Which Party is Better For Canada?

Canadians are fascinated with American elections. In 2012, as in previous election years, Canadians have followed the twists and turns of the U.S. election campaign almost as passionately as if they voted themselves. Because our countries are so closely integrated and American policies have a real impact on Canada, people on this side of the border have genuine preferences when it comes to U.S. politics, and for at least the past two decades, including the current election cycle, Canadians have preferred Democrats. It is often said, however, that this preference does not generally reflect the country’s actual economic interest. If Canadians chose with their pocketbooks, the argument often goes, they would prefer Republicans. This article puts this proposition to a series of tests, and the results may surprise more than a few.

In many ways, the Canadian public’s preference for Democrats in the White House is not surprising. The mainstream of Canadian public opinion tends to remain close to the centre on economic and social policies. Canadians favour open immigration and multiculturalism, and their views on religion, foreign policy, health care, the environment, and social policy are more closely aligned with Democratic, rather than Republican, views. Indeed, if Canadians were given ballots this November, a solid majority would cast them for Barack Obama over his Republican opponent, Mitt Romney. In 2008, Obama’s victory was welcomed with unfettered enthusiasm by the Canadian public, which has remained quite solidly in favour of the Democratic president in the last four years, even as it shifted enough to the right in domestic politics to give Stephen Harper’s Conservative government its first majority in Ottawa. A May 2012 Angus Reid poll showed that 60 per cent of Canadians thought that Obama’s presidency has been good for Canada, against only 13 per cent of Canadians who thought the opposite. The same poll shows Obama would win 65 per cent of the vote among Canadians, compared to then-presumed Republican challenger Mitt Romney’s nine per cent.

This preference for Democrats was not always clear-cut over the years, notably in 1984, when Ronald Reagan attracted a fair amount of sympathy in Canada, but it was definitely present in the strong rejection of the Bush presidency from 2000 onward. In 2004, for example, a sizable majority opted for John Kerry over George W. Bush, but that majority was not quite as strong as the support for Obama in 2012. Clearly, the war-prone “Jacksonian” policy of the Bush administration abroad, along with the increasingly radical tone of its conservatism at home, were rejected by the Canadian public. Nonetheless, the same public remained nearly unanimous in saying that the relationship with the United States was important, and two-thirds viewed the overall bilateral relationship as good.

Even if public opinion and the news media tend to lean heavily in favour of the Democrats, a recurring theme of commentary on Canada-U.S. relations is the notion that, in spite of this strongly expressed preference, having Republicans in power in Washington should be better for Canada’s economy, if only because of the GOP’s reputation as the party of free trade. This is why we are often reminded by experts in Canada-U.S. relations and right-leaning pundits that the public’s preference for Democrats is irrational. Such experts confidently assert that the Republicans, who purport to be the champions of free trade and fiscal discipline, are much better for Canada’s economy. After all, why would the party that gave us free trade not be the best bet for our exporters? At a recent conference in Montreal, I asked a roomful of distinguished economists whether a Republican or Democratic president is generally preferable for Canada’s economy. At least three out of four confidently answered, a Republican.

The debate was reignited this summer when Derek Burney and Fen Osler Hampson wrote that the Democratic administration of Barack Obama had “lost Canada” by implementing a series of policies that they judged detrimental to the Canadian economy, from the “Buy American” clause of the American Recovery and Reinvestment Act of 2009 to the Obama administration’s decision to delay approval for the Keystone pipeline. Their comments echoed those of other pundits or politicians, who emphasized the potential advantages of a Republican administration for the energy sector. Notably, former U.S. ambassador to Canada David Wilkins, a Republican, stated earlier this year that “Mitt Romney would be a better U.S. president for Canada than Barack Obama because he’d curb protectionism and expand energy markets.”

This is nothing new. In 2008 the former U.S. ambassador to Canada Paul Cellucci voiced a similar warning. Former Canadian ambassador to Washington Raymond Chrétien, who cannot be accused of a pro-Republican bias, warned that an Obama victory with Democratic majorities in the House of Representatives and Senate would spell trouble for Canada’s exporters. In a more thorough but less unbiased report, the Fraser Institute insisted that Canada’s economic interest was squarely aligned with a Republican win in November 2008. The refrain was similar in 1992, when commentators raised concerns over then presidential candidate Bill Clinton’s hesitation to unambiguously embrace the North American Free Trade Agreement.

In sum, the perception that Republicans are preferable to Democrats for Canada’s economy is so common that few ever bother to look at decades of readily accessible evidence. Is it really the case? Is the Canadian economy actually better off when a Republican occupies the Oval Office?

The test is simple. If we assume that a presidential administration’s policies can realistically have an effect on measures of Canada’s economic performance once the policies have had the time to set in, we can compare available indicators during Republican and Democratic administrations with a lag of one year. I use four indicators that reflect the most relevant dimensions of Canada’s economic performance (with the periods for which directly comparable Canadian statistics are available shown in parentheses): the annual rate of growth of real GDP per capita (1961-2011), the annual unemployment rate (1960-2011), the annual growth rate of Canadian exports to the U.S. (1972-2010), and the annual growth rate of real manufacturing output (1951-2010).

