Partisan Differences in the Distributional Effects of Economic Growth: Stock Market Performance, Unemployment, and Political Control of the Presidency

Abstract

This article examines the differences in the distributional effects of economic growth. While all incumbents are incentivized to create economic growth in order to win reelection, they use a diverse variety of policies to achieve this growth. These policy choices are often congruent with the demands of the core constituent groups of the respective parties. This suggests that economic growth is not equally shared by all, but that some groups are more or less benefited from the sets of policies chosen by the incumbent parties to stimulate growth. We test this proposition by investigating the effects of economic growth on stock market performance and unemployment. Our results show that economic growth under Republican presidents has a stronger effect on stimulating stock market performance, while economic growth under Democratic presidents has a stronger effect on reducing unemployment. Overall, these results highlight the partisan differences in macroeconomic policy and illustrate one of the causal mechanisms behind the substantial and rising economic inequality in the USA.

Supplementary Material

Supplemental data for this article can be accessed at http://dx.doi.org/10.1080/17457289.2014.1002790

Notes

1. Data for replication are available from the authors at [email protected] and ancillary results can be found at the publisher's website: www.doiXXX.org

2. Income data are taken from March 2009 and unemployment data are from the fourth quarter of 2009. For more, see: http://www.northeastern.edu/clms/wp-content/uploads/Economic\_Recession\_of\_20072009.pdf. Last accessed February 21, 2014.

3. From Bureau of Labor Statistics official reports/press release. More available at http://www.bls.gov/news.release/empsit.t04.htm. Last accessed February 21, 2014.

4. Data are from the US Census Bureau (2011).

5. Extending the logic of these studies, Di Tella and MacCulloch (2005) reveal ideological differences in happiness consistent with this partisan model of economic policy, where the happiness of left-wing citizens is more responsive to unemployment, while that of right-wing citizens is more responsive to inflation.

6. Additionally, Oatley (1999) demonstrates that globalization and financial integration have not reduced these partisan differences in macroeconomic policies in advanced industrial nations.

7. Inclan, Quinn, and Shapiro (2001) demonstrate that the internationalization of financial markets has not reduced these partisan differences in corporate tax rates.

8. We follow Brambor, Clark, and Golder (2006) in not interpreting the constitutive terms of the interaction term as the unconditional marginal effects but only as the effects of Republican presidencies when growth is 0, and the effect of growth during Democratic administrations (when Republican President is 0). Our focus is the conditional relationship which is captured by the interaction term.

9. Similar to Table 2, we follow Brambor, Clark, and Golder (2006) in not interpreting the constitutive terms as the unconditional marginal effects and focus on the interaction term given our conditional hypothesis.

10. Additional analyses indicate that these results increase over time – with the exception of the Clinton administration – and are stable to the inclusion of unemployment as a control variable. See Supplementary Material.