Who's Plan for the Economy is Best?

This post was originally publishedon my blog at marktomarket.typepad.com.

Harvard economist Greg Mankiw had a great postrecently, providing a preview of two articles from two separate economists who are using statistical models to argue how each Presidential candidate’s economic policies are better for the future of the US economy.

On today’s WSJ editorial page, Casey Mulligan, an economist at the University of Chicago, argued that McCain’s and Republicans’ economic policies prove to be more efficient for the economy as a whole …

*Democratic candidates Barack Obama and Joseph Biden have proclaimed that they favor equal pay for women, and have alleged that Republicans do not. Sen. Biden has also insisted that Republicans, including vice presidential nominee Sarah Palin, represent a step backwards for women. The economic record says exactly the opposite.

I have used labor market data from the Census Bureau to study the amount and reasons for women’s progress in the labor market since the 1960s. One byproduct of my study is a calculation of women’s relative wage growth by presidential administration. [continue reading full article …]*

Over in New Jersey, Princeton economics professor Alan Blinder argued in the NY Times that his analysis shows Barack Obama’s economic plans will be better for the US economy …

*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. [continue reading full article …]*

In his post, though, Mankiw makes the most important point that we have to keep in mind when reading these types of analyses. Both of these analyses are very persuasive and we can assume that the viewpoints are both right and both wrong, in different ways. The authors have used data and statistical/econometric models to form conclusions about future results. The key here is that in these analyses (if we take them to heart), we are making the assumption that correlation equals causality.

Of course, a (if not the) core tenant of regression analysis, as we all know, is that correlation in fact does not automatically equal causation. Now, there are methods for determing causality and we can incorporate different Granger methods for testing causality, but that’s over and beyond these analyses.

The point here is that even economists can frame data in a manner that helps make their point, using it to influence others. There’s nothing wrong or unethical about this, although, it typically doesn’t fly in the academic environment, but who listens to academia anyways, right?

Ultimately, we could take all sorts of data to build arguments as to how the economic agendas of both political sides are best for the US economy. In reality, there are just too many variables to say “agenda X” is better for the economy, especially when we all probably couldn’t even agree as to what constitutes “better”.

Still, both are good pieces of analysis and very interesting at that. I do think there seems to be a consensus of economists from the private sector and industry who would agree that the traditional economic policies of Republicans tend to be better for the US economy, while a good portion of academic economists argue that liberals tend to have better proposals for the economy. Again, I don’t think the two groups would agree as to what is even best for the economy; therefore, there would obviously be disagreement in the methods.

I did find it Mulligan’s analysis slightly more interesting, though, because he was showing how the selection of Gov. Palin as the candidate for VP is better for further women’s roles in the US economy and how increasing the role of women is good for the economy. Also, he exhibits how Palin’s economic stances are beneficial for both women and the economy at large.

How’s that for tying correlation and causality?