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2012 Election

Myth #4: Democrats are bad for business


It has long been an article of faith amongst Republicans that only their party can be good for the economy, because Democrats are in fact closet socialists. This tradition goes back all the way to the founding of the Republican Party, which was disdained by the 1850’s version of the Democratic Party as Yankee stockjobbers and rabid New England abolitionists. The Republicans meanwhile denounced the Democrats as a “slavocracy” consisting of indolent and ignorant Southern aristocrats living a life of degenerate leisure on their vast cotton latifundia.

Much has changed, but much is still the same. The “slavocracy” is gone, but Republicans still consider Democrats to be indolent and degenerate, more interested in living off the government dole than in breaking a sweat and working for a living. Democrats still consider Republicans to be fat cat bankers and industrialists, hoarding up their ill-gotten wealth from the backs of widows, orphans and minorities.

This election, perhaps more than any since the 1980 election between Carter and Reagan, these attitudes are front-and-center of the political debate. The Tea Party movement, Occupy Wall Street, the “47 percent” and “they didn’t build that” have highlighted some of the fundamental divisions between the parties, regardless  of the degree to which they may (or may not) represent extreme positions of the respective parties.

This election will largely be determined by the performance of the economy, and how the public perceives the capacity of the two candidates to continue or improve upon the previous four years. Mitt Romney’s message, indeed his only hope of victory, is to convince Americans that his policies and those of the GOP, will be superior to those of President Obama and the Democratic Party. He touts his own experience as a successful business leader with Bain Capital as his primary qualifications.

Mr. Romney has not been very explicit in describing any other aspect of his economic recovery plans. The only discernible elements in his ideas are the following two (highly questionable) propositions:

  1. Barack Obama is “anti-business” and I’m not Barack Obama;
  2. Trust me on the rest, I’m rich.

Common Sense is going to look at both of Mr. Romney’s assertions. Paul Krugman points out that it is actually unfair to call them Mr. Romney’s – they are part of Republican orthodoxy.

“Republican leaders have long insisted that the main thing holding the economy back is the ’uncertainty’ created by President Obama’s statements — roughly speaking, that businesspeople aren’t investing because Mr. Obama has hurt their feelings. If you believe that, it makes sense to argue that changing presidents would, all by itself cause an economic revival.”[1]

Unfortunately, there are many Americans who are perfectly disposed to believe this declaration without the slightest shred of economic evidence. I’ll provide at least that much, without any hope or expectation that conservatives will be converted. Why discard a useful lie when the truth is so much more inconvenient?

The Measure of the Myth

So are Democrats bad for business? Assuming they were, we would expect noticeably different results in business outcomes between Democratic and Republican Administrations.  At the very least we could expect it after Ronald Reagan and “trickle-down” economic theory gained credence, since pre-Carter Republicans lived under the “shackles” of the New Deal.

Let’s take a look at five economic measures to see first whether economic outcomes were substantially worse under Democrats and, second, whether businesses reacted adversely to Democratic Administrations. In the outcomes column, we’ll look at:

  1. Real GDP growth;
  2. % annual change in private non-farm payrolls;
  3. Corporate profits before and after tax;

In the business reactions column, we’ll include:

  1. Real non-residential business investment;
  2. % annual change in equity valuations;

If Democratic Administrations were anathema to business and investors in general, we would expect investment in business and equities to drop just prior to a Democratic Administration assuming office, and for economic outcomes to begin to suffer 6 to 12 months after that. We should similarly see a “business boom” in investment and equities upon Republican electoral victories, with improved economic performance shortly thereafter.

Real GDP

Tracking real GDP growth on a quarterly basis turns out to be “noisy” – there are too many factors at play in determining the direction of the economy, so we end up having examples of both good and bad performance at the start of a new Administration for both Republicans and Democrats. This, however, in and of itself gives us a clue that the affiliation of the November victor is largely irrelevant to the decision of business people to invest or not.

If we look at the average growth of real GDP over the entire period of each President’s administration, we get a clearer picture. The most successful Administrations were Clinton’s second term and Reagan’s second term. After that, Clinton’s first term and Carter’s term both experienced – on average – greater economic growth than any other Republican President, including Reagan’s first term and all three Bush terms.


Most people remember the Carter era as one of high unemployment and high prices with low economic growth. President Carter had the misfortune of presiding over the Second Oil Shock of 1979, when the US economy fell off a cliff. In fact, during the first 9 quarters of the Carter Administration, the economy grew at a blistering 5.2% rate year-on-year.


