Sunday, August 31, 2008

Do you make more than $180,000 per year?

If not, then you might want to think about voting for the Democrats...

Is History Siding With Obama’s Economic Plan?

Published: August 30, 2008

CLEARLY, there are major differences between the economic policies of Senators Barack Obama and John McCain. Mr. McCain wants more tax cuts for the rich; Mr. Obama wants tax cuts for the poor and middle class. The two men also disagree on health care, energy and many other topics.

Such differences are hardly surprising. Democrats and Republicans have followed different approaches to the economy for as long as there have been Democrats and Republicans. Longer, actually. Remember Hamilton versus Jefferson?

Many Americans know that there are characteristic policy differences between the two parties. But few are aware of two important facts about the post-World War II era, both of which are brilliantly delineated in a new book, “Unequal Democracy,” by Larry M. Bartels, a professor of political science at Princeton. Understanding them might help voters see what could be at stake, economically speaking, in November.

I call the first fact the Great Partisan Growth Divide. Simply put, the United States economy has grown faster, on average, under Democratic presidents than under Republicans.

The stark contrast between the whiz-bang Clinton years and the dreary Bush years is familiar because it is so recent. But while it is extreme, it is not atypical. Data for the whole period from 1948 to 2007, during which Republicans occupied the White House for 34 years and Democrats for 26, show average annual growth of real gross national product of 1.64 percent per capita under Republican presidents versus 2.78 percent under Democrats.

That 1.14-point difference, if maintained for eight years, would yield 9.33 percent more income per person, which is a lot more than almost anyone can expect from a tax cut.

Such a large historical gap in economic performance between the two parties is rather surprising, because presidents have limited leverage over the nation’s economy. Most economists will tell you that Federal Reserve policy and oil prices, to name just two influences, are far more powerful than fiscal policy. Furthermore, as those mutual fund prospectuses constantly warn us, past results are no guarantee of future performance. But statistical regularities, like facts, are stubborn things. You bet against them at your peril.

The second big historical fact, which might be called the Great Partisan Inequality Divide, is the focus of Professor Bartels’s work.

It is well known that income inequality in the United States has been on the rise for about 30 years now — an unsettling development that has finally touched the public consciousness. But Professor Bartels unearths a stunning statistical regularity: Over the entire 60-year period, income inequality trended substantially upward under Republican presidents but slightly downward under Democrats, thus accounting for the widening income gaps over all. And the bad news for America’s poor is that Republicans have won five of the seven elections going back to 1980.

The Great Partisan Inequality Divide is not limited to the poor. To get a more granular look, Professor Bartels studied the postwar history of income gains at five different places in the income distribution.

The 20th percentile is the income level at which 20 percent of all families have less income and 80 percent have more. It is thus a plausible dividing line between the poor and the nonpoor. Similarly, the 40th percentile is the income level at which 40 percent of the families are poorer and 60 percent are richer. And similarly for the 60th, 80th, and 95th percentiles. The 95th percentile is the best dividing line between the rich and the nonrich that the data permitted Professor Bartels to study. (That dividing line, by the way, is well below the $5 million threshold John McCain has jokingly used for defining the rich. It’s closer to $180,000.)

The accompanying table, which is adapted from the book, tells a remarkably consistent story. It shows that when Democrats were in the White House, lower-income families experienced slightly faster income growth than higher-income families — which means that incomes were equalizing. In stark contrast, it also shows much faster income growth for the better-off when Republicans were in the White House — thus widening the gap in income.

The table also shows that families at the 95th percentile fared almost as well under Republican presidents as under Democrats (1.90 percent growth per year, versus 2.12 percent), giving them little stake, economically, in election outcomes. But the stakes were enormous for the less well-to-do. Families at the 20th percentile fared much worse under Republicans than under Democrats (0.43 percent versus 2.64 percent). Eight years of growth at an annual rate of 0.43 percent increases a family’s income by just 3.5 percent, while eight years of growth at 2.64 percent raises it by 23.2 percent.

The sources of such large differences make for a slightly complicated story. In the early part of the period — say, the pre-Reagan years — the Great Partisan Growth Divide accounted for most of the Great Partisan Inequality divide, because the poor do relatively better in a high-growth economy.

Beginning with the Reagan presidency, however, growth differences are smaller and tax and transfer policies have played a larger role. We know, for example, that Republicans have typically favored large tax cuts for upper-income groups while Democrats have opposed them. In addition, Democrats have been more willing to raise the minimum wage, and Republicans have been more hostile toward unions.

The two Great Partisan Divides combine to suggest that, if history is a guide, an Obama victory in November would lead to faster economic growth with less inequality, while a McCain victory would lead to slower economic growth with more inequality. Which part of the Obama menu don’t you like?

Alan S. Blinder is a professor of economics and public affairs at Princeton and former vice chairman of the Federal Reserve. He has advised many Democratic politicians.

From the New York Time: http://www.nytimes.com/2008/08/31/business/31view.html?_r=1&em&oref=slogin

Apparently Reganomics are pretty much just wrong. An economic plan that cuts taxes for the poor and middle class and shifts more of the burden to the extremely wealthy both reduces overall inequality and spurs the economy. So if you are not rich and vote with your wallet you might want to think a bit more about supporting democrats.

3 comments:

Beck said...

Ah yes: Dare I say it? "Lies, damned lies, and statistics."

Honestly, if this were all there were to it, why would any economist disagree with Mr. Alan Blinder, and why aren't all fiscally minded Republicans flocking in droves to the Democrats?

The answer is: it isn't that simple. Since you piqued my curiosity, I took some numbers for the average net worth of households in the United States for the past 50 years, and decided to compare them to control over Congress, rather than the sitting president (since, arguably, Congress has as much, if not *more* control of economic stimulus than the sitting administration).

