Bartels Redux: The Fed’s Political Influence

by Benjamin Studebaker

I have been somewhat dissatisfied with the explanations I offered a few days ago for the surprising gap between democratic and republican economic performance in election years. Today I have decided to dig a little deeper, and I believe I have found a more satisfactory explanation for the gap.

So, to recap, I have been reading a fascinating tome by Larry Bartels, a political scientist at Princeton. Bartels compared US economic performance under democratic and republican presidential administrations during the period 1948-2005 and the results were quite odd–income growth, unemployment, and GNP growth more broadly were all substantially better under democrats, while inflation was more or less the same regardless of which party was in power. What growth there was under republicans was much more unevenly distributed among the economic classes. My original piece is available here. Of special interest were these figures, which showed that republicans seem to be able to nonetheless produce better figures in election years than democrats:

The patchwork explanations I offered for this were, in retrospect, flimsy. I suggested either that corporations were timing expansions in order to benefit republican candidates or that republican administrations were deliberately designing policy to produce strong numbers in election years. The former explanation was too conspiratorial; the latter begged the question of why, if republican administrations could generate strong growth figures in election years, they would not do this the rest of the time. It also raised the question of why democrats could not sustain the same level of performance in the election year that they were able to produce in the previous years. If the answer is republican obstructionism, why don’t democrats engage in the same behavior when republicans are in office? The only outcome of this limited analysis was the notion that republicans were deliberately trying to harm the country while democrats were not, and such a black and white analysis is naive and ridiculous.

However, we do indeed know that economic performance–almost exclusively election year economic performance–plays a substantial role in determining who wins presidential elections:

Bartels observes that particularly in 1952, 1968, and 2000, voters allowed weaker growth in the election year than what occurred over the term as a whole to cause them to throw the incumbent party out. In each instance, the democrats were the incumbent party, and in none of these instances did a recession immediately precede the election. However, this doesn’t tell us what the cause is of under-performance by the democrats in those years.

There must be a cause. I decided to have a look at the timing of US recessions. In particular, I’d like to look at US recessions that were triggered by the Federal Reserve via interest rate hikes to reduce inflation:

Recession Presidency Election Year/Off Year Outcome in Next Election
1953 Eisenhower (R) Off Year Republican Hold
1958 Eisenhower (R) Off Year Republican Loss
1960 Eisenhower (R) Election Year Republican Loss
1969 Nixon (R) Off Year Republican Hold
1980 Carter (D) Election Year Democratic Loss
1982 Reagan (R) Off Year Republican Hold
1991 Bush I (R) Off Year Republican Loss

There’s a general trend here–recessions in election years will fell the incumbent party while recessions in off years are usually survivable so long as they are not followed by a further recession in the election year. Indeed, when taken in tandem with the above data showing that parties often manage to win reelection despite under-performing, a recession in an off year can actually help a party retain the white house if that party is able to produce the appearance of recovery during the election year. In 1953, 1969, and 1982, early term recessions for Eisenhower, Nixon, and Reagan gave them the opportunity to look like heroes by generating stronger growth in 55/56, 71/72, and 83/84. Each of those presidents is generally remembered as economically highly skilled. The perception is that they survived adversity, and that, in so doing, they illustrated their skill.

What is lost on the voters is that in each of these cases, the recession was triggered by the Fed raising rates and was ended predominately by the Fed relaxing rates (although all three used fiscal stimulus to some degree as well). By contrast, Fed-triggered recessions, over which presidents have no power, sunk the Nixon campaign in 1960 and Carter’s re-election campaign in 1980. Perversely, presidents that undergo early term recessions are often viewed better by voters than presidents who undergo no recessions at all–Lyndon Johnson has the best statistical economic record of any president of the past half-century, but his far left policies are rarely looked to for guidance the way Reagan’s are.

