Inflation Under Democrats And Republicans
Inflation Under Democrats And Republicans[On LeftWing, it was said that...]
On the difference between LeftWing "Democratic Party" and RightWing "Republican Party" in UnitedStates politics:
To European standards, both would probably qualify as right-wing parties. (Democrats moderately right-wing, Republicans extremely so.) However, I did some economics courses, and there the professor showed us some data that made clear that during Democratic governments in the USA, unemployment went down at the cost of more inflation, while during Republican governments, inflation was controlled at the cost of more unemployment. This seems to suggest that there is indeed a very real economic difference in both parties, and that Americans' choice at the ballot box makes a real difference, perhaps even more than they realize.
executive (i.e. Republican or Democratic president). I will see if I can find this data somewhere, and even include a reference (Wow!). -- StephanHouben
I've read (I think this was in Krugman's Peddling Prosperity, ISBN 0393312925 ) that this inflation-unemployment tradeoff was true from, er, around 1945 to 1975; I'd be very interested in knowing if if held during other time periods as well. The "Phillips curve" of an inflation/unemployment trade-off is standard fare in economics classes, but much harder to see in real economic statistics[1]. --- SethGordon
OK, I found the reference. It was actually in my textbook: N. Gregory Mankiw, "Macroeconomics", second edition, ISBN 0-87901-722-8 , chapter 12, p. 330-331. Described is the period from 1948 up to and including the Bush administration. It gives the real GDP growth during the 4 years of each presidential term, and the averages per party. Those are (in percents of the real GDP):
1st 2nd 3th 4th
Democrats 3.3 6.1 4.8 3.4
Republicans 3.0 0.0 2.7 3.8
Especially in the 2nd and 3th year, Republican administrations display a
consistently lower real growth. In fact, of the 7 years in the period with
a decline in real GDP, 6 were either the 2nd or 3th year of a Republican
administration. (The 7th was during the 4th year of Carter).
For the last administration mentioned (Bush), we have:
2.5 0.8 -1.2 2.1
This seems to suggest that the pattern, at that time, still held. The large
economical growth during the Clinton administration means that the pattern
probably still holds today.
It is claimed, without further data, that monetary policy is less inflatory
during Republican administrations, and that this explains the lower growth
during Republican administrations.
Stephan,
There seem to be two things that go against popular belief here. First, that Republicans are the party of prosperity. More importantly, there is a strong "stated" reasoning that the choice of president has very little effect on the ecconomy ("the legislative branch has control over the purse strings, yada-yada-yada").
Very interesting data. -- JohnRepici
I am also an economics student and the connection between unemployment and inflation is certainly there and important. However, it is the Federal Reserve, not the President or the legislative branch, that holds the key to the trade-off. In addition, recently the curve that relates the two has seemed to have shifted considerably, which means that at the moment, as long as government policy keeps us out of recession, neither is a major problem.
The usual caveat about correlating officeholders and economic performance: the economy is a very complicated system, and lots of the phenomena in it take time to develop. So the good economy of year Y might actually be the result of economic policies carried out in year Y-2, Y-5, or Y-10. The lags can be even longer: if the Clinton-era expansion was largely the result of the application of information technology, then the marginal tax rate cuts of the Reagan era (which led to explosive growth in venture capital) are an important contributor.
Also, inflation is not necessarily a bad thing, as long as it is low and expected. A inflation level of 0.5-2% may even be desirable, because it prevents deflation, which does cause problems.
Look at it from an economic perspective: If $100 in cash can buy the same stuff today as it can a year from now, why would you wait? What would be the incentive to loan the money to someone else who "needs it more now, but can pay it back later?" Yes, a low and stable rate of inflation is probably a good thing.
The incentive to lend money is the real rate of return: interest rate minus inflation rate. You don't need inflation to stimulate lending. In fact, it drives interest rates up by a second mechanism: creating more uncertainty in the economy. A "low and stable rate of inflation" may not be a bad thing (the US economy seems to have done fine over the past decade), but there's no reason to actively promote it.
The only major problem comes from our tax system, which taxes nominal gains, not real gains. Doing so discourages investment. However, the tax is also highly progressive, which means it probably won't change anytime soon.
If you count Social Security, the US income tax system isn't very progressive at all. That might not be so bad, but it's helpful to have a clear picture of progressivity when debating it.
A inflation level of 0.5-2% may even be desirable, because it prevents deflation, which does cause problems.
This is one of the great economic myths perpetrated today that deflation is somehow bad. If inflation is the decreasing ability of a unit of currency (dollar in this case) to purchase goods, then deflation is the increasing ability of a unit of currency to purchase goods. This means that your paycheck, in absolute constant dollar terms, buys you more stuff.
Flying in the face of common sense, Keynesian economics argues that this is a manifestly bad thing. Their theory goes something like if you think you can buy more tomorrow than you can today, you will put off the buying decision until tomorrow. Of course, when tomorrow comes, you will have the same expectation and continue to put off buying stuff.
Of course, it's just dumb to think people will put off their material well-being indefinitely. Eventually, I have to eat, I have to buy new clothes and, eventually, I have to put in that wireless router so I can walk around my house naked because I've put off buying food for so long that my clothes have fallen off.
A deeper analysis shows that when people decrease current consumption in favor of future consumption, the pool of available investment funds increases driving down the natural rate of interest. A decreasing interest rate does two things: First, it encourages entrepreneurs to create goods that people would be willing to trade for their cash even given their deflationary expectations. Second, it discourages savings because people are faced with the question, Is a 0.5% interest worth not buying that new BritneySpears? album?
For more, see http://www.mises.org/fullstory.asp?control=1254
EditText of this page
(last edited June 16, 2003)
or FindPage with title or text search