed, much of this rejoinder will be off the top of my head with some help from my trusty Encyclopedia Brittanica 2004 CD-ROM (it adds the specifics as to policies of the presidents, see below). But here's a shot at an answer, which will not wholly debunk the Oyster's point, but will cut the legs out from his premises.

First, we need to cut the abstractions and identify the Presidents in question. For the Republicans: Teddy Roosevelt, William H. Taft, Warren Harding, Calvin Coolidge, Herbert Hoover, Dwight D. Eisenhower, Richard M. Nixon, Gerald Ford, Ronald Reagan, George H.W. Bush and George W. Bush. That's a varied bunch that includes two of the top 10 presidents (TR, Reagan) in history and the two who are often called the worst (Harding, Nixon), and the one who failed to resuscitate the country after Black Monday (Hoover).

For the Democrats: Woodrow Wilson, Franklin Roosevelt, Harry Truman, John Kennedy, Lyndon Johnson, Jimmy Carter and Bill Clinton. This bunch has less variation than the Republicans. FDR is considered one of our best (although I think he's vastly overrated); ditto Truman. Carter was one of the worst in US history. None of the others is really horrible.

Second, we need to cut through one concept that is pure rubbish: the notion that the President has ultimate power over the success of the economy. Examples will follow on both sides.

Third, there is a fallacy underlying this whole exercise by Oyster (and the Michael Kinsley half-truths he peddles) -- the notion that Democrats and Republicans have remained consistent in either economic policy and principles in (1) the past 100 years and (2) the 42 years from 1960-2002. Neither hidden premise is true.

Fourth, the stock market measurement. A good stock market is a measure of confidence, not a reflection of economic health. Key case in point -- the Clinton stock market that cratered early in the Bush presidency. Anyone who argues that the collapse was proximately caused by any Bush policy or action is completely wrong, primarily because no Bush policy had been implemented when the Internet bubble burst. Moreover, as this in-depth report of the House of Representatives Joint Economic Committee shows, stock ownership was a rarity among the US public before the mutual fund revolution in the late 1980s and through the Clinton Administration. Indeed, the number of households that owned ANY stock in a publicly traded company increased TENFOLD from 1980 to 1998. Of that increase, the vast majority occurred under Reagan and Bush (from 4% of households owning stock to more than 30% when Clinton took office). And as an aside, the person most responsible for this stock ownership revolution is not a president, but a CEO (former) -- John Bogle of Vanguard.

Fifth, the level of tax revenues as a percentage of GDP does not measure economic performance, so Kinsley's use of the statistic is meaningless. Tax revenues as a percentage of GDP has been relatively steady since the end of World War II -- basically in the 18-21% range no matter what the top marginal rates were at the time and no matter how good or bad the economy performed. Even after the Reagan tax cuts, the gross receipts of the government increased and the GDP % of taxes remained relatively steady. Why? Because the rising tide DID lift all boats. Moreover, the President who had the HIGHEST peacetime taxes-GDP ratio is Clinton, and it's not even close.

Sixth, the inflation rate information that Oyster cites is completely misleading. From 1930-49 we had negative inflation due to the Depression (1930-41) and price controls during WWII (1942-45). That's 13 years of Democratic rule ('33-'45) where inflation was not a factor because the economy was awful. See here for more information. Take the inflation rate from 1960-02 and the Democrat inflation rates are much higher than Republican inflation rates.

Now, we'll go blow-by-blow and president by president.

First, TR. He was really the second Republican president of this century but he took over after McKinley was assassinated in 1901. TR's legacy is as a "trustbuster" -- that is, his economic policy fought against consolidation of key industries into the hands of a small number of companies. By libertarian thought, that's not exactly business-friendly. Moreover, TR was a proponent of the "Square Deal" that imposed greater regulation on businesses and created some new regulatory agencies like the Interstate Commerce Commission. Most of these regulations were beneficial in some manner (especially slaughterhouse regulations). Nonetheless, TR had a generally good economy as the US expanded.

Taft did not have as successful an economy as TR. One big reason, he supported a protectionist tariff bill that slowed trade and stalled the economy. Lesson -- free trade helps the economy (note that if you ever consider voting for Kedwards' protectionism).

Wilson lowered the tariffs enacted under Taft, and that helped the economy. The economy also soared in World War I as the US's war footing required industry to reach its production peaks. Harding reversed much of the Wilson progress by enacting that bane of economic growth -- protectionist tariffs. He also limited immigration, thereby cutting off supplies of additional labor.

