The Presidential Puzzle: Does the US Economy Perform Better under Democrat or Republican Presidents?

The Presidential Puzzle: Does the US Economy Perform Better under Democrat or Republican Presidents?

In this episode of 'Questions in Finance,' university professors Kate Holland and Veljko Fotak dive into an intriguing economic puzzle: why does public opinion favor Republicans as better managers of the economy, while macroeconomic indicators, corporate performance, and stock market returns generally show better outcomes under Democrat presidencies? And what explains some of the gap in performance?

The discussion, grounded in academic research, explores various metrics, at the macroeconomic, firm, and market levels and the strength and robustness of findings.

Kate and Veljko delve into common explanations, debunk the flawed ones, and emphasize the role of risk-aversion cycles and the timing of the Korean war and crude-oil shocks as having favored Democrat presidencies.

The episode concludes with an exploration of party identity and political polarization, touching on the complex factors influencing electoral success and public perceptions.

Timeline:

00:00 Introduction and Personal Anecdotes

01:17 Questions in Finance Podcast Introduction

02:08 Economic Performance Under Different Presidents

02:46 Public Perception vs. Economic Reality

05:04 The Presidential Puzzle

09:52 Diving into the Evidence

18:35 Corporate Performance Analysis

36:35 Exploring Explanations for Economic Trends

37:05 Cherry-Picking Time Periods: Valid or Not?

40:52 Impact of Crude Oil Shocks and the Korean War

43:51 Inherited Economic Conditions and Lead-Lag Effects

45:48 Risk Cycles and Economic Performance

50:36 Policy Explanations: Congress and Corporate Outcomes

59:34 Behavioral Explanations: Over-Optimism and Euphoria

01:03:20 Summarizing the Presidential Puzzle

01:06:06 Republican Electoral Success Despite Economic Trends

01:10:04 Party Identity and Political Polarization

01:11:45 Conclusion and Future Topics

Bibliography:

Alesina, Alberto and Howard Rosenthal. "Partisan politics, divided government, and the economy." Cambridge University Pres, 1995.

Alesina, Alberto, Nouriel Roubini, and  Gerald D. Cohen. "Political cycles and the macroeconomy." MIT Press, 1997.

Belo, Frederico, Vito D. Gala, and Jun Li. "Government spending, political cycles, and the cross section of stock returns." Journal of Financial Economics 107, no. 2 (2013): 305-324.

Blinder, Alan S., and Mark W. Watson. "Presidents and the US economy: An econometric exploration." American Economic Review 106, no. 4 (2016): 1015-1045.

Holland, Kateryna, and Esther Im. "Corporate Cash Flow Outcomes Across Presidencies: Still a Presidential Puzzle." Working paper.

Mian, Atif, Amir Sufi, and Nasim Khoshkhou. "Partisan bias, economic expectations, and household spending." Review of Economics and Statistics 105, no. 3 (2023): 493-510.

Potrafke, Niklas. "Government ideology and economic policy-making in the United States—a survey." Public Choice 174 (2018): 145-207.

Santa‐Clara, Pedro, and Rossen Valkanov. "The presidential puzzle: Political cycles and the stock market." The Journal of Finance 58, no. 5 (2003): 1841-1872.

Snowberg, Erik, Justin Wolfers, and Eric Zitzewitz. "Partisan impacts on the economy: evidence from prediction markets and close elections." The Quarterly Journal of Economics 122, no. 2 (2007): 807-829.

Online Sources:

EPI Report: https://epiaction.org/2024/04/02/economic-performance-is-stronger-when-democrats-hold-the-white-house/#full-report

Belfer Center Study: https://www.belfercenter.org/publication/historical-puzzle-us-economic-performance-under-democrats-vs-republicans

Soundtrack:

The soundtrack is based on "Walk on a Funky Street" by MondayHopes. Thanks for the music and keep up the good work! Use is under the Pixabay Content License.