It’s About the Economy
Part I: Growth
I want to address a long-standing belief about the two major political parties. The Republican party has successfully promoted the idea that Republican leaders are much better at managing the US economy. After all, most captains of industry are Republicans, and they should know. Right?
This is a myth that has become ‘common wisdom’ for many Americans, Republicans and Democrats alike, and it is false. Since 1950, the US economy has grown on average by 3.5% per year. Since 1950, you may be very surprised to learn that the US economy grew by 2.5% annually under Republican presidents and 4.1% when a Democrat was in the White House! The US economy grew 64% faster since 1950 when a Democrat was President.
Over the years, as I shared this data, occasionally I have received objections from some people, primarily Republicans, who attempt to counter that the conclusions must be misleading. Democratic presidents who follow Republican presidents must be benefiting from the wise decisions made by their predecessors. As I have looked at this data in depth, I do not see that hypothetical borne out. I could see conceptually, an instance, where a Democratic president got lift from a predecessor, but that hypothetical is eliminated by the span and consistency of the data. Plus, in many cases, especially since Ronald Reagan, presidents have served for two terms and during eight years, the impact of their policies will be clearly seen. Over lengthy periods of time and many presidents from both parties, the patterns are consistent.
Republicans may also object: The modern Republican party has operated under the leadership gospel of Ronald Reagan. They would claim that it would be much more accurate to focus on the period beginning in 1980, when Reagan became president. I agree. Ronald Reagan initiated a strategy of cutting income taxes massively and reducing social safety net spending. Every Republican president that followed for the next 40 years followed Reagan’s strategy. Let’s look at the results.
Since 1980, from the beginning of Ronald Reagan’s presidency, the US economy grew at the annual rate of 2.6% on average during Reagan’s and all successive Republican presidents. In contrast, when the president was a Democrat, since 1980, the US economy grew at the rate of 3.8%, over 46% faster! So much for Reaganomics…
During the current presidential election, Donald Trump brags about how wonderful the US economy performed when he was President. “It was one of the strongest economies in history”. True? During the four years of Trump’s presidency, the US economy grew on average 1.2%, less than one half the trailing average of all other Republican presidents! I can almost hear the protests from Trump loyalists: Unfair! Covid started during the final year of his presidency! Two responses: There are no excuses for presidents. Many presidents have to deal with any number of crisis's that happen. The long-term data I have been reporting in this analysis was full of crisis along the way for the previous presidents. The presidency is a no-excuses zone! But even if we looked solely at the first three years of Trump’s presidency, the results are mediocre. The Trump economy grew at 2.5%, even with a hall pass, below his Republican peers and far below the Democratic presidential average.
Trump boasts that the economy under his leadership was great, which we now see is false. He also claims that in three and one-half years, the Biden administration, including Kamala Harris, has ruined the economy and the US is now a failing state, a disaster. True? During the first three years of the Biden presidency, the US economy grew at the rate of 3.5% Is this less than the sub-par economy under Trump? No! Does it show any evidence in support of Trump’s campaign claims about a failing state? No! If we ignored the fact that the global pandemic hit full force in 2020 and has continued to significantly impact all economies in many ways, then we might see the Biden results as average at worst. However, an unbiased evaluation would be to compare how the US economy has fared during the pandemic compared with other major economies around the world and in this comparison, the US has performed competitively compared to other major economies under the same circumstances. Once again, Trump’s claim is false.
Why should you consider this analysis as having merit? Let me credentialise myself, because my sense is that the vast majority of what we see on social media are opinions from people who don’t have professional expertise on the subject. If you don’t know my work, I was the Chief Investment Officer responsible for the asset management functions of several major banks during the last 25 years of my career. I have listed my roles on FB, because I believe experience matters, I believe facts matter and I also believe in full transparency.
Economics/capital markets is my home turf. I considered economic and capital market decisions daily to lead the management of hundreds of billions of dollars in client accounts. I decided to compare economic results from Democratic and Republican administrations back to 1950. Why 1950? Because WWII changed the world and, in my experience, looking at economic data since then is quite valid. I have found that longer sets of data produce better accuracy of conclusions in general, so I started my analysis with that timeframe.
Given the conclusions I’ve already given about our economy performing better under Democratic administrations, how can that be, you may be thinking…What would cause the economy, over a long period of time, to grow faster under Democratic leadership?
When I look at the economic indicators since 1950, the primary reason is clear. The philosophy of the Republican party tends to be aligned with the interests of CEO’s and the owners of large businesses. Conversely, the Democratic party has tended to align with ‘labor’, meaning the employees of companies. Why does this matter? It matters because of the reasons why an economy grows. We usually measure economies in GDP terms, which stands for Gross Domestic Product. While the real process for measuring all the factors that go into GDP calculations are very complex, to boil it down to the very basics, there are two factors that drive an economy; how many workers are employed and how much is each of those workers producing. In other words, how productive are US workers and how many workers are there?