I’m not going to include the table of GDP growth for each President after Carter; if you’re interested, they’re at the end of this article in the “Sources and Notes” section.

The table makes clear that President Obama has had the weakest average performance on any recent President; then again, President Obama inherited the worst economic crisis since the Great Depression. We would have to go back at least that far to find a comparable set of data. What’s clear enough is that the US economy was very weak even at the beginning of President W Bush’s second term – the economy grew a very meager 1.8% over those four years.


Interestingly enough, if we discount any quarter with negative GDP growth (i.e. Bush’s last 2 quarters and Obama’s first 4 quarters) these are the average growth rates of real GDP:

  • George W Bush, second term:   2.37% over 14 quarters
  • Barack Obama, first term:            2.15% over 10 quarters

That’s not a very large difference, and it shows that whatever the fundamental weakness may be in the US economy (that’s a subject for another article) it has nothing to do with who is in the White House.

New Jobs

Job creation is one of the most relevant measures of economic performance, and the one that is most relevant to the mass of voters. Increases in production may or may not lead to employment increases, depending on how much excess capacity exists and the degree of globalization or openness of the economy. If businesses are hiring workers, though, it shows that there is confidence in the economy – it is more difficult and expensive to hire new staff than to draw-down inventories.


On this metric, the Democratic record is substantially superior to that of the Republicans. The “dismal” Carter Administration created twice as many jobs as Reagan’s first term and almost as many as Reagan’s second term. None of the three Bush Administrations were remotely successful from a jobs standpoint, while the 8 years under Clinton were a Golden Age of employment growth.

President Obama has a dismal record – on aggregate – but to be fair, the Great Recession destroyed 8.1 million jobs. President Obama has recouped 3.4 million of those. To put things in perspective, if we eliminate every month of job destruction of the Great Recession (Feb 2008 to Sep 2010), we see that President Bush created 5.7 million jobs over 37 months and President Obama created 3.4 million jobs over 24 months. That comes out to a monthly average of 154,000 vs. 142,000 new jobs: in other words, practically identical.

Just as with the aggregate metric of GDP, whatever ails the US job market was already there from 2004 to 2007 and remains as an active drag on employment.


Corporate Profits

If gross domestic product is too general a metric, and new job creation is also only an indirect indicator, then surely corporate profits is one that his nearest and dearest to the heart of every business person. After all, increasing profitability is the primary, perhaps only, goal and yardstick for every CEO and business owner. If Democrats are the bane of business, it must be reflected in lower corporate profits during their administrations. That would be enough to anger any Board of Directors.


Unfortunately, that argument doesn’t seem to hold any water either. Corporate profits fell sharply during the Carter Administration – but that was to be expected as the Fed raised interest rates to historic highs and energy prices shot up. Businesses were hit with the double whammy of higher input prices and higher financing and debt servicing costs.

Conditions improved moderately under Reagan – by 1983, Paul Volcker had lowered the Federal Funds Rate from 19% to under 9%[2], while the nominal price of a barrel of crude oil fell from a high of $36.83 to $29.55[3], a drop of 33%. In fact, Q4 1982 is the low point of the whole series; thereafter, corporate profits rise steadily though they do not again exceed their Carter era highs until the Administration of Bill Clinton.

Corporate profits increased even more rapidly during the H Bush presidency despite anemic GDP and job growth – part of this is the business euphoria associated with bubble economics, part of this by the increasing globalization of major US corporations and banks. Job creation shifted overseas, but the profits kept rolling in.

Disturbingly (perhaps), corporate profits have recovered and exceeded their W Bush era highs during the Obama Administration. In fact, within 5 quarters of the deepest part of the recession for businesses (Q4 2008), corporate pre-tax profits had regained 93% of the pre-crisis level while after tax profits had already exceeded that maximum. From a profit point of view, not only had US businesses not suffered under the horrible tyranny of the Black Kenyan Socialist, they had their best performance ever.


Another measure of business confidence is the amount that they are investing in their productive capacity.  If businesses expect the economy to improve or remain strong, they will invest more in plant and equipment, buy new machinery, and generally take advantage of favorable conditions. Our indicator is private investment – since we’re not interested in what governments are investing at the time – and non-residential investment, since housing moves at a different rhythm.

Since investment decisions are not made on the spur of the moment, we’ll look at the average investment over the 4 quarters preceding the election and the 4 quarters following the election. That should be a long enough time horizon for businesses to see the outcome of the election and react. In the case of a “bad” Democratic victory, their reaction would presumably be by reducing investment following the election.


