[The Soup Nazi]

From Paul Krugman's NYT newsletter (1/2):

Is divided government good?

Would we be better off with gridlock? Don’t take Elon’s word for it.

By Paul Krugman
Opinion Columnist

I have to admit: It has been fascinating to see Elon Musk tweeting his way ever deeper into a hole. It’s like watching a car crash — an electric, self-driving-car crash.

Nor is this just about Twitter. I’m not a marketing expert, but it seems obvious that Tesla’s brand rests in part on the perception that Musk himself is a cool guy. Tweeting out homophobic conspiracy theories about the attack on Paul Pelosi and suspending the accounts of comedians who mock him doesn’t seem good for that perception.

But I’m not here to give Musk business advice. What struck me instead was the justification he gave in urging Americans to vote Republican — an assertion that divided government is good because “shared power curbs the worst excesses of both parties.”

Leave aside the rather obvious question of whether extremists are equally prevalent on the two sides of the aisle. Is divided government actually good?

Now, Musk’s assertion didn’t come out of nowhere. The idea that divided government is good, at least for the economy, is widespread among businesspeople. I see it quite frequently in economic newsletters. What does history have to say?

First, we have to note that there’s divided government, and then there’s divided government. Democrats controlled the House of Representatives throughout the Reagan years, but some of them were conservative southern Democrats (some of whom later became Republicans). More broadly, political scientists have devised useful measures, based on roll-call votes, of polarization in Congress over time, and they show that neither house in the Reagan era was anything like it is today:

 

One nation, all too divisible.
Voteview.com

Still, the battle between the parties was already fairly bitter by the 1990s. Let’s not forget that Newt Gingrich shut down the government in 1995 in an attempt to force President Bill Clinton into cutting Medicare.

Yet the economy thrived during the six years of divided government that made up most of Clinton’s time in office. Unemployment fell further than most economists had thought possible, while inflation remained low:

 

Good times in the ’90s, not so much after 2008.
FRED

Does this episode show that divided government is, in fact, good? Not really. There were underlying reasons for the good times that had nothing to do with politics, and the state of the economy at the time made strong government action unnecessary.

Most important, from the mid-1990s to the mid-2000s the U.S. economy experienced a surge in productivity as businesses finally figured out what to do with information technology. Here’s total factor productivity — a measure of the economy’s overall technological level — since the early 1970s:

 

The golden age of I.T. is behind us.
FRED

I’ve expressed productivity as a natural logarithm, so that the slope of the line shows the rate of growth; if you don’t get that, never mind, just look at the picture. Clearly, there was rapid progress back then that has slowed a lot since. And I see no reason to believe that these good things had much if anything to do with politics.

Rapid productivity growth was good for both supply and demand: It held costs down, helping to keep inflation low, and it fed a boom in business investment. This boom, combined with favorable demography — baby boomers weren’t yet beginning to age out of the labor force — had an additional effect that economists, at least, consider important. Namely, the “neutral” interest rate — the rate consistent with full employment — was relatively high. As a result, the interest rates set by the Federal Reserve were consistently well above zero:

 

Sometimes the Fed has room to cut, sometimes it doesn’t.
FRED

Why was this important? Because it gave the Fed — a quasi-independent agency fairly insulated from politics — room either to raise or cut rates to stabilize the economy. That is, we didn’t need active fiscal policy, which would have required some bipartisanship, to fight possible recessions. Alan Greenspan, who was then the Fed chair, and his colleagues could do that job themselves without needing much of anything from Congress or the president.

So while it’s hard to make the case that divided government was responsible for the good economy of the 1990s, at least it didn’t do much harm.