Productivity of workers has to do with many things, for example, education, technological innovation, and mechanization.
The factor that appears to explain much about why Democrats tend to lead towards a faster economy is job creation. Since 1950, under Democratic presidents, job creation was 2.6% per year. In contrast, job creation under Republican leadership was only 1.2%. Over twice the number of jobs were created under Democratic leadership since 1950. The data from 1980 tells a similar story. Democratic administrations produced 2.5% job creation vs 1.0% under Republican presidents.
Job creation means more workers. Each worker, through their productivity, adds to economic growth. Consistent with an emphasis on labor, during Democratic administrations, employment stats are higher, and unemployment is lower than during Republican administrations on average.
A direct result of job creation and employment in general, is that when more workers are employed/working, they are earning income and spending income to support their families. Approximately two-thirds of the US economy is composed of consumer spending. More workers earning wages and then spending helps drive the majority of economic activity.
When we analyze worker productivity during this same period of time, I find it interesting that productivity growth shows a similar pattern. Since 1980, under Republican administrations, average annual productivity grew by 1.28%. Under Democratic presidents, productivity grew by 1.93% during the same period, over 50% higher.
Focusing on the current election, the track records of Trump and Biden are consistent with this pattern. From 2017 through 2020 under the Trump administration, productivity grew annually on average by 1.3%, the same as the average of all prior Republican administrations. Under Biden, productivity grew by 1.6% per year, on average. This is somewhat less than the long term Democratic presidential average but still 23% higher than under Trump.
Now, you may ask, Republican administrations are focused on cutting taxes, doesn’t that drive economic growth? Not as much as the Republican party would love you to believe.
The Republican party changed its focus dramatically in 1980 when Ronald Reagan became president. With this in mind, I calculated the economic differences between Republican and Democratic administrations since 1980. Reagan led what has become the primary mantra of Republican administrations ever since; keep cutting taxes as the primary, economic strategy. It turns out that cutting taxes generates only modest economic activity. Why would that be so? Republican tax cuts have primarily benefitted CEO’s and the owners of large companies, who tend to be very wealthy. When a very wealthy person gets a tax cut, and has extra dollars in their pocket, what do they do? They don’t spend much of it because they are wealthy. The latest academic study I saw calculated that on average, when a wealthy person receives a tax cut, she only spends 30 cents of every dollar received from tax cuts. If she wanted something, she would have bought it already! These wealthy tax-cut beneficiaries don’t add very much to the two-thirds of the US economy made up of consumer spending. Not much fuel for the economic growth engine.
So, what does the average rich beneficiary of a tax cut do if she doesn’t spend those extra dollars? She saves most of those extra dollars, about 70% of those extra dollars. What impact on the economy does that have?
There are two primary results of tax cuts being saved. The first, obvious result, is that those wealthy tax cut beneficiaries get richer. Not only do they like getting wealthier and continue to support the Republican party because of the promise of future tax cuts, but that also means that wealth inequality in the US gets worse. The rich get richer. Wealth inequality grew faster on average under Republican administrations than Democratic leadership since 1950. However, the wealth gap exploded with Reagan’s massive tax cuts during the 1980’s and has jumped further during every successive Republican president.
The second result of Republican tax cuts has to do with what wealthy tax cut beneficiaries do with the extra money if they don’t spend it. Most of these extra dollars ‘saved’ are put to work as investments, classically stocks and bonds. Investment markets are run by supply and demand. When Republican presidents cut taxes, stock markets tend to jump, why? Those extra dollars chasing stocks push stock prices higher, giving the impression that something good is happening in the economy when all that happened is that the supply of investment dollars in play increased. You may have noticed that in presidential elections, when the stock market digests that a Republican has won, typically the market will jump up because tax cuts are almost assured. When Trump won the election in 2016, the stock market cheered in this exact way in anticipation of ample tax cuts soon to follow. However, these stock market reactions are an initial reaction and don’t tell the whole story of what happens to stock markets under different party administrations.
Many may again be surprised by the facts about how stock markets behave relative to political parties. Since 1950, the annual total return of the S&P 500 averaged 9.8% under Democratic administrations but only 6.0% under Republican presidents! Since 1980, the same relative performance is clear; 11.4% return under Democratic Presidents and only 7.0% under Republicans! How in the world can this be true with most of the corporate titans being Republican? Simple. The stock market only cares about the earnings of the companies whose stocks are traded and the expected growth of those earnings in the future. Company earnings (profits) are directly related to the health (growth) of the economy and since we now know that economies grow much faster under Democratic administrations, more economic growth translates to more earnings growth which is reflected in stock markets by higher stock prices. It all goes hand in hand.