Coolidge is an icon to some conservatives, and for good reason. Under Coolidge (and his Treasury Secretary Andrew Mellon, yes, that one), Congress lowered the income taxes first permitted by the XVI Amendment (proposed under Taft and enacted under Wilson) and the tariffs that had strangled economic growth. Coolidge thought the government needed to get out of the way of businesses and let them pursue profit; under his tenure the costs of regulation decreased along with income taxes and estate taxes.

Hoover is most connected with not just the Depression but with the alleged failure of a laissez-faire economy. The Great Depression began on his watch, but the worst part of the Hoover years is that the Depression was not halted. Instead, Hoover agreed to the Smoot-Hawley tariff that raised import duties and initiated an international trade war. FDR lowered tariffs in 1934 but severe damage had been done.

FDR grew the economy . . . but did so in 1942-45. The Depression ended after the US war machine ramped up production. Indeed the US economy was still in trouble in 1940 after seven-plus years of FDR's Keynesianism. See here, here and here about debunking Keynes and the actual end of the Depression. Truman presided over the postwar boom. Ike also benefitted from postwar boom, which slowed toward the end of his second term.

To improve the economy in 1960, JFK advocated LOWERING PERSONAL INCOME TAXES. Indeed, Reagan and Bush fils would later echo JFK's reasoning. Indeed, employment rates improved as did the economy thanks to JFK's lower-tax plan, which LBJ actually pushed through Congress in 1964. LBJ's lasting negative legacy = the Great Society and increasing the welfare state.

Nixon abandoned his principles on economics: in response to the recession of 1970, he took the US off the gold standard (not negative in long run), and imposed wage and price controls. The immediate effects jump-started the economy temporarily, but the Oil Embargo of 1973 and continuing decline of the world economy in response to the semi-protectionist effects of Nixon's policies stalled economic growth for the rest of the decade. Ford failed to revoke the controls Nixon put on the economy, as did Carter.

Carter did nothing of use: under his reign social security taxes were increased (costing businesses and workers), the wage and price controls that were disastrous were not revoked, he dithered through the second oil crisis in 1979 and did nothing to push the economy forward. Somehow 21.5 million jobs were created in the Carter years, but unemployment remained steady. Carter sat back as the economy worsened to become the worst post-Depression economy in US history.

Reagan worked to kill the escalating inflation that had restrained the economy since 1965. He and Fed chairman Paul Volcker instituted Milton Friedman's monetary theories. In 1981 and 1982, Reagan allowed Volcker to put the country through a deeper recession in order to curb double-digit inflation (which has not topped 5% since). Reagan also cut tax-rates, thereby increasing the percentage of taxes paid by the wealthiest Americans -- when wealthy Americans have less incentive to hide their money (read: lower top tax rates), they do not. Reagan's roaring '80s economy is to his great credit.

Bush pere inherited a strong economy that would trend toward the 10-year recession again (see 1960, 1970, 1980). His response to raise taxes in order to avoid halting the government (and failing to face down the Democrats in Congress) cost him reelection, but the economy began trending upward once again in 1992 (no relation to the tax-hike).

Clinton made two good calls viz the economy: NAFTA and welfare reform. More importantly, Clinton was an ardent free trader, much more so than the current President. His peace dividend that he inherited after the fall of the USSR in 1991 contributed greatly to Clinton's economic successes and his ability to generate surpluses in the US budget.

Bush inherited the 10-year recession, this one spurred on by the collapse of the Internet bubble. As most commentators and anti-Bushies, Kinsley completely discounts the horrific, albeit temporary, effects of 9-11 on the economy (eliding this fact, he purposely cuts his analysis at 2002, before the 2003 recovery began). Indeed, Fed Chairman Greenspan's lowered interest rates and Bush's tax cuts helped create one of the softest recessions and swiftest reversals toward economic growth in recent history.

The upshot of all this analysis? First, free trade helps the economy. That's reason one to vote against Kerry and his ridiculous fair trade notions. Second, lower marginal income tax rates will help the country out of recessionary periods. Third, recessions tend to come every 10-12 years -- economies are cyclical, not president-driven for the most part. Fourth, presidents generally have ability to help improve a flagging economy with lower taxes and use of monetary policy tools. And FIFTH, it's not the party of the President that matters, it's what he advocates as policy that counts.

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