The results are rather interesting: overall average household net worth when Democrats controlled congress has an average yearly increase of around 7.3%. When Republicans control Congress, the average is a yearly increase of 7.8%.

Now, what does this say? Just looking at the numbers, someone who isn't an economist could say "well holy crap, we should be voting Republican if we want to increase our yearly net worth!"

The real answer is: Well, they don't say much. I compiled these numbers to see if I could spot a trend; but the focus is so narrow that it doesn't take into account any other factors. Sound familiar?

The bottom line is (and you should be doubly aware of this, being a member of the academic community): When anyone is presenting data or statistics of any kind, be keenly aware of the presenter's background and agenda.

Mr. Bartels, as a democrat and someone who regular works for democrats, has an agenda. And when you have an agenda, it is extremely easy to make numbers taken from extremely complex systems say whatever it is you want them to say, even if you believe at heart that your intentions are objective and pure. And to a journalist (for the New York Slob-Obama's-Nob Times, no less), these compiled trends might look awfully tempting if you want to influence public opinion.
8
Do I think Mr. Blinder or Mr. Bartels is trying mislead anyone? No, not really. But after looking at some of these numbers and plotting them out, I just can't accept his proposition that the party of the sitting president is going to make my paycheck go up 250 more dollars a year if he's a Democrat rather than a Republican, and leave it at that.

If my yearly income goes up 2%, but my net worth only increases by 7.3%, is that better than 0.4% and 7.8%? Purely economically speaking, if I'm a home owner with even a modest retirement fund, I'd *much* prefer the latter. If I'm a renter with little to no equity in anything substantial, I'd probably prefer the former.

Even so, what other things am I not taking into account? A buttload.

Interesting Side Note: Average household increase in net worth absolutely plummeted in the scant few years when the senate was divided 50/50. And I mean retardedly so: -2.41% in 2001, -3.9% in 2002. This time period is the only one within the past 50 years that the average was actually a negative number. When Republicans regain control of the senate in 2004, that number soars back up to 9%. But, objectively, I think that has less to do with Republicans being in control as it probably does with the fact that the Senate actually had some capacity to move business along without being deadlocked.

Anyway, I'm getting off into the weeds. To briefly summate my point:
Beware statistics, and the agenda of those who present them. If these trends were presented by someone without a political agenda, I would probably be more receptive. As it stands, the computer scientist in me knows that I need more info and a greater context with which to compare the data.

Anonymous said...

It is nothing short of true that statistics are misleading and that we should all beware. I would also add that the numbers that both the article and Beck cite do not control for any other factors, so it is not really possible to say that control of the executive branch or the Congress has any statistically significant effect on annual growth.

You also need to be careful about not comparing apples and oranges. Domestic production, household worth, and annual income are related but very, very different things. If your household worth goes up but the price of goods goes up more then you really haven't gained. The same is even more true for income. Beck should be sure to check that the numbers he cites are controlling for inflation. Otherwise, they might be wholly meaningless.

Another note is that Congress does not have more control of fiscal policy than the president. They do exercise some control over lots of aspects of the economy (big issues like approving int. trade agreements for example--though these are negotiated by persons from the exec. branch), but fiscal policy is pretty much the domain of the executive and the fed. Taxation is Congress's bag pure and simple (though the Pres. can of course veto), but interest rates, inflationary controls, and such are more in the palm of people appointed by the pres.

Assuming Beck's numbers are true, there are still two issues. One, I want to see income growth stratified by income brackets or quintiles. It doesn't do the average American much good at all if the national wealth is growing but it is all focused at the top 5%. Some money trickles down, sure (but far less than Reagan and his acolytes believe), but real wages and worth for average Americans (middle class and below) often fall even in times of aggregate growth. Second, again even if Beck's numbers are correct, I would gladly sacrifice 0.5% economic growth to see some positive shift in income distribution. According to Beck's numbers when either party is in power there is significant growth and the difference is only half a percent (which of course if large in the aggregate), but again, if the vast majority of the actual growth is skewed toward the top of the income scale, it does much less good for the average American. In this case, middle class and poor voters should pick the slightly lesser total growth if they see more equitable distribution of the gains.

Lastly, to answer Beck's question about why if Barter's is right doesn't everyone flock to the Dems: Well, for one, economists have argues these things since the emergence of free market systems, and arguments go back and forth and look at different figures and debate different qualities and outcomes. As in the above discussion, is it better to look at overall growth or income distribution? Household worth or annual income? Not to mention, if there is no debate economists are out of a job, so it pays to argue. From a political and philosophical standpoint I would also add that these difference reflect core beliefs about what is morally or ethically "best". If Beck thinks redistribution is basically unjust and I see mass accumulation of wealth in the top 5% at the sacrifice of a more equitable society as an economic and social evil, then we will of course look at different results even if both sets of numbers are true(ish).

Pope said...

I think here it is important to say that people in general have not voted in their economic best interests since the sweeping idiocy of "values voters" (which btw, if "values voters" would actually look at what was promised and what was delivered they would abandon voting for people with their "values" anyway). So as great as it would be for voters to look at things like economic well-being, income disparity, the working poor, and unequal tax burdens ... they don't. They care more about abortion, keeping homosexuals from marrying and who is more Christian. The falsehood of voting for someone with your "values" is significantly more important to most voters than their economic self-interest. That I don't understand. Maybe, just maybe, since the dollar is worthless and the domestic economy is in the tank this year, the electorate will begin to examine these things and vote on something that might actually make a difference.


*Slightly off topic, but I thought it was important to say here.*