Monday, October 20, 2008

Do Not Read This Until Nov 5

If your candidate lost yesterday, I'm sorry. If you lament because you assumed that your candidate would have implemented superior public policies, then you can feel better already because your sorrow is based on a false assumption.

Democrats and Republicans clearly have different rhetoric. But rhetoric is not policy. Republicans talk a great game when it comes to cutting government spending, but President Clinton's administration had one of the lowest ratios of government spending to GDP. President Bush added immensely to Medicare spending with the Prescription Drug Act. Democrats talk a great game about helping the poor, but they pushed through a bill to tax America in order to bail out Wall Street fat cats. FDR started Social Security, but Nixon did the most to increase its spending. Democrats talk about limiting the power of the state when in comes to the death penalty, but a Republican Governor (Ryan in IL) put a moratorium on the death penalty.

Do you remember when Democrats were devasted because Roe-v-Wade would be overturned once President Reagan made his Supreme Court appointments? Well, those appointments happened and Roe-v-Wade still stands. I could go on and on with examples.

Economic theory suggests that political party might not affect policy, but instead merely reflect public policy preferences of the citizens. With some exceptions (see below), political parties compete with each other. Obama was one of the most liberal U.S. Senators because he faced little contest in Illinois, but became quite middle-of-the-road when it came to the Presidential race. Politicians are politicians first and (at best) ideologues second. A public opinion shift may give one party or another a small advantage and thus create a correlation between public policy and party-in-power, but this does not mean that political party itself has a significant impact on policy. Indeed, it would be inefficient if it did.

A number of economic studies have failed to find a correlation between party-in-power and public policy. Others have found a correlation (Professors Besley and Case have a nice survey in the JEL), but even there the implied impact is quite small. For example, Besley and Case look at state governments (where spending is about 1000 1982-dollars per capita per year) and find that governor's party is not correlated with spending and that a 10 percentage point increase in the Democratic party's share of the state legislature is associated with additional state government spending in the amount of $10 per capita per year. $10 per capita per year could be less than the cost of voting itself! Furthermore, effects at the state level may be larger than they would be at the national level because state-legislature elections are often uncontested and the whole economic logic cited above presumes competition.

Professors Snowberg, Wolfers, and Zitzewitz tried to look at situations in which party-in-power was significantly different even when citizen preferences were not. They found some effects, but they were also quite small. Eg., a Bush administration (rather than Kerry or Gore) was expected to increase stock prices by 2-3%. That is pretty trivial, given that the stock market fluctuated that much in the 20 minutes it took me to type this entry.

The Federal government currently spends about $9000 per capita per year. Even if I applied the estimates from the states (which I think are too big because national elections are more competitive), that means a victory for Obama (McCain) AND the Congressmen of his party will increase (decrease) federal spending by $90 per capita per year. Regardless of whether you like or dislike public spending, $90 is not worth much worry.

I am aware that I wrote an article showing how women's relative wages increased over the years, but essentially did so only during years of Republican presidents. But I don't know (yet) whether or how that progress can be attributed to public policy (more on the women's wage issue here).

P.S. How much would did (would have) an Obama victory cost? The $90 upper bound pertains to both executive and legislative victories by Democrats. Obviously, Obama is only part of that. Furthermore, some of the $90 would be a pure transfer. On the other had, deadweight costs may be created both from the taxation and the spending of the $90. I would say less than $50.

2 comments:

happyjuggler0 said...

I don't know about all Republican presidents, but Reagan significantly cut the marginal rate of tax on married couples. Note that the top tax rate isn't the only marginal rate that (likely) matters a lot when there is a marriage tax penalty.

By cutting the marginal tax rate on married working women, Reagan thus encouraged, by action not words, women to go to work in droves, which they did indeed do during his presidency.

Since one of the best ways to increase one's wages is to get on the job training, and since skills are highly correlated with wages in a capitalist economy, it is not at all unreasonable to suggest that Reagan was arguably the best thing that could have happened to women who wanted to work! Especially educated women, the subgroup most likely to skew the wage averages upward.

He is usually portrayed as having been a negative force for women, so this is a huge swing between reality and public opinion.

By the way, the other major way to increase one's wages is education. A mindblowingly large amount of women "went back to school" after Reagan got elected, for the precise purpose of (re)joining the workforce, so Reagan gets credit for this too since it suddenly made financial sense for many more married women to work, especially educated women married to high earner men.

I suspect other Republican presidents were mostly noise, although if they engaged in tax cutting talk they may well have fooled women into thinking that going to work would be more lucrative than it really turned out to be (who else besides Reagan made any income (rate) tax cuts, let alone significant tax (rate) cuts?

By the way, I guess I cheated. I read the post before Election Day (+1). Oops.

Don said...

Surely one can only tell if it's worth the cost if you know what it buys. Otherwise, everyone would shop at the dollar store.

Here's Greg Mankiw on presidential power and the stock market:

http://gregmankiw.blogspot.com/2008/10/republicans-democrats-and-stock-market.html