Presidents and the Macroeconomy
To credit or to blame?
Most of the students in my intro-to-macroeconomics class this semester were born in 2004 or 2005. So, as I do in this blog, I like to emphasize our historical macro experience as a way to understand how to evaluate the macroeconomy today. If the economy grew at 2.8 percent last quarter, is that above average or below? Should we expect higher growth? And so on.
This sort of context is all the more relevant around presidential election season. Naturally, both sides will try to claim that under their watch the United States’ economy was Eden-like, full of bounty and pleasure; while under the other side it was a barren hell-scape, rife with squalor and hopelessness.
Oh really? Like we do in Macro-101, let’s look at the data!
GDP from Reagan to Biden
Figure 1 shows the year-over-year growth rate for real GDP (adjusted for inflation) from 1981 through the third quarter of this year. The top panel shows the entire span of time without presidential terms identified, the bottom provides an overlay of the terms.
Since 1981, the U.S. economy has averaged 2.7 percent growth. And as mentioned or highlighted many times on this blog, the average growth was higher in the 1980s and 1990s than it has been since 2000.
That fact is evident looking across the presidential administrations. George W. Bush’s eight years was book-ended by two recessions, while Obama’s term started with one and Trump’s ended with one.
Was the 2001 recession George W’s fault? Only a couple months into his term? Not likely. Was it Obama’s fault 2009 was such a bad year? No. That recession started in 2008 and the fallout from the housing market took a long time to unwind. Was the economic collapse in 2020 Trump’s fault? No, that was due to the Covid-19 inspired lockdowns (I think it is reasonable to assume that lockdowns would have happened regardless of who was president).
In contrast, since 2021, GDP growth has averaged 3.7 percent, explained mostly by 2021. Was the record growth of 2021 Biden’s doing? Actually, in this case, give him half-credit. There was a giant stimulus injected into the economy in 2021 under Biden, which no doubt fueled that growth. But there was also a giant stimulus injection in 2020, under Trump. So, if you want to give credit to a president for that year, give it to them both.
Inflation and the Unemployment Rate
Let’s look at the other two “big” macro statistics, the unemployment rate and the CPI rate of inflation, displayed in Figures 2 and 3, respectively.
On the unemployment rate, the average under Biden is a bit lower than under Trump, though both are around the non-cyclical rate. The rate under Obama was much higher, as the unemployment rate took a long time to decline following the Great Recession (the unemployment rate under Obama, in fact, looks very similar to the experience of the Reagan administration).
With respect to inflation, Obama and Trump both show sub-2 percent averages, much lower than during any of the pre-Obama administrations. Inflation under Biden has been notable, especially compared to the previous two decades. But, as this blog has maintained in many posts, the inflation over 2022 and 2023 was driven by spending; spending fueled from stimulus supported by the Trump and Biden administrations. If we give both of those administrations credit for the growth of real GDP in 2021, then both share the blame for this inflation.
The S&P500
What about the stock market? Figure 5 shows the year-over-year growth rate of the S&P500 index since 1986.1
The best average goes to Clinton; the second-best average goes to Biden. Except for George W. Bush’s years, both Trump and Obama show the lowest averages of the seven presidents.
So, do we credit or do we blame?
Really, the ups-and-downs of the business cycle concurrent with an administration have little to do with the person sitting in the Oval Office. The business cycle is the result of countless factors pushing and pulling the economy in one way or the other, with events from quarters or years prior affecting current fluctuations. In the view of this macroeconomist, presidents generally get lucky or unlucky when it comes to the behavior of the business cycle during their term.2
This data is only available publicly starting in 1985 (I downloaded the data from yahoo.finance.com). I used to be able to download the S&P500 data going back as long as it has been published—much further back than 1985. As such, I would be able to show my students the long history of the stock market. Alas, to obtain that data going further back now requires one to pay for it with a monthly subscription.
This research paper emphasizes this theme. If there is a more direct correlation than I am claiming, it would more likely show up for presidents that served two terms. It is reasonable to say that the policies enacted in the first term have time to play out in the second term.