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2012 Election

Myth #4: Democrats are bad for business

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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.

 Investment

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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Discussion

2 Responses to “Myth #4: Democrats are bad for business”

  1. These are strawman arguments. The Clinton years were the best years so far in my lifetime but with the advent of the PC and the internet the decade should have been much better. I wonder how the economy and jobs relates to government spending. I would bet that government spending is directly porportional to the economy. Regan achieved a high GDP considering his first years we were in a sereve recession. There are many factors that play into the economy. From my experience, the economy is good when the private sector creates jobs and invents good products. The only way a president can affect the economy is through government spending or tax policy. The 90s the economy was mostly drvien by the private sector and had zero to do with Clinton. Regan created jobs through the private sector by his tax policies. I go by personal experiences and my life was better in the 80s, 90s and the Bush years. You use the excuse Obama had poor economic growth because of the recession. Regan had a very bad recession with interst rates of 15%, double digit inflation and unemployment of well over 10%. He seem to have good GDP numbers. Maybe Obama needs to spend less and lower business taxes.

    Posted by ohiodale | July 25, 2013, 21:23
    • Dear Dale,

      Thanks for your comments. You make some good points. Let me address them one by one below:

      1. These are not straw-man arguments. A straw-man is an argument which I myself make to contradict my own theory, in order to tear them down in support/defense of that theory. I didn’t pick the arguments: these are the common arguments made by an endless stream of Republican politicians against Democratic ones. Nor do I defend my own hypothesis; my intention is only to refute the Republican hypothesis the Democrats are bad for business. If you find these arguments to be simplistic and unconvincing (which I assume you do as you call them “straw-men”) then we are in agreement. They ARE simplistic and unconvincing, as well as untrue;

      2. “The Clinton years were the best years so far in my lifetime but with the advent of the PC and the internet the decade should have been much better.” The first half of the sentence is perfectly true. The Clinton Administration did benefit from the crest of the wave of PC and internet innovation, which really began in the early 1980’s. This “digital revolution” or “Third Industrial Revolution” as I call it (see my article “The World Has Moved On” for more on this topic) enabled the U.S. economy to enjoy productivity gains not seen since the previous industrial revolution. Those gains have played themselves out, which is one of the reasons that growth was much flatter in the 2000’s. The second half of the sentence is purely speculative. I tend to think that a GOP president would have made no difference to the overall economic performance of the country – at most, it would have led to larger deficits and more concentration of wealth. But again, speculation leads us nowhere;

      3. “I wonder how the economy and jobs relates to government spending. I would bet that government spending is directly proportional to the economy.” No doubt about it! The definition of gross domestic product includes government consumption; so yes, government consumption leads directly to increased GDP.

      GDP = Private consumption + Government consumption + Fixed Capital Investment + (Exports – Imports)

      So long as the government is willing to finance its consumption with deficits and borrowing, rather than with tax increases, GDP will go up by the same amount as consumption.

      The only clarification I’d make is that government spending and government consumption are not the same. The government could spend on something which doesn’t contribute to GDP, for example, when it pays the interest on the national debt, that spending does not contribute to GDP directly;

      4. “Reagan achieved a high GDP considering his first years we were in a severe recession.” Yes, that’s true. Reagan did achieve high GDP growth, and unemployment did go down. I might clarify that he did it by running huge deficits, taking advantage of the equation I just went over. I might also add that Reagan ran such big deficits that he was forced to raise taxes twice in his second term and H.W. Bush again during his term, in order to get the deficit under control. That is hardly in line with GOP economic orthodoxy. I might also mention that the economy was already starting to recover during the election year, but too late for it to benefit Carter. Unemployment was already falling before Reagan had even taken the oath of office.

      I’m not knocking Reagan with this, I’m merely explaining that Reagan used very Keynesian means to get the US economy back on track; the very same tactics that Republican legislators have denied to President Obama since 2010. Of course, the situation was very, very different back then, which is why historical examples are dangerous.

      5. “There are many factors that play into the economy. From my experience, the economy is good when the private sector creates jobs and invents good products.” You’ll get no argument from me there. I agree completely.

      6. “The only way a president can affect the economy is through government spending or tax policy.” That’s not true at all. For one thing, government spending and fiscal policy are both in the hands of Congress, not the President. Of course the Administration often has a leading role in crafting these; but often enough, Congress does something different. So even when I said previously “Reagan ran big deficits” what I really mean is that “Reagan proposed to run big deficits and Congress agreed to it.”

