Republicans love to believe they are good for the economy. In the private sector I believe they are. Most of the Republicans I know are dedicated workers or contentious business people. Somehow this pro-business attitude that makes them good for the economy in the private sector appears to harm growth when Republicans gain political power in Washington.
Back in February the New York Times published: Opinion | Why Are Republican Presidents So Bad for the Economy? The piece showed a strong correlation, but didn’t address possible lead times. For example, does the impact of a President on growth coincide with the time in office or does it lag a few months or even a few years? When I studied the lag time I also found Republican Presidents were worse for growth and that the correlation was strongest with a lag/lead time of two or three years. This would suggest for example that President Trump’s impact on the economy would be most felt in the years 2019–2022 or perhaps 2020–2023. I say suggest, because some Presidential actions might have immediate effect while the influence of other actions might be five or more years in the future. It’s easy to speculate an effect and its timing, but nigh impossible to know.
Correlation, of course, doesn’t prove causation. I’m not even sure I believe in the typical meaning of causation where one thing causes another. The cause of something might be dozens of factors or even the sum total of everything going on at present and in the past. I do believe in influences, favorable conditions and necessary pre-conditions.
While the Times article dismisses political control of Congress as a factor in the economic growth rate I find it dwarfs the impact of who is President. When I compare the ten-year GDP growth rate per-person with the 10-year average share of Congress held by each party, the impact on growth of who is President becomes statistically insignificant.
The Chart above shows 10-year periods of growth 1905–1914 through 2011–2020. The maximum impact on growth of political control of Congress appears to lag about three years; or you could say Congressional control leads growth by three years.
Since 1905 Republicans have averaged holding 45.8 percent of the seats in Congress when the percentage control of the House and the percentage control of the Senate are weighted equally. The ten year periods influenced by a share of Republicans above that average grew at a 1.1 percent average rate per-person. Ten year periods influence by a share of Republicans below 45.8 percent had average growth per-person at 2.8 percent (about 155% higher).
I selected the period in the chart to show the strongest correlation. From 1857 to 1904 there was not much difference in the parties’ influence on growth. In the last forty years one could observe that the correlation was weaker.
On the other hand, you could claim the correlation was stronger, but that it took about eight years instead of three for political control to have its largest influence.
My aim in writing about this is to make America prosperous. The correlation between political power and growth is too strong, has lasted too long and followed too many ups and downs for me to believe it is coincidence. Restoring prosperity requires enough American voters to understand the influences on growth so we can elect politicians that will enable prosperity.
David Leonhardt, who wrote the NY Times piece, contacted a number of economists who had no explanations of why Republicans appeared to be worse for growth. He concludes Democrats are more practical and adapt policy to what works while Republicans are more likely to stick to their policies such as tax cuts even if they are shown to not help the economy. He also suggests the aims of labor unions and civil rights groups which help finance Democratic campaigns are more aligned with widespread prosperity than the aims of businesses and the ultra wealthy which tend to prefer the more wealth friendly Republicans.
Republican persistence on tax cuts appears to undermine growth. Republican tax policy effectively reduces unproductive tax avoidance which is a prerequisite for good growth and requires a low average income tax rate on business owners. However, their tax cuts also undermine the incentive for productive tax avoidance where business owners avoid a high marginal tax rate by plowing a larger share of business revenue into building businesses and growing the economy, rather than pulling more income out of businesses.
Contrary to Republican assertions that a low top tax rate improves growth and the economists who look at single year data points and claim the tax rate does not affect growth, the long term rate of growth has a significant positive correlation with the top tax rate.
While Republicans get the top tax rate issue wrong, this doesn’t come close to explaining their full negative impact on growth. From my perspective we will get closer to what works when we understand the difference between the economy and business. The purpose of an economy is to satisfy the needs and wants of people. Business is the main tool of the economy. The objective of business is to maximize profits. Many policies are good for both the economy and business. Politics can lead us astray on policies that are good for business, but not the economy. For example, satisfying people is better served by high wages and low prices, while maximizing profit is better served by low wages and high prices.
High profits tend to be better for financing Republican campaigns. It’s tempting for Republicans to believe high profits mean a good economy. It’s true that growth in GDP tends to strengthen in the quarter after strong profits, but the longer term correlation tends to go the other way. Profit is the portion of business revenue not spent on the deductible and depreciable expenditures that build businesses and grow the economy such as: wages, equipment, marketing, research and training.
Republican profit friendly policy likely enables some misallocation of resources to businesses that exploit workers and take advantage of consumers. In a well run market economy profit directs talent and resources to the businesses doing the best job of satisfying people and there is sufficient competition to compete away large profits. Republicans tend to pull back on the protections for workers and consumers that helps profit allocate resources to businesses that efficiently satisfy people.
None of this means we should all vote Democrat. Not everyone’s primary issue is national prosperity. However, if your top issue is economic prosperity and you are a Republican you may need to support primary candidates with more of a tough love approach to business and the ultra wealthy than a coddling approach.
If you are an independent and care about prosperity it may be time to shift toward the Democrats until Republicans experience enough electoral pain to shift to policy that works.
If you are a Democrat, continue your pro-people policies, but try not to sound anti-business or like you want to punish success. The higher top marginal tax rates you propose will help growth, but will mean the wealthy pay less income tax not more, because they will take less income while growing their wealth tax free or tax deferred in businesses more. When the top tax rate was 70 percent the top one percent of taxpayers paid about half the share of the income tax they do now.
Restored prosperity will come when the best way to build after tax wealth over the long term is to build and hold wealth in businesses that take the best care of people. Help us make that happen. Like this article, comment on it. Share it.