Monday, February 20, 2012

Presidents' Day special

As this is Presidents' Day, perhaps this is a good time to compare recent presidents. The chart below shows the average annual growth of real per capita GDP for recent presidential terms.

The notion that a president causes growth is not particularly sound, but if there is anything to it then we need to account for the long lags between presidential policies and economic outcomes. To do this, I attribute to a presidential term the four-year period beginning a year after taking office and a year after leaving office. Thus, all of 2009 is attributed to George W. Bush rather than Barack Obama, and all of 2001 is attributed to Bill Clinton rather than to George W. Bush. It's not exact, but it makes more sense than attributing the first year of a term to the new president.

Bill Clinton's first term scores highest, but Ronald Reagan's combined performance beats Clinton's. Back in 2004, Paul Krugman poo-poohed the notion that the Reagan boom had much to do with Reagan's policies. For Krugman, what really mattered was the depth of the recession prior to the boom:
The secret of the long climb after 1982 was the economic plunge that preceded it. By the end of 1982 the U.S. economy was deeply depressed, with the worst unemployment rate since the Great Depression. So there was plenty of room to grow before the economy returned to anything like full employment.

The depressed economy in 1982 also explains "Morning in America," the economic boom of 1983 and 1984. You see, rapid growth is normal when an economy is bouncing back from a deep slump.
This notion that the bounce-back is stronger after deep recessions is not uncommon, and is often part of forecasting models. So, perhaps there's something to what Krugman said. On the other hand, this notion is pretty weak in explaining how Reagan's second term was stronger than his first.

Funny, but now that I think about it, I haven't seen or heard anything from Krugman about the bounce-back effect since 2004, despite the fact that the slump that Barack Obama inherited was deeper than any since since the Great Depression. If anything, Krugman should be joining the chorus saying that President Obama's policies have been preventing the roaring recovery we should be experiencing.