Why The Economy Does Better Under Democratic Than Under Republican Presidents

Economy Democrats v Republicans

We’ve known for a long time that if you want to live like a Republican you should vote  Democratic. The economy has consistently been stronger under Democratic presidents than Republican presidents. Even under Obama, despite all the Republican efforts to block recovery, we have seen record increases in corporate profits and the stock market, which should make Republican love him if they ever turn off Fox and look at the real world. While Republicans talk about Democrats supporting big government (despite the biggest increases in the size of government in recent years coming under Republicans), private sector employment also grows more under Democratic presidents.

Jared Bernstein looked at a “new paper by the economists Alan Blinder and Mark Watson that rigorously examines how the economy has performed under presidents since the 1940s.” The answer was clear that the economy grows faster under Democratic presidents than Republicans:

The American economy has grown faster — and scored higher on many other macroeconomic metrics — when the president of the United States is a Democrat rather than a Republican.

The two looked at key macroeconomic variables averaged over 64 years (16 four-year terms), from Harry Truman to Barack Obama. Mr. Blinder and Mr. Watson focus mostly on the 1.8 percent annual difference in real G.D.P. growth. That is, over the full study, real G.D.P. growth averaged 3.33 percent per year. But under Democratic presidents the economy grew 4.35 percent and under Republicans 2.54 percent.

Under Democratic presidents, the economy also spent fewer quarters in recession; added more jobs and more hours worked; and posted larger declines in unemployment and higher corporate profits than under their Republican counterparts. Stock market returns were a lot higher under Democrats as well, but because equity markets are so volatile, that difference is not statistically significant. (By the way, since March 2009, the S.&P. stock index is up 160 percent).

They considered possible reasons.  The difference could not be explained by Democrats inheriting better economies or by deficit spending:

Democrat presidents don’t inherit better economies — to the contrary, they inherit worse ones, at least by the measure of G.D.P. growth. Control of Congress or the Federal Reserve fails to explain the gap. Same for budget and tax policy. That is, it’s not that Democrats juice the economy with deficit spending; the cyclically adjusted budget deficit is actually smaller under the Democrats.

Some of the differences may be due to factors which cannot be explained, possibly even better luck. However Bernstein did point out a couple factors which do contribute to these differences:

The fact that bad fiscal policy — sharp deficit reduction when the economy was still weak — has hurt the current recovery is knowable and important. Though here, too, there’s ambiguity: The recent austerity is mostly the work of Republicans, but the president has also at times bought into it.

Finally it is glaringly obvious that complex, advanced economies need well-functioning federal governments that can accurately diagnose and prescribe; they need governments that can absorb factual information and respond to threats and opportunities. These requirements hold regardless of the president’s party, and the fact that we do not currently have such a federal government is without doubt what’s most important and most scary.

There is another aspect of Republican economic policy which is also harming the economy long term, but the effects don’t vary with the party in office as shorter term indicators do–the increased concentration of wealth by the top one percent. Monica Potts refers to trickle-down economics as The Big, Long, 30-Year Conservative Lie. She has support in this argument from sources which are hardly left wing:

Conservatives have dominated discussions of poverty for a generation with arguments like this one. It’s completely wrong. It’s more than that—it’s just a lie, concocted as cover for policies that overwhelmingly favored the rich. But it took the worst economic crisis since the Great Depression for many economists, liberal or not, to finally say publicly what many had long argued: Inequality is bad for the economy.

The latest to say so is the rating agency Standard and Poor’s, not exactly a bastion of lefty propaganda. An S&P report released August 5 says that rising inequality—gaps in both income and wealth—between the very rich and the rest of us is hurting economic growth. The agency downgraded its forecast for the economy in the coming years because of the record level of inequality and the lack of policy changes to correct for it. The report’s authors argue against the notion that caring about equality necessarily involves a trade-off with “efficiency”—that is, a well-functioning economy.

To be sure, they’re not making a case for a massive government intervention to help low-income Americans. They discuss the benefits of current policy proposals—like raising the federal minimum wage to $10.10 per hour—with the caveats that such changes could have potential negative consequences—like dampening job growth. (Most economists agree that such a small hike wouldn’t have that impact.)

At its core, though, the S&P report does argue that pulling people out of poverty and closing the gap between the 1 percent and the 99 percent will increase economic growth. The authors argue for some redistributive policies, like increased financial aid for post-secondary education. “The challenge now is to find a path toward more sustainable growth, an essential part of which, in our view, is pulling more Americans out of poverty and bolstering the purchasing power of the middle class,” the authors write. “A rising tide lifts all boats…but a lifeboat carrying a few, surrounded by many treading water, risks capsizing.”

Despite their rhetoric, Republicans are no more the party of a strong market economy than they are the party of small government or individual liberty.

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