There are two seemingly odd outcomes in this data set that I’d like to briefly address:

  1. The republicans failed to retain the presidency in 1960 despite an off-year recession in 1958–this is due to a further election year recession in 1960.
  2. George HW Bush bizarrely failed to win re-election in 1992 despite delivering a recovery (albeit a not especially spectacular one) from the 1991 recession. This may be due to the relative lateness of his recession (it occurred the year before the election year rather than 2 or 3 years before) and/or the role Ross Perot played as a third party candidate in that year–Perot took around 19% of the vote and Perot voters were far more likely to otherwise be potential Bush voters than potential Clinton voters.

The Federal Reserve, whether deliberately or inadvertently, has played a powerful role in determining who wins elections, helping Eisenhower, Nixon, and Reagan to second terms while helping Kennedy and Reagan to victories over incumbent parties.

Other recessions, though not triggered by the Federal Reserve, can also serve a similar function. George W. Bush won re-election in 2004 in no small part due to a 2001 recession that he had the privilege of being able to portray himself as having vanquished. Obama defeated McCain in 2008 due to an election year recession that annihilated republicans’ chances and won re-election in 2012 on the strength of the muted recovery that has transpired since then. Whether or not the democrats win in 2016 will likely have quite a bit more to do with how the economy performs in that year than will any of the contemporary issues of today, the Obamacare roll-out included.

So why do republicans do much better in election years than democrats, but much worse the rest of the time? Because frequently in recent history the Federal Reserve has tightened the money supply early in republican presidents’ terms only to relax again in the run-up to the election. The American voting public is far more short-term oriented than the Federal Reserve likely fully comprehends, such that when it engages in early-term tightening during republican administrations, it depresses the electoral expectations for republican presidents allowing them to win re-election despite producing growth figures during the election years that remain inferior to the figures democrats produce on average in ordinary years.

But while this analysis of recessions has shed light on most of the republican victories (1956, 1960, 1972, 1980, 1984, and 2004), there are still a few cases that don’t make sense. 1988 is explicable–Reagan genuinely produced strong growth numbers throughout his second term. But what triggered the slow-downs in 1952, 1968, and 2000 that allowed republicans to win despite having generally weaker economic records during this period?

The 2000 case is fairly recent and easy to remember. There was a stock bubble, a bubble that would pop and trigger the 2001 recession, and in 2000 it was on its way to popping, although not quite there. Growth was consequently slower in 2000 than it was throughout the rest of Clinton’s second term.

What happened in 1968? The London Gold Pool collapsed. This event was a forerunner to the demise of the Bretton Woods system under Nixon–the United States was increasingly unable to offer holders of US dollars their value in gold due to a small spike in inflation that was triggered by defense spending increases in the late 60’s to fund the escalation of the Vietnam War. It produced reduced US growth in that year, although it failed to trigger a recession.

The causes of economic slowdown in 1952 are less clear. The data shows that the democrats did not meet the trend line in the 1952 election even after the voters’ tendency to pay attention exclusively to economic performance in the election year is taken into account. This suggests that the 1952 election was likely decided by non-economic issues, such as Eisenhower’s war hero status, the unpopularity of the Korean War, the belief by many that the Democratic Party was to some degree or other infiltrated by communist spies, etc.

In sum, republicans are able to defeat an incumbent Democratic Party despite performing worse economically on average primarily because, for a variety of different contingent reasons, democratic incumbents have under-performed in election years and given them openings. They have managed to win re-election because of the tendency for republicans to experience recessions early in their presidencies followed by recoveries for which they successfully take credit, even though the average figures over the course of their terms have been poorer.

The primary culprit in all of this is the American voting public, which grossly overestimates the significance of election year economic results and ignores performance in the remainder of the term. Given all of this, the Federal Reserve plays a larger role than has generally been recognized in determining who wins presidential elections–when it triggers reduced growth in election years, it sinks the incumbent party, and when it triggers reduced growth in off years, it lowers voters’ expectations and enables potentially poor performers to remain in office. Given that it is inevitable that the Federal Reserve will, from time to time, engage in monetary tightening, it is imperative that it endeavor to conduct this tightening during booms so as to minimize its impact on the political process. However, unless voters become substantially better at keeping economic performance in the election year in perspective, we can expect voters to continue to vote against their own interests going forward.