- Republican presidential candidates often made a pro-business case, and many voters believe them
- But all signs point toward democratic presidents performing better in managing the economy
- How can this be? New research from Imperial College London adds a piece to the puzzle
Since Reagan, who came with sweeping reforms that helped usher in the world of late capitalism which we inhabit today, modern Republicans have claimed to be all about business. Why, then, have they proven to be so bad for the economy?
The question is a perplexing one, and was asked in the New York Times in 2021: “Why Are Republican Presidents So Bad for the Economy?”
Between 1933 and 2020, US economic growth under Democratic presidents averaged 4.6% annually, which is double the 2.4% growth seen under Republican presidentship. This trend spans a whopping (not to say statistically significant) 14 presidencies.
‘A president has only limited control over the economy. And yet there has been a stark pattern in the United States for nearly a century. The economy has grown significantly faster under Democratic presidents than Republican ones,’ the authors write. ‘It’s true about almost any major indicator: gross domestic product, employment, incomes, productivity, even stock prices.’
And this is agreed upon by Princeton economists: In a 2016 paper, economists Alan Blinder and Mark Watson concluded that, “The US economy has performed better when the president of the United States is a Democrat rather than a Republican, almost regardless of how one measures performance.”
Why are Democrat presidents better for the economy?
Democrats have frequently assumed office during economic downturns, only to go on to tinker with and fix up the American economy, and they pass on healthier economies to their successors. Of great note is the fact that 10 of the past 11 U.S. recessions began under Republican presidents. After inheriting the Great Recession, President Obama went on to preside over the longest job-creation streak in modern history, while President Trump became the first post-WWII president to leave office with a net loss in jobs.
The economy has even been a bright spot for Biden, despite inheriting a gutted and junky economy from Trump.
The reasons behind Democratic economic mastery (compared to Republicans) have remained elusive (some point to Republican overreliance on tax cuts, which have been shown to have a limited effect on growth), although the pattern is clear. Perhaps Reaganomics’ mixture of tax cuts, budget cuts, and programme cuts, was not an all-time economic panacea.
The link between politics and currency value
Recent research from Dr. Pasquale Della Corte and Hsuan Fu at Imperial College Business School adds a new angle and further evidence to the argument. Analysis of more than four decades of data uncovered a significant relationship between the performance of the US dollar and the political party of the sitting President.
The good old US greenback appreciated by more than 4% annually during Democratic presidencies, compared to a 1.25% average depreciation under Republican presidents, resulting in a stunning difference of over 5%.
The findings point to divergent trade policies as the primary factor behind this divide. The research, spanning the period from 1983 to 2024, analysed the value of the US dollar against various foreign currencies in both developed and emerging markets. The key variable, the authors argue, lies in the approaches to international trade taken by the two political parties.
Trade policy emerged as a decisive factor in the valuation of the dollar. Under Democratic administrations, policies that promote international trade often lead to increased demand for US goods and services, thus driving up demand for the dollar in global markets.
The impact of trade policy on currency
By contrast, Republican administrations tend to favour more protectionist policies (going further than Regan, who warned against trade wars, arguing that they “close doors, create greater barriers, and destroy millions of jobs,” adding that “protectionism is destructionism.”) which frequently result in retaliatory trade measures from foreign markets. These responses suppress demand for US dollars, leading to depreciation.
On the note of protectionism, a piece from Colin Grabow and Scott Lincicome from the Cato Institute, argues that conservatives (who are traditionally, at least since Reagan, loud supporters of the free market) are wrong to defend Trump’s naked and market-rattling protectionism ‘by favourably comparing it to the policies of President Ronald Reagan.
Indeed, just last week, Henry Olsen and Victor Davis Hanson both defended Trump’s promises to block imports, tear up our trade agreements, and “fix” the trade balance by asserting that his efforts are simply the modern manifestation of successful Reaganite protectionism. Such claims, however, emphasise Reagan’s discrete anti-trade actions while ignoring their historical context, woeful results, and inapplicability to today’s global economy. Trumpist efforts to save U.S. jobs through higher tariffs, bilateral trade deals, and lower trade deficits can find no “conservative” justification in Reagan-era trade actions. In fact, it’s just the opposite.
The Imperial study’s comprehensive analysis of alternative factors—such as interest and inflation rate differentials, and political changes in other major economies—found that these variables did not account for the observed differences in the dollar’s performance.
The researchers emphasise that it is not the political party in power per se that drives exchange rate fluctuations, but rather the trade policies associated with each administration, and both parties tend to cleave to their traditional ways of behaving, with Democrats being more globalist and Republicans more protectionist.
Professor Della Corte notes that while Democratic presidents have traditionally supported trade liberalisation, a Republican president with pro-trade policies could see the dollar appreciate, as seen in some exceptions over the past 40 years. However, history suggests that protectionist stances, often associated with Republican administrations, tend to coincide with a decline in dollar value.
As the US approaches the 2024 presidential election, the research draws attention to the impact of future trade policies on currency markets. While the political landscape may shift, the research underscores that it is trade strategy – whether expansionist or protectionist – that will likely influence the value of the dollar in the years ahead.
Fresh insights into a complex economic situation
The Imperial study adds to the growing body of literature analysing the interaction between political cycles and financial markets, offering fresh insights into how geopolitical and economic policies intersect with currency performance. As the global financial system continues to evolve, the exchange rate remains a key barometer of economic health, particularly for the world’s reserve currency, the US dollar.
Whether the truism that Democrat presidents are better for the economy than Republican presidents will resonate with the American electorate – as well as the loud and persuasive warnings against Trump’s economic policies from lauded experts – is yet to be seen.
By, Thomas Willis
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