Sunday, December 07, 2003

If you want to live like a Republican, vote Democratic.

Supposedly, happy days are here again. Announcements of job gains, and a slight improvement in the unemployment rate, together with a bullish sentiment reading in a poll of manufacturers, has the major media gushing all over the Bush administration for solving the economic crisis. This is, to use James Kilpatrick's favorite word: "balderdash". I'm going to defer to Gene Sperling's excellent column at Bloomberg to lay out how bogus the story of economic recovery really is. The failure of Bush's three record breaking tax cuts and equally ill advised budget decisions to jumpstart the economy should come as no surprise. After all we've been getting the same lackluster results from GOP borrow and spend policies for decades. The raw numbers show very clearly the truth of the old saw: "If you want to live like a Republican, vote Democratic". Here's why:

Any budget policy ideas are going to transfer money and resources from one place to another place. (duh.) Thing is though, that some transfers add more to the economy than others. A dollar spent on a public works project or a social welfare check will recycle quicker and more often in the domestic economy than the same dollar spent on the military or in a tax cut redirected back to the affluent. This is because a poor person will not only spend that dollar faster than an affluent person, but a poor person is more likely to spend that dollar in turn on things that in themselves will recirculate dollars quicker. (food, shelter, heat bills versus savings, luxuries or foreign travel for example.) These relationships are pretty well known and economists can tell well enough how much growth a dollar spent on each type of activity will cause. So professional policy wonks know full well what kind of budget spending will jump start the economy and what kind of spending won't have much effect.

The problem is that the immediately obvious beneficiaries of pro-growth budget policies are all interest groups lumped together in one political party - the Democrats. Each party wants to reward their own base, so you see the Democrats spend more on social/domestic spending and the Republicans spend more on the military and on tax cuts to the affluent. The former will grow the economy, the latter will not. You can see this dynamic in the inflation-adjusted growth rate of the economy since 1950. The average yearly GDP growth under Democratic administrations from 1950-2002 is 4.4%. The average growth rate under Republican administrations over the same period is 2.8%.

Looking at party control of Congress as well as the White House show a clear correlation between Democratic Party control of government and maximum economic growth. Let's look at which party controls the House of Representatives (since the House originates the budget bills), which party controls the Executive, and average the annual inflation adjusted growth of Gross Domestic Product for each combo. Since 1950 there were 17 years in which the Democrats held the House and the Presidency. In those years GDP grew an average of 4.5%. In the 6 years where the Democratic president had to contend with a Republican House, GDP growth was a little less, averaging 3.9% per year.

There were 26 years in which a Republican President had to contend with a Democratic House. In those years GDP growth was much lower, averaging 2.9%. Finally, for those who feel that Republican spending policies would really only benefit the country when the GOP owned the House and the White House, during the four years that this was the case, growth came in the smallest of all, averaging only 1.9% per year.(My source for GDP, and the GDP deflator, when applied to GDP gives you GDP adjusted for inflation is President Bush's last Budget message to Congress, the historical tables of which are available here.)

This is very clear cut. When Democrats run the economic show, we have robust growth of the economy. Add in Republican power participation in increments and each step of the way reduces economic growth. This shows the reality of the theory of the velocity of money, explained in my previous essay below titled: "Whatever Goes Around, Comes Around".

Why is this important? Well imagine just for a moment the 2000 election. Change 275 Florida votes (and/or 1 Supreme Court vote), and change about 20,000 votes that would have given the Democrats control of the House. If the Democratic tandem delivered 4.5% economic growth the way they have before over the last 52 years and we have a completely different country right now. Given that kind of growth over the last three years, we would have seen over $900 billion more economic activity in 2003 than we had. Goodbye unemployment problem. Goodbye budget deficit. Hello stock market success. If you want to live like a Republican, vote Democratic.