Data Wonk

What Explains the Democratic Economic Advantage?

Possible explanations for why the economy and stock market perform better under Democratic presidents.

By - Sep 25th, 2014 12:53 pm

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.

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.

7 thoughts on “Data Wonk: What Explains the Democratic Economic Advantage?”

  1. Eric S says:

    Thank you for pointing out that consumers/customers are the job creators, not business owners.

  2. Andy says:

    Saying consumers create jobs is like saying gasoline makes your car go. It is an extremely important pieces of the puzzle, the more you have the further you can drive, and certainly the car would go nowhere if not for the gas in the tank. However, it’s the engine that uses that gas to create the motion of the car.

    Consumers by themselves do nothing to create jobs. Demand without supply is just shortage. Without business you have no supply, no spending, no jobs.

    However, this is changing the argument that most democrats like to make… the main issue I have is when people say government creates jobs. The government’s ability to directly create jobs is extremely limited and inefficient. The private sector does and always will be the best place to create jobs.

    Further, you also recognize that the more money consumers have and spend, the more jobs are created. This goes to the fundamental idea that letting people keep as much of the money they earn as possible is the best thing for our economy. You probably see where I’m going here but let me spell it out. Lower tax rates helps create jobs.

  3. Jeff Jordan says:

    Supply and Demand. The only time the government causes deep harm in the so called “free market” is when we have policies that adversely affect one side of this scale. The balance if fairness in the market is the need for regulation by the government to protect society. A vital marketplace is a necessary and desirable for a democratic society. Anyone that seriously believes that government doesn’t have a role in the conduct of a ‘Free Market” is deluding themselves. And who makes sure the government doesn’t go too far? Voters. For instance, If your governor promises you he is going to create 250,000 jobs and he doesn’t even come close, maybe you should think about replacing him.

  4. PMD says:

    Except that tax cuts really don’t create jobs. Two seconds on Google will tell you that.

    Donald Marron, director of the highly regarded Tax Policy Center and a former Bush administration official in 2012:

    “At the level of taxes we’ve been at the last couple decades and the magnitude of the changes we’ve had, it’s hard to make the argument that tax rates have a big effect on economic growth.”

    Andy you are no economist.

  5. Chris Byhre says:

    I didn’t see anywhere that Andy claimed to be an economist, just someone with some good ideas. Jeff, if you think Walker falling short of his 250k jobs pledge should lead to his defeat in November then surely you must have wanted Obama to lose his reelection bid 2 years ago after his failed stimulus never even came close to the promises he made for it. Included in this was his promise that unemployment would be kept below 8% with this scheme when in fact it rose to near 10% after we burned through all that money. Bring your ID’s with you and vote in November.

  6. Andy says:

    PMD, you’re over simplifying Marron’s position. I started to respond to that point directly but I found my response was getting rather long winded.

    To bring this back around, I’ll just point out that Bruce Thompson was the one who suggested customers and how much they spend is what dictates job growth. I was just making the logical connection that cutting taxes is one way to give customers more money to spend.

  7. Pat says:

    Why companies should receive credits and entitlements for job shredding is a question of importance for the 21st Century. When job shredding may be blamed for reducing freedom, and national strength, and threatened America with a no job recovery, the question is novel, and one essential to be answered for America’s survival.

    GOP needs to prove its “job creator” label preference rather than “job shredder,” and should host conferences for brainstorming how bottom up innovation may be accomplished, because top down innovation has yielded only more risk, fewer jobs, and more instability.

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