US Elections and the Canadian Economy

DEBATES
Pierre Martin
US elections and the
Canadian economy
Is a republican in the White House really what’s best for Canada’s
economy?
Canadians are fascinated with American elections. In 2012, as in previous
election years, Canadians have followed the twists and turns of the US 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 US 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
Pierre Martin is a professor of political science at the Université de Montréal, where he also
holds the chair in American political and economic studies.
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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
percent of Canadians thought that Obama’s presidency has been good for
Canada, against only 13 percent of Canadians who thought the opposite. The
same poll shows Obama would win 65 percent of the vote among Canadians,
compared to then-presumed Republican challenger Mitt Romney’s nine
percent.1
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,2 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.3
Even if public opinion and the news media tend to lean heavily in
favour of the Democrats, a recurring theme of commentary on Canada-US
1 On 2008, see Compas, Inc., “Barack Obama, Canadian Idol, Quebec Super-Idol,”
28 November 2008, www.docstoc.com. For 2012, see Angus Reid Public Opinion,
“Obamania is alive and well in Canada and Britain,” Press release, 31 May 2012, www.
angus-reid.com.
2 On Bush’s “Jacksonian” foreign policy and its rejection by Canadians, who tend to
be more in tune with the Wilsonian tradition, see David Haglund, “Whose divergence?
Canada-US relations in a period of Jacksonian ascendancy,” Policy Options (October
2004): 34-40.
3 CROP poll published by La Presse, 15 October 2004, A6. The poll gave Kerry a 60-20
edge over Bush in Canada. Also, 93 percent claimed it was important for Canada to
have a good bilateral relationship with the US, and even if they were highly dissatisfied
with the incumbent in the White House, 65 percent thought US-Canada relations were
good.
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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-US 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.4 Their
comments echoed those of other pundits or politicians, who emphasized the
potential advantages of a Republican administration for the energy sector.
Notably, former US ambassador to Canada David Wilkins, a Republican,
stated earlier this year that “Mitt Romney would be a better US president for
Canada than Barack Obama because he’d curb protectionism and expand
energy markets.”5
This is nothing new. In 2008 the former US 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
4 Derek H. Burney and Fen Osler Hampson, “How Obama lost Canada: Botching
relations with the United States’ biggest trade partner,” Foreign Affairs (June 2012),
online ed.
5 Robert Benzie, “Mitt Romney would be better for Canada than Barack Obama, says
former U.S. envoy David Wilkins,” Toronto Star, 9 February 2012. See also Jameson
Berkow, “Winner of U.S. election to play key role in Canadian industry,” National
Post, 31 August 2012. Republican politicians also tend to make their case plainly, as
did US Representative Darrell Issa (R-Ca), who zeroed in on the Romney promise to
jumpstart the Keystone pipeline. See Bryn Weese, “Romney win would do wonders for
Canadian economy: Congressman,” Sun News, 27 August 2012.
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of Representatives and Senate would spell trouble for Canada’s exporters.6
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 2008.7 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.8 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 US (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 percent. When a Democrat occupied the White
6 Barrie McKenna, “Is Obama right for Canada? Experts say trade, energy and
economic ties to the U.S. could suffer for Canada under Democrat leader,” Globe and
Mail, 9 June 2008.
7 Alexander Moens and Derrick Schroeter, “Canada and Obama: Canada’s Stake in the
2008 US Election,” Fraser Institute, November 2008.
8 The use of a lag of one year to assess the economic performance of US presidential
administrations reflects the realistic assumption that the economy does not respond
immediately to monetary or fiscal policy changes and is empirically consistent with
measured reactions to these changes. For a recent discussion of this practice, see
Larry Bartels, Unequal democracy: The political economy of the new gilded age (Princeton:
Princeton University Press, 2008), 31-34. All the tests presented in this article were
also conducted without this one-year lag. The results are broadly similar, albeit not
as strong.
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House, average growth the following year was 2.92 percent, compared to 1.34
percent 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).9 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.
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. Based on
Figure 1: Average annual growth of Canada’s real per capita GDP during
each US presidency (with a lag of one year)
9 Statistics used in series 1 (GDP), 2 (unemployment) and 4 (manufacturing) were
retrieved from Federal Reserve Economic Data (FRED), www.research.stlouisfed.
org. Series 3 was obtained from Statistics Canada’s CANSIM interface. Series 1:
Real GDP per Capita in Canada (CANRGDPC in FRED), Percent Change from Year
Ago, Annual); Series 2: Harmonized Unemployment Rate: All Persons for Canada
(CANURHARMADSMEI in FRED), Annual, Seasonally Adjusted); Series 3: Statistics
Canada, Table 228-0003, Merchandise imports and exports, annual (dollars); Series
4: Output in Manufacturing in Canada (CANOTPT in FRED). TSX series (figure 4):
historical data from the web site tradingeconomics.com. For earlier years, the index
value is an estimation based on monthly averages for January. For more recent
decades, they correspond to the actual closing value on inauguration day (20 January).
The final value in graphic 4 is based on TSX closing value on 11 September 2012.
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this most important indicator, it is not possible to conclude that Republican
presidents are better for the Canadian economy.
Figure 2 : Average performance of the Canadian economy on four indicators
during Democratic presidencies compared with Republican presidencies
(with a lag of one year)
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 highemployment macroeconomic policies in the US,10 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 US 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
10 See, for example, the classic analysis of Douglas A. Hibbs, The American political economy:
Macroeconomics and electoral politics (Cambridge: Harvard University Press, 1987).
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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 US 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
percent annually during Democratic presidencies and by 1.7 percent 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
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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.
Figure 3: Indicators of Canadian economic performance with three partisan
mixes in the US Congress (with a lag of one year)
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 analysis11 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. For the unemployment indicator, the presence of
a divided Congress (as seen in figure 3) seems to be a bigger factor than the
11 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.
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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.
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 US 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 proDemocratic 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?
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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 US 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 US economy have effects on that country’s largest trading
partner and, we like to think, closest ally. What is also clear, however,
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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 US 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.12
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 US 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.
12 On recent changes in American conservatism and their potentially profound
consequences for American society, I strongly recommend this recent essay by E.J.
Dionne, Our Divided Political Heart: The Battle for the American Idea in an Age of
Discontent (New York: Bloomsbury Publishing, 2012). Dionne’s observations on the
radicalization of the Republican party are compatible with those of the unimpeachably
bipartisan duo of Thomas E. Mann and Norman J. Ornstein, whose recent book lays
the blame for the recent dysfunctional climate of polarization in Washington squarely
on the Republican party’s shoulders. See Mann and Ornstein, It’s Even Worse Than
it Looks: How the American Constitutional System Collided with the New Politics of
Extremism (New York: Basic Books, 2012).
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