Why Republicans Are Bad for Business

Republican politicians bill themselves as pro-business, pro-growth, and pro-opportunity. Yet the financial facts say otherwise. Republican administrations bring hard times, for rich and poor alike. Why are their results so different from their aims? Perhaps Democrats are better at motivating workers.

Prosperity can be measured in many ways. Using the stock market as a measure would seem to bias matters in favor of Republican leaders who, after all, cater first to the needs of Wall Street businesses that they wish to boost.

Take it From the Stock Market
According to a 2012 study, of the Dow Jones Industrial Average since 1900, the stock market returns when Democrats occupy the white House are very much higher than when presidents are Republicans. The average yearly return is 15.31 percent for Democratic presidencies and 5.47 percent for Republican presidencies.

This is a startlingly large difference but the stock market is a bipolar beast subject to manic booms and depressive busts that are often out of touch with how good, or bad, the real economy is, as illustrated by the boom and bust surrounding the great depression in the time of republican presidents Coolidge and Hoover, respectively.

In recent history, we have seen the Internet bubble, the financial crash of 2008 that made George Bush II look bad and the recovery that made Barack Obama look much better.

Surprisingly, scholars have not been able to find consistent policy differences between Democratic and Republican presidents that could account for the partisan behavior of the stock market. Many commentators are inclined to dismiss the entire pattern is a statistical fluke.

The problem with that reasoning is that the pattern applies not just to the sock market but every other major index of economic health, including employment, productivity, and growth rates of gross domestic product (GDP) that increases 4.35 percent annually under Democratic presidents but only 2.54 percent under Republicans.

Why Does the Economy Grow Faster Under Democratic Presidents?
A US president is actually quite limited in what he can do to increase economic vitality. For one thing, his policies might be either promoted, or undercut, by a congress that is friendly, or hostile. Economists Alan Blinder and Mark Watson wondered whether the GDP effect would be increased, or reduced depending on which party controlled either house of Congress but found that the economy grows faster under Democratic presidents even if Republicans control both houses of Congress.

Blinder and Watson found that left-wing leaders also had faster-growing economies in Canada, but not in France, Germany, or the United Kingdom.

As for the Democratic-Republican growth gap, they concluded that much of the "growth gap in the United States comes from business fixed investment and spending on consumer durables. And it comes mostly in the first year of a presidential term." Otherwise, Democratic presidents were lucky in terms of more favorable oil markets ("better oil shocks"), benign international conditions and more optimistic consumer expectations. Even so, Blinder and Watson could only explain half of the party gap in growth rates.

American businesses and consumers evince greater confidence in the wake of a Democratic president getting elected. The buzz lasts for only about a year. Perhaps that short-lived psychological boost is the main reason that the economy does better under Democrats.

Is there a Psychological Explanation?
If the US economy grows faster under Democratic presidents but this has little to do with the official actions of the president, or of Congress, then the effect must be psychological. This is suggested by the elevated confidence of businesses and consumers. The fact that the change is crammed into the first year of the presidency is also suggestive. There is a honeymoon effect where voters and businesses expect the economy to improve and behave accordingly. After a year, their hopes may start to fade.

To the extent that workers are enthused by a new Democratic administration, they may be motivated to work harder, producing more goods and services, as well as spending more and boosting business confidence. Why do Republican administrations engender a more pessimistic mindset. Perhaps they see the world as a more threatening place and project that fear onto participants in the economy.