The Political Party of the President Matters for the Economy

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Fiscal Times


By Mark Thoma
September 22, 2015

Since WWII, the economy does better when there is a Democrat in the White House. That conclusion holds for “almost every metric” of the economy’s performance according to research by Princeton economists Alan Blinder and Mark Watson. But is this due to policy differences between Democratic and Republican administrations? Or, with the limited number of observations since WWII, is this simply a statistical artifact, simply the luck of having Democrats in the office when good things happen?

The dominant position among economists, one I’ll push back against, is that presidents have little ability to influence the economy.

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I disagree. Whether the president is a Republican or Democrat can make a critical difference for the economy.

Let’s begin with monetary policy. Yes, it’s true that monetary policy is largely independent of government. But which policies are chosen depends upon who is in control of the Fed. Although the Federal Reserve system was set up so that no president could appoint more than two of the seven Federal Reserve Governors in a four year term, four of the seven in an eight-year term, this is not how the system has worked in recent years.

Due to the large number of resignations before Federal Reserve Governors have served their full fourteen-year term, both Obama and Bush have appointed all of the members of the Federal Reserve Board. This is important because so long as the seven Board members are united on policy matters, they can dominate the vote on the twelve-member monetary policy committee. Thus, the president has a large influence on the shape of monetary policy.

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Fiscal policy brings up similar concerns. If a deep recession occurs, both Republican and Democratic administrations are likely to turn to fiscal policy when monetary policy alone is not enough to turn around the economy. But the extent and composition of the policy – tax cuts versus government spending – as well as whom the policy is directed at – the wealthy versus the middle class – make a difference for how well the policy works.

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Democrats would support a large investment in infrastructure, or government spending more generally, to spur the economy but can’t get Republicans aboard, and Republicans would salivate at a large tax cuts, but Democrats won’t go along. This also highlights that it is not just the president alone that matters, the interaction between which party controls congress and which party holds the presidency can also have a large impact on our ability to do fiscal policy at all.

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Whether the president is a Republican or a Democrat could make a critical difference in how well we respond to the next economic crisis. My own preference – a strong one – is to have a president willing to use fiscal policy if it is needed and willing to appoint Federal Reserve Governors who will also take creative and forceful action in response to disruptive economic forces. Your preference may differ (and thus fly in the face of the evidence) – but make no mistake about it. Your choice at the ballot box could make a big difference to you and your family.