The New York Times published an article several days ago, “The Economy Does Much Better under Democratic Presidents. Why?” Their conclusion is based on the chart of GDP growth going back to FDR (attached). Based on this chart alone it certainly appears that they are correct.
But let’s look into this matter more carefully and completely. Consider the following graph of GDP growth from 1930 to 2020. It fluctuates greatly over the entire 90 year period. This makes it hard to draw conclusions about which economic policies are better than others.
We also observe that the average GDP value is dropping from left to right, over the entire period from 1930 to 2020. In other words, there is an overall decrease in GDP growth over time. From the top chart, it is clear that there is a rough correlation with the chronological time period served by the particular president. In other words, not only is Roosevelt at the top of the list and Trump last, but earlier presidents appear nearer the top of the list and more recent presidents near the bottom.
It turns out that there is a plausible reason why overall GDP growth is shrinking over time. The economist, Dietrich Vollrath, says it is because our economy is “Fully Grown.” What this means is as follows:
- “Human capital” has been shrinking because the percentage of retirees is increasing relative to working-age adults. Furthermore, the average level of education has stopped rising because high school graduation rates, and women’s college graduation rates, have peaked and plateaued in recent years.
- Furthermore, economic activity has shifted significantly from manufacturing to service industries where productivity gains are harder to achieve. This is an indication that people are getting wealthier, a sign of social and economic progress.
If GDP growth is declining for good reasons, as Mr. Vollrath claims, then we should pay more attention to the unemployment rate and less attention to GDP. The unemployment rate was a very low 3.5% for several months before the pandemic hit in early 2020. This led to big wage gains for lower-income workers. The Biden Administration hopes to restore the low unemployment rate to its pre-pandemic level. But excessive fiscal stimulus could easily set off higher inflation.
Conclusion. I conclude that it is very hard to say, probably impossible, that one party does a better job for the economy based on looking at only the rate of GDP growth. In fact, if the overall rate of GDP growth continues to decline over time, it will become even more important to look at the unemployment rate as a measure of how the economy is doing.