There is also harm to the US economy from Republican tax cuts. Harm? Yes. The US has a budget not unlike any company or household. A certain amount is spent which is hopefully covered by a certain amount of income. Income taxes represent a very large proportion of the income to the US. So, when Republican Presidents cut taxes, they are cutting income to the US. However, Republican leaders don’t choose to cut spending as much as they have chosen to cut income (taxes), which means the federal government has to borrow (debt) to make up the difference. Federal deficits have been larger under Republicans than Democrats since 1950 (3.2% Vs 2.5% of GDP, respectively), but this significant difference over the long term became a huge difference with Reagan and every Republican President since, with massive increases in debt under Republican leaders. Since 1980 federal deficits under Republicans averaged 3.4% compared to 2.1% under Democratic Presidents. In percentage terms, Since Reagan, Republicans saddled the US with 62% more in deficits than Democratic Presidents. The Republican party is the borrow and spend party and with every Republican administration, Republican presidents are burying the US further under debt.
How was the Trump presidency with respect to deficits? During Trump’s administration, US deficits grew by 6.6% of GDP, nearly twice as bad as his Republican predecessors and over three times worse than Democratic presidents!
The secondary harm to the US economy from Republican tax cuts is due to the spending cuts that Republicans make to offset a little of the decrease in income from tax cuts. Philosophically, Republican presidents tend to cut spending on programs that fall into the general category of ‘social safety net’, claiming that these spending programs are ‘welfare’. These programs target low-income Americans who spend everything they receive, because they are living on meager amounts. Studies have shown that when a low-income family receives a dollar of some sort of support from the government, the US economy reacts as if that dollar was $1.25. How could that be? In economics, this is referred to as the multiplier effect. It works like this: a low-income family gets a dollar from a support program. That family will spend every dollar they get, let’s say that the dollar is paid to their grocer for food. The grocer, in turn, makes a living from selling groceries, earning a little from the dollar spent by the low-income family. The grocer, in turn, spends a portion of that dollar that she received on things her family needs. The point is that a dollar paid to a low-income family gets used in transactions several times, making a bigger impact on overall consumer spending than just one dollar. Unfortunately, the reverse is also true. If the government cuts a dollar from a low-income support program, the economy cools by more than one dollar's worth.
These comparisons highlight the economic impacts of different political administrations, highlighting that Democratic presidents have been much more successful with respect to the US economy on average and provides context for evaluating the Trump administration’s economic performance, which was mediocre at best.
Analysis tool used: Microsoft CoPilot
Sources:
Page 1 Historic economic growth analysis:
1 en.wikipedia.org | 2 epi.org | 3 investopedia.com | 4 simple.wikipedia.org
5 hoover.org | 6 belfercenter.org | 7 macrotrends.net | 8 statista.com
9 data.worldbank.org | 10 macrotrends.net | 11 fred.stlouisfed.org
12 thebalancemoney.com | 13 fred.stlouisfed.org
Page 2 Trump vs Biden economic analysis:
1 macrotrends.net | 2 statista.com | 3 thebalancemoney.com
4 multpl.com | 5 macrotrends.net | 6 fred.stlouisfed.org
7 factcheck.org | 8 bea.gov | 9 commerce.gov | 10 bea.gov
11 cbo.gov | 12 tradingeconomics.com | 13 bea.gov
Page 4 Job creation 1950 through 2023
1 en.wikipedia.org | 2 seidmaninstitute.com | 3 ycharts.com
4 united-states.reaproject.org | 5 economicstrategygroup.org
6 statista.com | 7 politifact.com | 8 epi.org | 9 newsweek.com
10 belfercenter.org
Job creation 1980 through 2023
1 united-states.reaproject.org | 2 epi.org | 3 politifact.com
4 belfercenter.org | 5 en.wikipedia.org | 6 newsweek.com
7 ycharts.com | 8 economicstrategygroup.org | 9 ycharts.com
Page 6 Stock market returns: 1950 through 2023
1 investopedia.com | 2 fool.com | 3 financialsamurai.com
4 macrotrends.net | 5 fool.com | 6 am.jpmorgan.com
7 slickcharts.com | 8 ofdollarsanddata.com | 9 ycharts.com
10 finasko.com | 11 en.wikipedia.org12shutterstock.com
Stock market returns 1980 through 2023
1 ofdollarsanddata.com | 2 fool.com | 3 advisor.morganstanley.com
4 macrotrends.net | 5 savantwealth.com | 6 macrotrends.net
7 en.wikipedia.org | 8 slickcharts.com | 9 investopedia.com
Page 7 Federal deficits 1950 through 2023
1 fred.stlouisfed.org | 2 en.wikipedia.org | 3 fred.stlouisfed.org
4 politifact.com | 5 en.wikipedia.org | 6 consumeraffairs.com
7 presidentialdata.org | 8 politifact.com | 9 gisreportsonline.com
10 thebalancemoney.com | 11 fred.stlouisfed.org
Trump deficits 2017 through 2020
1 thebalancemoney.com | 2 thebalancemoney.com