The US economy performs better under Democratic presidents. Why?
Since World War II, economic growth has been faster in the US under Democratic presidents than under Republican ones. This column documents that which party controls Congress does not matter for growth, that the Democratic growth advantage is concentrated in the first two years of a presidency, and that presidential party affiliation Granger-causes growth. Neither fiscal nor monetary policy can account for this gap. Instead, the factors that have explanatory promise are: shocks to oil prices, total factor productivity, European growth, and consumer expectations of future economic conditions.
Economists and political scientists – not to mention the political commentariat – have devoted a huge amount of attention to the well-established fact that faster economic growth helps re-elect the incumbent party (see, for example, Fair 2011 for the US). But what about causation in the opposite direction – from election outcomes to economic performance? It turns out that the US economy grows faster – indeed, performs better by almost every metric – when a Democratic president occupies the White House.
This partisan gap has barely been noticed by researchers, but it is wide.1 Since the end of World War II, there have been 16 complete four-year presidential terms - seven Democratic and nine Republican. Growth of real GDP averaged 4.35% per annum under the Democratic presidents but only 2.54% under the Republicans. That partisan growth gap of 1.8 percentage points is large by any standard - it implies that real GDP grew by 18.6% during a typical Democratic four-year term, but only by 10.6% during a typical Republican term - and it is statistically significant despite the relative paucity of data.2 In fact, as Figure 1 shows, growth has always slowed down when a Republican president replaced a Democrat and always sped up when a Democrat replaced a Republican. There are no exceptions.3
Similar partisan gaps favouring Democrats – some larger, some smaller, and not always significant – appear in almost any macroeconomic indicator you can think of: the incidence of NBER recessions, employment growth, business investment growth, stock market returns, the profit share of GDP, and so on.
Figure 1. Average annualised GDP growth, by presidential term
The data hold more surprises. Here are a few:
- Even though the US Constitution assigns power over the budget (and most other economic powers) to Congress, not to the president, there is no difference in growth rates depending on which party controls Congress. It’s the presidency that matters.
- The Democratic growth advantage is concentrated in the first two years of a presidency, especially the first, even though Republicans bequeath much slower-growing economies to Democrats and US GDP growth is positively serially correlated (ρ ≈ 0.40 in quarterly data).
- As indicated both by time series models and by genuine ex ante forecasts, Democrats do not inherit economies that are poised for more rapid growth. Granger-causality runs from party-to-growth not from growth-to-party.
Trying to explain the partisan growth gap
Confronted with such stark partisan differences, a macroeconomist naturally wonders whether the explanation could be that fiscal policy was, on average, more expansionary under Democrats. We assess this possibility in a variety of ways and come up with the same answer: no. What about monetary policy, despite the Federal Reserve’s vaunted independence from politics? The answer here is that, if anything, monetary policy was more pro-growth under Republican presidents.4
If the partisan gap cannot be explained by differential monetary and fiscal policy, what does explain it? And do these explanatory factors suggest it was good luck or good policy? We searched over a wide variety of factors, mostly entered in the form of econometric ‘shocks’, that is, as residuals from regressions that include the variable’s own lags and the current and lagged values of GDP growth. Four showed econometric promise:5
- Oil price shocks;
- Total factor productivity (TFP) shocks, adjusted to remove cyclical influences;
- Foreign (that is, European) growth shocks;
- Shocks to consumer expectations of future economic conditions.
In addition, defence spending shocks mattered in samples that include the Korean War, but not much in samples that do not. Using all five of these variables enables us to explain about half of the partisan gap in GDP growth rates since 1947.
As we peruse the list of explanatory variables, the first (oil shocks) looks to be mainly good luck, although US foreign policy (rather than economic policy) certainly played a role. (Think about George W Bush’s invasion of Iraq, for example.) The second variable (TFP) should in principle measure improvements in technology – and so be mostly driven by luck. But a wide variety of economic policies, ranging from R&D spending to regulation and much else, might influence TFP in multiple, subtle ways. And TFP shocks affect the economy with long lags, so that a portion of the TFP-induced strong growth for Democrats was inherited from previous administrations. The third (real growth in Europe) should not have much to do with US economic policies. And when you couple the fourth variable (consumer expectations) with the observed fact that spending on consumer durables grows much faster under Democrats, you get a tantalising suggestion of a self-fulfilling prophecy – consumers, expecting faster growth under Democratic presidents, buy more durable goods on that belief, which makes the economy grow faster. Did they know something economists didn’t?6
These findings raise a host of questions. Among them:
- Is the basic finding limited to post-World War II data?
We think not. We found a similar (though smaller) partisan growth gap in US data going all the way back to 1875. But the 1875–1947 data are dominated by the administration of Franklin D Roosevelt, during which real GDP grew at a heady 7.4% annual rate.
- Are there similar partisan gaps in other countries?
We looked briefly at four other large democracies with stable two-party systems: Canada, the UK, France, and Germany. The Canadian data display a similar (though not quite as large) GDP growth gap in favour of Liberal over Conservative prime ministers. But that is not true in any of the three European countries.
Our best econometric efforts explained little more than half of the Democratic growth gap - our ‘glass’ wound up literally half full and half empty. What factors explain the rest? Hopefully, further research will cast some light on that question.