The Biden bump

I have written in a blog post for the CFA Institute about the historical track record of Republican and Democrat Presidents. Going back to the Second World War, US GDP growth was about one percentage point per year better under Democrat Presidents than under Republicans.

Yet, when it comes to forecasting future growth, the political sentiment of an economist seems to influence the forecast. I have noticed often how US economists tend to be much more optimistic when Republicans control the White House or Congress than when Democrats do. Meanwhile, particularly economists in Europe who often shake their heads in disbelief when looking at the economic policies promoted by the Republican Party tend to be more sceptical about the economic performance under Republicans. This isn’t surprising, since the policies pushed by Democrats are more closely aligned with the economic policies found in Europe and the UK like universal health care and a better social safety net.

These differences in opinion are usually small because the policy differences between Republicans and Democrats tend to be small most of the time. But in the transition from Trump to Biden, the differences are significant and that has exacerbated the expectations of economists as well. A group of economists from the German ifo Institute asked c. 700 experts from the United States and Europe to forecast US GDP growth in 2021 and out to 2023 just before the election and after Biden was declared the winner in early November. 

The shift in growth expectations was remarkable. While there was little difference between the American experts and foreign experts for their growth forecasts to 2023 (and both expected no significant change in growth overall) the growth expectations for 2021 changed significantly. American economists became somewhat more pessimistic about US GDP growth, lowering their growth forecast for 2021 by 0.2 percentage points on average. Meanwhile, foreign experts became much more optimistic, increasing their forecasts by 1.2 percentage points.

It seems as if their emotions have carried their forecasts because I think the truth is most likely to be somewhere in between these two extremes. In fact, the methodology of superforecasters would be to take the historic average as the expected change and then make small adjustments based on current policy intentions and the ability to put these policy measures into law. In the end, my guess is that you would end up with c. 0.5 to 1 percentage points higher growth in 2021 under Biden than under Trump.

Change in 2021 US GDP growth forecasts after Biden win

Source: Boumans et al. (2021).