Thursday, April 3, 2008

Why Democrats are Better on the Economy

A striking empirical regularity is emerging. The US economy experiences better growth and less inequality under Democratic presidents.

Like Paul Krugman I have typically dismissed this as a likely statistical aberration because I could not think of how presidents, democrat or otherwise could affect the economy in the near term. Unlike Paul I have spent most of my life as a Republican and so I have been somewhat hesitant to accept the regularity as well.

However, the data is the data and until it is overturned it is up to us to explain it.

I should not that in the finance literature I have also seen articles purporting higher returns in equity markets during democratic administrations - so it doesn't seem to be class warfare.

My Guess: Lower risk premiums.

What the President can do in the short term to benefit wages and equity prices is reduce risk. If the President handles national and international crises with more adeptly then we should see lower risk premiums, and a greater investments in capital and labor. This should drive up equity prices and wages.

26 comments:

Anonymous said...

There's actually some empirical support for the equity prices part. Matt Krantz, a USA Today columnist, wrote about it in late 2005:

http://www.usatoday.com/money/perfi/columnist/krantz/2005-12-02-presidents_x.htm

happyjuggler0 said...

Maybe the Democrats are less willing to engage in structural reform that will hurt the little guy in the short run, and that they tend to get elected when Republicans anger enough "little guys".

At the same time, Republicans tend to get elected when the economy is showing signs of wear and tear, to which they apply economic medicine whic tastes badly short term.

Or maybe it really is a coincidence, much like superbowl winners predicting the stock market etc. The sample size isn't really big enough to make any statistician happy.

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assenzio86 said...

and what about labor legislation? and what about progressive taxation?

Gregory said...

In this post and the links provided in it I find a disturbing lack of discussion of the data set used.

And when I see results like these my first response is to conclude a self-selection problem, perhaps people going into uncertain times are more likely to choose a republican president?

My second response is to conclude the data set is too small. Afterall, does the data-set go back to lincoln? Where was the cutoff?

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