Of politics and Sith mind tricks

Does the party in power matter for economic performance?

Dr. Elliott Parker is a professor of economics at the University of Nevada, Reno.

Polls in 2004 showed that a large number of voters believed that Saddam Hussein’s government participated in the terrorist attacks of 9/11. How could so many Americans have been so mistaken about such a basic fact? Perhaps the political discourse at the time confused the American public, and the repetition of false or misleading statements managed to convince people that something was true when, in fact, it was false—a sort of mind trick on the electorate, not unlike those performed by the Sith masters of the dark side of the force in Star Wars.

It is worth analyzing popular perceptions occasionally to see if they are based on facts or not. As a professor of economics, I recently became curious about whether there was economic evidence supporting two other widely held beliefs: that the Republican Party is better for the economy than the Democratic Party, and that the Democratic Party is more the party of big government than the Republican Party. I found that government statistics demonstrate that both beliefs are simply false.

Growth and the economy
Since 1949, real Gross Domestic Product has grown significantly faster under Democratic administrations, by 4.2 percent per year on average compared to only 2.9 percent per year under Republican administrations. Adjusting for population growth, the postwar economy grew almost twice as fast under Democratic administrations. This comparison holds true for the Clinton administration versus the current Bush administration, but it also holds true for Democratic and Republican administrations before Clinton, and the differences are statistically significant. Of course, the differences would be even greater if I began the comparison in 1929, but including the Great Depression and the Second World War does not make for a fair comparison.

Democrats do better under a variety of other measures of economic performance, as well. Since 1949, unemployment rates rose on average under Republican administrations but fell under Democratic administrations. Productivity grew twice as fast under Democrats. Weekly earnings for workers rose faster, corporate profits were higher under Democrats, and even the stock market did better. In fact, researchers have found a “Democrat anomaly,” in which the stock market does even better under Democrats than can be explained by the better economy. Rhetoric aside, the facts show that the economy has done better under Democrats than Republicans.

The party of big government
How do Democrats and Republicans compare on the size of government? As it turns out, Republicans have become the party of big government, not Democrats. During the Clinton administration, federal spending fell from 23 percent of GDP in 1992 to 19 percent in 2000, a decline that began before Republicans took control of Congress in 1994. During the first five years of the current Bush administration, the share of federal spending rose at rates not seen since, well, the first Bush administration. For the entire postwar period, federal expenditures as a share of GDP were higher on average under Republicans, and the peaks in federal spending over the last 30 years or more have all come under Republicans (Ford, Reagan, and Bush I).

Of course, another way to measure the size of government is tax revenue, and federal tax receipts have indeed generally grown faster under Democrats than Republicans. However, this can be largely attributed not to increases in the tax rate, but rather to the faster growth seen under Democratic administrations. Prior to the tax cuts of the current administration, tax receipts have shown a very close correlation with growth, and Democratic administrations have tended to preside over faster growth. Since 2000, however, we have witnessed the largest drop in tax receipts since the end of the Second World War, even as a share of GDP, and this drop is much more (currently about $600 billion per year more) than can be explained by the lower average growth of the past five years.

Because federal expenditures have been higher under Republicans and tax receipts have been lower, Republicans have become the party of fiscal irresponsibility. Since 1949, the federal budget deficit as a share of GDP has been more than four times higher under Republicans, and not because they inherited the problem; the deficit has been much larger at the end of the average Republican term of office than it was at the start, while the deficit has fallen during the average Democratic administration.

Under the present Bush administration, the continuing budget deficits have helped to cause a record trade deficit—even as a share of GDP—and massive borrowing from foreigners. The amount the federal government now owes foreign lenders has doubled to more than $2 trillion, and foreigners now hold more than half of the Federal government’s privately held debt. As a government and as a country, we are borrowing from future generations of Americans to pay back future generations of foreigners. If Democrats are the “tax and spend” party, then Republicans have become the “borrow and spend more” party.

Why the misconception?
It is not clear exactly why this widespread misperception exists or why it persists. Perhaps endless repetition by Republican politicians and some media that Democrats are the tax and spend party, while Republicans are the party of business, has had the effect of doing a Sith mind trick on the American public. But facts are facts, and we should try to set the public straight. I am not sure why the economy has performed better under Democrats than Republicans, and most economists agree that there are many factors at work, but I think it could be in part about basic political attitudes. Republicans are more likely to be economic fundamentalists who believe that government is the problem, and therefore see less reason to craft intelligent solutions to economic problems because they think government’s real objective should be to just get out of the way. With this approach, solutions may be simple to craft and easy to explain to voters, even when they are wrong. In comparison, Democrats are more likely to believe that government, when competently led, can actually fix many problems. While this attitude may be harder to explain to voters, it evidently leads to better economic policies.