      What the President can control directly, without Congressional approval or oversight, is the implementation and enforcement of regulations; like interstate commerce regulations, labor regulations, environmental regulations, etc. Not financial regulations, at least not directly. He (or she) can choose to be very strict or very lax in enforcing these, which has a certain amount of impact on the business climate (but not as much as one would think). The President can also choose to use the Justice Dept. more or less aggressively to focus on white collar crime and corruption: the whole LIBOR scandal was going on for years and had serious economic costs attached to it. Think Enron also, as an example.

      Finally to say “government spending” only, referring I assume to the total amount of the budget, is misleading. WHERE the money is spent is far more important than the TOTAL amount spent. $100 spent on federal salaries is not the same as $100 spent on defense, or $100 spent on roads and bridges. In general, when the President submits the budget, the amounts spent on discretionary items has a major impact on the economy and internal improvements (like transportation) have traditionally generated more than $1 in growth for every $1 invested, which makes it a good deal. I would argue that the same goes for investments in education, especially as the economy has become so much more focused on information and innovation products;

      7. “The 90s the economy was mostly driven by the private sector and had zero to do with Clinton.” I both agree and disagree. The economy is ALWAYS mostly driven by the private sector, in every decade you care to look at: that’s the whole basis for my argument. Presidents have only a limited impact on the economy – unless they do something stupid like start unnecessary wars or help create financial bubbles. Presidents CAN make a difference by “priming the pump” which is kick-starting the economy through government spending until the private sector recovers confidence and starts growing again. That is what Reagan did (with Congressional approval). To say Clinton did “zero” is ungenerous. Clinton ran small fiscal deficits and then small surpluses at the end of this second term, which benefited the economy; he was not “anti-business” and didn’t ask for any new or onerous regulations – if anything, he helped screw up the financial system when he signed Gramm-Leach-Bliley and finished of Glass-Steagall once and for all;

      8. “Reagan created jobs through the private sector by his tax policies.” I would disagree with that statement completely. Taxation has almost no direct correlation with job creation at the levels we are discussing. The famous Laffer Curve does exist, but at marginal rates well above 50%. There is enough economic literature on this for me not to go into more detail. Reagan helped create jobs by increased government spending, period. I would add, to his credit, that Reagan changed the tone of the country to one of optimism, which also helped tremendously. But it wasn’t because of lower taxes (the economy still grew and jobs were still created when he was forced to raise taxes, when H.W. Bush raised taxes, and when Clinton raised taxes to balance the budget).

      9. “I go by personal experiences and my life was better in the 80s, 90s and the Bush years.” The 1980’s and 1990’s were precisely the years of the digital revolution, when the U.S. outpaced all other advanced economies through early adoption of these technologies. It was also the last years of the Cold War, and before competition from the Emerging Markets really picked up. I would disagree about the “good times” of the W. Bush years – I remember them as being extremely worrying from an economic perspective, with only 2 decent years out of 8 and none that were comparable to the 1990’s.

      As for our personal anecdotes, I don’t think they are really valid for extrapolation to the whole country. I’m sure there were plenty of people that had a rotten time, even in the “Golden ‘90’s”;

      10. “You use the excuse Obama had poor economic growth because of the recession.” Incorrect, I don’t use the recession as an excuse, but I do say that you can’t directly compare a recessionary period with a non-recessionary period. “Reagan had a very bad recession with interest rates of 15%, double digit inflation and unemployment of well over 10%. He seems to have good GDP numbers. Maybe Obama needs to spend less and lower business taxes.” Reagan also spent a lot more than Obama did to get the economy back on track. If you don’t believe me, look up the numbers, adjusted for inflation. Don’t look only at the total deficit numbers, look at the actual difference in outlays and receipts. Obama’s deficit has a much higher proportion coming from decreases in receipts rather than increases in outlays; which is the opposite of Reagan. If Obama had spent like Reagan, we would have had a bigger deficit and bigger debt, but shorter recession. The only stimulus packages Obama was able to pass was the big one in 2009 and a much, much smaller one in 2010 (an extension of the 2009 stimulus actually).

      After that, Republicans in the House have made sure that Obama has not been able to follow in Reagan’s footsteps and spend his way out of the recession.

      Thanks again for writing on the site, Dale. I hope you’ll read some more. I look forward to hearing from you again.

      Posted by fdbetancor | July 26, 2013, 13:01

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