CANADA’S ECONOMY PERFORMS BETTER WHEN A DEMOCRAT IS IN THE WHITE HOUSE

The results speak for themselves. On average, since 1961, annual real GDP growth per capita has been 2.02 per cent. When a Democrat occupied the White House, average growth the following year was 2.92 per cent, compared to 1.34 per cent when a Republican did. Figure 1 shows how the Canadian economy grew in the periods corresponding to each presidential administration since 1961 (lagged one year). The years of fastest growth in Canada, as in the United States, coincided with the Democratic administrations of Kennedy and Johnson, and more recently with the economic revival of the Clinton years, while the slowest years were those of the two Bush administrations.

Figure 1: Average annual growth of Canada’s real per capita GDP during each U.S. presidency (with a lag of one year)

The same exercise was repeated for three other key indicators. Figure 2 compares the averages obtained on four indicators of performance for the Canadian economy during Democratic and Republican administrations. On average, per capita growth in Canada is 1.6 percentage points higher during Democratic administrations than during Republican ones.

Figure 2 : Average performance of the Canadian economy on four indicators during Democratic presidencies compared with Republican presidencies (with a lag of one year)

Based on this most important indicator, it is not possible to conclude that Republican presidents are better for the Canadian economy.

Unemployment follows a similar pattern. Canada’s jobless rate was on average 1.1 percentage points lower during Democratic presidential administrations. Democratic administrations are known to favour high-employment macroeconomic policies in the U.S., and this result suggests that these policies may have a measurable spill-over effect in Canada.

But what about trade? Are the Democrats not supposed to be the protectionist villains? Democrats are bad news for Canadian manufacturers, aren’t they? Indeed, fear of Democratic protectionism is the refrain most often heard from commentators on U.S. politics and elections in Canada. It is not entirely without foundation. With their natural (albeit shrinking) base of support in industrial labour unions, Democrats have for long been vulnerable to pressures for protectionism. Yet, this reputation may be exaggerated, as high-employment expansionist policies also tend to reduce the strength of political demands for protection. When it comes to trade, and particularly trade with Canada, Republicans tend to benefit from the afterglow of Ronald Reagan and his successor, who both contributed to make North American free trade a reality. In terms of actual Canadian exports to the US, however, the Clinton years (and, to some extent, the Carter years also) saw the most important increase in recent decades. Trade flows vary widely from year to year, and comparisons are tricky, but Canadian exports to the U.S. have grown more, on average, during Democratic administrations. One caveat is that this indicator has a high variance, and the observed difference is the only one of the four reported in figure 2 that is not statistically significant.

Annual growth in real manufacturing output is a less volatile indicator and is more readily comparable. It can also be argued to vary to a significant degree in response to demand for exports, particularly from the United States. Since the 1950s, Canada’s real manufacturing output grew on average by 5.7 per cent annually during Democratic presidencies and by 1.7 per cent when Republicans were in charge. If Democratic administrations are somehow inimical to Canada’s manufactured exports, the difference should go in the opposite direction.

WHAT ABOUT CONGRESS?

As most Canadian pundits who prognosticate on American politics invariably remind anyone who cares to listen, party control of Congress is determinant on issues of trade and economic policy that have a direct impact on the Canadian economy. So, what about Congress? When the Democrats control Congress, Canadian exporters, and by extension the whole Canadian economy, are in trouble, right? Well, not really. If that were the case, control of Congress would make a difference in our indicators of performance. A Congress entirely controlled by the Democrats should be the worst of all possible worlds for Canada, followed by a divided Congress, whereas a Republican Congress should provide the most favourable conditions, at least for export-led growth.

Again, this type of affirmation can be tested. Let’s see how our four indicators behave in each of the three scenarios: a Republican Congress (1953-54, 1995-2000, 2003-08), a divided Congress (1981-86, 2001-02, 2011) and a Democratic Congress (1951-52, 1955-1980, 1987-94, 2007-2010). Then we can test the joint effects of the president’s party and of the composition of Congress. As figure 3 suggests, on the same four indicators, party control of Congress (lagged one year, as in the previous analyses) makes no systematic or significant difference. We can observe a slight advantage in terms of GDP growth during periods of Republican-controlled Congress (essentially due to the prosperous Clinton years). Statistically speaking, however, none of these differences is significant, although one might be tempted by the provisional conclusion that a divided (or dysfunctional) Congress may be less favourable for the next-door neighbour’s economy than a one-party Congress.

Neither Congress nor the president, however, operates independently. Accounting for the possible effect of various partisan configurations in Congress on our indicators requires taking all of these factors simultaneously into account. The question becomes, if we control for the possible effect of the partisan configuration of Congress on the four indicators, does this effect trump the positive effect of a Democratic presidency? In short, the answer is no. For three of the four indicators, multivariate regression analysis shows that the president’s party remains significantly correlated with the indicator of Canadian economic performance, and partisan composition of Congress has no significant effect.1

The equation takes the form: Y = a + b1 (party_lag) + b2 (cgop_lag) + b3 (cdem_lag) + e; where Y is the economic indicator, party_lag is coded 1 if the president was a Democrat the previous year, 0 otherwise; cgop_lag is coded 1 if Congress was Republican the previous year, 0 otherwise; cdem_lag is coded 1 if Congress was Democratic the previous year, 0 otherwise; e is a random error term. Detailed results are available upon request directly from the author.