There’s not much of a story. Apparently, businesses continue to invest in profitable activities whether a virtuous Republican or a wicked Democrat is elected.

Equity Markets

America is a country that has the stock market on the brain. It is maximum expression of capitalism, and the cesspool of speculators, robber barons and stockjobbers. It has been beamed at Americans 24 hours a day, 7 days a week, even when closed, since at least the late 1980’s. Most Americans would be able to correctly quote you the level of one of the major indices, like the S&P 500, than to quote the Decalogue or tell you how many amendments there are to the US Constitution (there are 27).

Most Americans are investors too, either directly through a brokerage account, or indirectly, through a pensions fund opened in their name by their employer. Stock markets contain a significant portion of American savings, and their performance is a major indicator not only of overall economic health, but of investor sentiment as well.

If investors are unhappy because a Democrat has won an election, we would expect that at least some of them would become bears and pull money out of the market. So I look at the Dow Jones Composite Average and the S&P 500 and compare their average end of month stock price for the three months prior to the general election, and compare it with the average stock price for the three months after the election (including the election month). If Democrats cause panic amongst investors, we would expect to see a short-term market dip (a value below 100). Any value above 100 means that the average stock price is higher, indicating the absence of bears.


The comparison suggests that there is no correlation between the short-term movement of the valuations of these two broad market indices and the election of a Democrat or a Republican. President Obama was, of course, pummeled for being elected in the worst market retraction in three quarters of a century, which makes him an outlier.

Looking at the overall returns on the Dow Jones Composite and S&P over each President’s term of office doesn’t change our conclusion any either. If anything, it suggests that President W Bush had an exceptionally weak two terms from a market performance point of view. Meanwhile, under President Obama, markets have come roaring back after reaching their nadir in February-March 2009.


An Inconvenient Truth

We’ve looked at five key economic indicators over the span of 36 years and 6 different Presidents: three Republicans and three Democrats. We’ve seen that election of “anti-business” Democrats does not lead to a weak economy, job loss, falling profits, disinvestment or bear markets. In fact, the record of the Democratic Presidents is as good as or better than that of the Republican Presidents: they hold the edge in real GDP growth and job creation, possibly in corporate profit growth as well.

Yet the myth persists. And in 2012 it is undeniably Mitt Romney who is receiving disproportionately the support and donations of corporate America. It is obviously not from fear of “anti-business” Democrats. What explains this?

In 2007, the share of national income of the top 1 percent reached 23.5%[4]. The last time this concentration of national income was so high? 1928. The following year, the stock market crashed, and the Great Depression began. Curiously enough, the modern peak was followed in 2008 by another crash, that of the housing bubble, leading to the “Great Recession.”

Between 1976 and 2007, the poorest 20% of families saw their incomes increase by 3% while GDP increased by 162%. Mean income went from $16,480 to $16,896. The top 5% of families increased their incomes by 90%. Mean income went from $175,107 to $332,943.


Over the same period of time, the bottom 80% of families saw their shares of national income fall; it was redistributed to the top 20% of families.


It’s not complicated. Mr. Romney has promised to make the Bush-era tax cuts permanent. He has promised to lower corporate taxes, to lower capital gains taxes and to reduce the top income tax brackets. In other words, he has promised to make permanent and perpetuate the redistribution of national wealth from the bottom 80% of families to the top 20% of families. In fact, 71% of the increase was taken by the top 5% of families.

President Obama has proposed raising taxes on the top 20%. He has proposed returning the capital gains tax and the top income tax brackets to their Clinton-era levels. Republicans accuse Mr. Obama of class warfare and redistribution politics: they should know, they are the experts in it.

This isn’t about business attitudes or economic acumen: the data shows Democrats to lead Republicans in almost every measure of both. This is about taxation, and the perpetuation of the largest increase in inequality since the 1920’s. Republicans are determined to protect the incomes and privileges of the top 5%. Democrats are determined to give the bottom 80% their fair share of the national wealth – wealth which is created not just by bankers, CEOs and hedge fund managers, but by the back-breaking efforts of millions of hard-working Americans.

In any case, this myth is busted.



Sources and Notes

 [1] Krugman, Paul, “The Optimism Cure,” New York Times, 23 September 2012
[2] Effective Federal Funds rate, Monthly, Not Seasonally Adjusted, Federal Reserve Economic Database (FRED), Federal Reserve Bank of St. Louis
[3] BP Statistical Review of World Energy – June 2012
[4] Piketty, Thomas and Saez, Emmanuel, “Income Inequality in the United States, 1913-1998,” Quarterly Journal of Economics, 118(1), 2003

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