Which Political Party Is Better For The Economy?

Which Political Party Is Better For The Economy?

David Leonhardt, a reporter at the New York Times, recently reported on research from two economists at Princeton University, Alan Blinder and Mark Watson. The two researchers statistically compared economic performance under all American presidents since Harry Truman and found that growth was better under Democrats than under Republicans, regardless of whatever measure was used. In particular real GDP growth (i.e. above inflation), one of the most common measures of economic performance, showed a large difference. The results were also statistically significant, meaning they can’t be explained by coincidence or luck.

It made no difference which party controlled Congress. The pattern also held regardless of the level of deficit spending (which was actually greater under Republican presidents over the last four decades). The results suggest that economic performance is more influenced by presidential election outcomes than other political factors. That’s been far from intuitively obvious to me, let alone that Democrats have so consistently held the edge.

Much of Blinder & Watson’s research also focuses on trying to understand the causes of the difference. Greater business and consumer spending under Democratic presidents were key contributors to economic growth, particularly during the first year of their administrations. But there’s no evidence that the difference was caused by better fiscal or monetary policies of either party. The two researchers suggest that the Democrats might have benefited more from lesser oil shocks (possibly due to foreign policy), greater defense spending, higher productivity, and possibly stronger concurrent international economic growth (implying that the U.S. does better when the rest of the world also does better). But they caution that more study is needed.

Leonhardt goes farther in surmising that it might be because Republican economic policy since 1980 has been based almost exclusively around tax cuts for the wealthy. He asserts that there’s no evidence that tax cuts improve economic growth except when tax rates have been very high, a situation not seen in the U.S. for many decades. Recent cases in point: the GDP growth rate did not increase after Trump’s 2017 tax cut, yet did improve after Clinton’s tax increase in 1993.

Numerous economists with whom Leonhardt shared the data were unable to offer an explanation. I can’t either. But the takeaway for investors and savers remains what it always has been. Don’t alter your strategy according to the latest presidential election or any political outlook you may have. Continue to follow your financial plan. You might miss out on an opportunity or two, but if you’re confident in the way you or your financial advisor constructed it, you won’t go wrong in the long term.

Here’s a link to the original research: https://pubs.aeaweb.org/doi/pdfplus/10.1257/aer.20140913.

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