For the unemployment indicator, the presence of a divided Congress (as seen in figure 3) seems to be a bigger factor than the president’s party, but it makes little or no difference which party controls the House and Senate. Periods of high unemployment in Canada are correlated with years when a president has to work with a divided Congress (1981-86, 2001-2002). Because the effect of this variable is lagged one year, the current divided Congress is not included in this analysis.

Figure 3: Indicators of Canadian economic performance with three partisan mixes in the U.S. Congress (with a lag of one year)

Note that I am not arguing that Democratic presidents are uniformly better under all circumstances for the Canadian economy, or that the decisions of Congress, whichever party is in control, make no difference for the Canadian economy. Neither am I making the causal argument that the election of a Democrat entitles every Canadian to a year-end bonus. What I am saying, however, is that decades of evidence can only lead to one conclusion: those who confidently make the claim that Republicans in power are generally better for the Canadian economy than Democrats probably didn’t take a close look, or any look, at the numbers.

WHICH PARTY IN WASHINGTON IS BETTER FOR CANADIAN INVESTORS?

Perhaps this demonstration is not enough, however. In the end, one could argue that growth, jobs, exports, and our own federal or provincial manufacturing don’t really matter. Profits do. What matters is that firms make profits and their stockholders cash in. Clearly, the stock market should do much better under the free-market, low-regulation policies of the Republicans rather than under the heavy hand of the Democrats, shouldn’t it?

To answer this question, I propose the following scenario. Assume that, on 20 January 1953, a Canadian couple, tired of seeing their young son and daughter argue over American politics, offered them a deal: they gave them each $1,000 to invest in a fund based on the Toronto Stock Exchange index, cashable 60 years later. The condition, however, was that they would put their money where their mouth was: each sibling’s respective fund would only fructify when his or her favoured U.S. party was in power. On 20 January 2013, after seeing his fund active for 36 of the past 60 years, the pro-Republican son already knows that he will collect about $2,200. The pro-Democratic daughter, however, doesn’t know exactly how much her fund will yield after only 24 years of activity. But those who still cling to the belief that the Canadian economy fares better when a Republican is in the White House may be surprised to learn that, unless the TSX takes a major hit in the coming months, she will be able to collect more than seven times more than her brother. At the time of writing, this fund would be worth more than $16,300. Any other questions?

Figure 4: Two alternative investment portfolios based on the Toronto Stock Exchange index and active either during Democratic presidencies or during Republican presidencies, 1953-2012.

CONCLUSION

For years, the Canadian public has expressed a clear preference for Democratic candidates in U.S. presidential elections. For years also, Canadians have been told by very serious people that this preference is irrational. Well, maybe it’s not. I am not making the case that all of Canada’s fortunes or misfortunes are determined inside the Washington beltway. After all, what would our own political life be if we couldn’t credit ourselves for our economic successes and blame our own federal or provincial politicians for our failures? If anything, the simple empirical tests reported in this article plainly show that Republican administrations in Washington are not better for Canada than Democratic ones, even from a strictly economic perspective. Whether and to what extent Democratic policies are uniformly favourable to all regions and sectors of the Canadian economy at all times remains open to debate, but I hope that readers of this article will pardon me if, in the future, I become slightly impatient when I hear that the preference of the Canadian public for a Democratic presidential candidates is “economically irrational.”

The party that controls Washington and the policies it implements to steer the massive U.S. economy have effects on that country’s largest trading partner and, we like to think, closest ally. What is also clear, however, is that when we try to assess this effect, we often pay too much attention to the “trees” of trade policy and not enough attention to the “forest” of macroeconomic policies, which ultimately matter much more for the health of Canada’s economy as a whole. Yes, Democratic presidents and their political allies in Congress often make protectionist noises that Canadian exporters do not like to hear. But they also tend to implement policies that favour strong broad-based demand in the U.S. economy, and if demand for their products and services dries up south of the border, whether Congress emits protectionist noises becomes a secondary concern for Canadian businesses and their workers.

This does not, however, alter the basic notion that the preference of Canadians for Barack Obama and his party stems from the fact that the Democrats’ values are closer to their own. This is all the more true in 2012, as the choice that Americans have to make between two contrasting and contending visions of their future is starker than it has been in several decades. It is telling, given the dismal level of support for Mitt Romney north of the border, that a fair proportion of Canadian small-c or large-C conservatives does not approve of the recent turn of the republican party away from the communitarian tradition of American conservatism and toward radical individualism, deepening inequalities, and a devotion to unfettered, winner-takes-all capitalism.

When all is said and done, the real reason why this election is important for us north of the border has little to do with our narrowly defined economic interest. Two starkly different visions of society, the economy, the environment, and foreign policy are at stake in this year’s U.S. election. The choice that our American friends make in November 2012 will inevitably affect the world we live in and the shape of our own society in the future. That’s why their choice matters to us, and that’s why we should care.