What Explains the Democratic Economic Advantage?

What can explain the Democratic Advantage—the fact that both the economy and the stock market have performed substantially better under Democratic presidents than Republican ones? Over the period examined by Princeton’s Blinder and Watkins and the longer period I used for stock market performance, there were many different presidents with many different policies, facing a variety of challenges. Besides whether they have a D or R behind their names, are there common threads connecting the presidents of each party?

Blinder and Watkins dismiss fiscal and monetary policy as explanations, concluding that the policies pursued by presidents did not vary greatly between the parties. In the case of fiscal policy this has not been true recently. There has been a huge divide between the parties as to whether it was better to stimulate the economy by increasing spending or to concentrate on reducing deficits. A similar divide appeared during the Great Depression. The fact that this divide appeared only once in the period examined by Blinder and Watkins and only twice during the period I examined makes any statistical analysis very challenging. Still, this difference in philosophy is important and I plan to examine it further in a future article.

In the meantime, here are some other possible explanations:

• Comfort with government. In recent years, the Republican Party has defined itself as opposed to government in general, quoting Ronald Reagan, “government is not the solution to our problem; government is the problem.” If one believes this statement always applies, one response is to deny the existence of issues that may demand some government action, such as climate change, even if that action could stimulate the private sector. Thus Democratic administrations tend to be more supportive of infrastructure investments and government-funded research.

• The government talent pool. In recruiting talented people to an organization, it helps if the organization’s leadership believes in the organization’s mission. If one has a choice of careers, why choose an organization whose leaders regard the organization as harmful?

• The importance of talent. Leaders who regard their organization’s mission as unimportant may feel there is little harm in hiring based on loyalty or ideological beliefs rather than ability. Perhaps this attitude helps explain the lack of plans for rebuilding Iraq after the American invasion or the ineffective response to hurricane Katrina. At the state level, it may help explain the number of petty crimes unearthed in the first John Doe investigation of the Walker campaign organization.

• The growing think tank competence gap. In recent years there has been growth in the number of organizations aimed at analyzing issues and making recommendations. Administrations often draw on these organizations both for ideas and personnel. For example, Democratic administrations draw on the Brookings Institution while Republicans look to the Heritage Foundation. While most think tanks have a point of view, the conservative ones have become much more conclusion driven, dismissing counter evidence. The more the research is driven by ideology rather than empirical evidence the greater the danger for office holders inclined to depend on a particular think tank. George W. Bush’s record suffered because of bad advice about the effect of tax cuts on the economy and the challenges in rebuilding Iraq. Walker’s promise of 250,000 new jobs relied at least in part on thinly researched policy recommendations.

Why the growing quality difference in the output of think tanks on the right or left? Part of the explanation may stem from differences in how they view their role. Increasingly, conservative think tanks like the Heritage Foundation, the Competitive Enterprise Institute, and the Heartland Institute seem to view their role as primarily providing support for policy proposals. For example, these three organizations recently joined 14 others in an open letter to Congress opposing legislation aimed at collecting sales tax on internet sales. Those regarded as more liberal, such as Brookings or the Urban Foundation, tend to be more cautious, regarding their role as exploring possible solutions to society’s problems. As a result, reports from the second group are much more filled with caveats and exceptions, perhaps making them less effective as advocacy.

• Inequality. Up until recently growing inequality has been treated mostly as a social problem, not as a drag on the economy. In fact, inequality was often considered the price of economic growth.  Recently there is increasing recognition that inequality has become a drag on growth, reflected  in a recent report from S&P Capital titled how increasing income inequality is dampening U.S. economic growth, and possible ways to change the tide.

Businesses too are becoming aware that if their customers are hurting, their sales suffer, as Walmart notes in its latest annual report:

The total U.S. comparable store and club sales for fiscal 2014 were negatively impacted by lower consumer spending primarily due to the slow recovery in general economic conditions, the 2% increase in the 2013 payroll tax rate, and the reduction in government food benefits…..

• Attitudes towards regulation. The recent recession was largely caused by the collapse of an overheated housing market and poorly understood financial instruments. A free market depends on the right kind of regulation. Despite being considered the godfather of free market economics, Adam Smith was not naïve about the need for regulation:

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.

When all these differences are considered together, a plausible case can be made that data showing Democrats helping business more than Republicans are not a statistical fluke. Is the case proven? Hardly. But the evidence is pretty strong.

If the evidence supports the proposition that Democrats are better for business, why does most of the business community try to elect Republicans?

Recently it has become popular to label businesses as “job creators.” This is nuts. The job creators are customers. Every month the National Federation of Independent Businesses publishes a Small Business Optimism Index based on a survey of its members. Among the questions asked are about expected sales and hiring plans. The responses make it is very clear that sales are the driver of hiring.

The notion that business, not customers, creates jobs promotes a damaging narcissism in which the care and feeding of business take precedence over the success of its customers. As the recession dragged on, the survey made it clear that the NFIB’s members were hurting because their customers were hurting. Yet the NFIB opposed legislation that would put more money in the customers’ pockets, whether it was the stimulus package or the Affordable Care Act. In Wisconsin, we see ALEC and the Heritage Foundation supporting proposals that would make taxes more regressive, promoting greater inequality and slowing the economy.

I suggest two factors behind business’ embrace of Republicans:

1. Much of the Democratic base is not very welcoming to business people or to those with an understanding of the power of a market economy. It is hard to win the support of people if you make it clear you don’t like them.
2. Board members of organizations like the NFIB, have two constituencies: members of the organization and themselves. On the one hand they represent businesses, many of which are still struggling because their customers are struggling. But a business owner or top executive on the board of a major trade association is likely to have done very well financially. Unless very far-sighted, that person’s personal interest is to support measures that would decrease the burden on wealthy people.

Democrats must recognize that Wisconsin needs a healthy business community. Business leaders must recognize that their prosperity is intimately bound up with the prosperity of their customers. Neither the customers nor businesses are well served when if the organizations that purport to represent business support policies that hurt customers.