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The Democrat-Republican presidential growth gap and the partisan balance of the state governments

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Abstract

It is known that the US economy has grown faster during Democrat presidencies, but the Democrat-Republican presidential GDP growth gap cannot be attributed fully to policy differences, nor did Democrat presidents happen to benefit systematically from more favorable external shocks. The question why thus remains open. We postulate that, if the effect is real, a Democratic Party performance advantage should be present with respect to measures of political control other than just the presidency. We investigate partisan control of US state governments and show that national GDP grew faster when more states had Democrat governors and Democrat-majority state legislatures: a one-standard-deviation increase in the share of governorships controlled by the Democratic Party (unified Democrat state governments) is associated with a 0.57-percentage-point (0.77-percentage-point) increase in the real US national GDP growth rate. The effect appears to occur on top of the presidential D-R growth gap, suggesting that the Democrat growth advantage may be a more generalized phenomenon. To investigate whether the effects are explained by state-level policy differences, we adopt an encompassing measure of a state’s policy priorities—state policy liberalism (in the modern, popular sense rather than the classical sense). Nevertheless, our findings are not explained by state policy liberalism. That result echoes the puzzle at the national level that key national policy differences cannot account for the presidential growth gap.

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Fig. 1

Source: David Leip’s Atlas of US Presidential Elections, Klarner (2013a), state agency websites

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Notes

  1. For example, interest rates were expected to be higher and the dollar expected to be stronger under a George W. Bush presidency than under John Kerry (Snowberg et al., 2007a, b). The election of Joe Biden increased growth expectations of international experts by 0.98 percentage points for the year 2021 (Boumans et al., 2021).

  2. On ideology-induced policies in OECD countries, see Schmidt (1996) and Potrafke (2017). Long-run growth is higher under right-wing than left-wing governments in industrialized and developing countries (Bjørnskov 2005).

  3. On determinants of economic growth, also see, for example, Olson (1982), Glaeser et al. (1992), Acemoglu (1995), and Coates et al. (2011).

  4. https://www.bloomberg.com/news/articles/2015-01-16/brown-s-california-overtakes-brazil-with-companies-leading-world.

  5. The weighted and unweighted measures are similar: the correlation coefficients between the weighted and unweighted Democrat share of governorships, state legislatures, and unified state governments all are about 0.92. The results are similar when we weight by state income (gross state product is not available over the full sample period).

  6. We do not include the share of Republican governors. Because only a handful of independent governors served over our sample period, their effect is almost exactly one minus the share of Democrat governors.

  7. The baseline D-R growth gap for our sample is 176 basis points, not 179 as found by BW, because we consider the 1950:I-2015:I period rather than 1949:II-2013:I. Some early observations are lost owing to the lags entered into the VAR model of BW. Missing observations also affect BW when they consider the Baa-Aaa bond rating spread and Baker et al.’s (2016) uncertainty index, for which VAR models also are estimated A few shocks like the Hamilton shock are available slightly earlier (1949:II) because they are not constructed by BW using the VAR. We also extended the data set through to 2015:I for most of our models, although the inferences are very similar if we end the sample at the same time as BW.

  8. Because of the small number of states when looking at subsets of the 50 states, we report heteroscedasticity robust standard errors as well.

  9. We also investigate the correlation between state government partisanship and real personal income per capita growth conditional on other variables. Many previous studies dealt with correlates of state government partisanship and real personal income per capita growth. Those correlates include, for example, tax policies (e.g., Gale et al., 2015; Pickering and Rockey, 2013; Reed, 2006, 2008, 2009), public expenditure (Pickering and Rockey, 2013), federal transfers (Carlino et al., 2021), economic freedom (e.g., Bjørnskov, 2017; Bjørnskov and Potrafke, 2013; Compton et al., 2011; Gu et al., 2017; Hall et al., 2019), and public employment (Higgins et al., 2009). We have included some of those correlates and others that we also expect to be relevant (e.g., population growth, total energy production, urbanization). All such data are, however, not available for the full 1949–2016 period. In any event, the results suggest that partisan control of state governments remains correlated with income per capita growth when we control for those variables.

  10. For example, liberal economic policies include a progressive tax system and more environmental protections, while liberal social policies include more social welfare benefits and fewer restrictions on abortion.

  11. Furthermore, incorporating state policy liberalism into the VAR framework of BW, as discussed in the “Appendix”, does not change inferences substantially. That is, the explained portions of the DR gap in Tables 3 and 4 are similar when state policy liberalism is entered as an additional explanatory variable.

  12. On the extent to which economic performance predicted votes shares of US presidents, see, for example, Hibbs (2000, 2008).

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Acknowledgements

We thank Warren Anderson, Jakob de Haan, James Hamilton, Gary Jacobson, Tim Kane, David Levy, Paolo Roberti, Nicolas Schreiner, William F. Shughart II, Michaela Slotwinski, Heinrich Ursprung, Kaspar Wüthrich, and the participants of the Silvaplana Workshop on Political Economy 2017, the CESifo Area Conference Public Sector Economics 2018, the Political Economy of Democracy and Dictatorship Conference 2019, the European Public Choice Society 2019, the Canadian Public Economics Group 2019, and seminars in Heidelberg, the ifo Institute for helpful comments, and Lucas Rohleder for excellent research assistance.

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Authors and Affiliations

  1. Department of Economics, University of Alberta, Edmonton, Canada

    Dodge Cahan

  2. Ifo Institute, Ifo Center for Public Finance and Political Economy, Poschingerstr. 5, 81679, Munich, Germany

    Niklas Potrafke

  3. Department of Economics, University of Munich, Munich, Germany

    Niklas Potrafke

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Correspondence to Dodge Cahan.

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Appendix: Alternative lag assumptions

Appendix: Alternative lag assumptions

An important issue is the timing of when changes in partisan control are likely to predict annual GDP growth. Our main results follow BW by assuming that a new president or governor starts to take effect during his or her first full quarter in office. Kane (2017) maintains that it takes longer than one quarter for a new government to affect GDP growth, because it takes quite some time for new legislation and fiscal policies to be implemented. Consumer behavior and firm investment decisions have, however, been shown to respond immediately to electoral outcomes because of shifts in expectations (Snowberg et al., 2007a, b; Falk & Shelton, 2018; Gerber & Huber, 2009; Jens, 2017; Julio & Yook, 2012). In Table

Table 10 State government ideology predicting real national quarterly GDP growth (annualized) for alternative lags of state government ideology (1949:II-2017:I)
Full size table

10, we enter different lags and leads of state government partisanship as explanatory variables. The correlation between Democrat state government control and GDP growth is strong for lags 0 to 3. For governors and legislatures, the correlation is less pronounced and no longer statistically significant when we consider lags of more than three quarters, while for unified governments, it remains positive and statistically significant at the 10% level up to the 10th lag. The first and second leads of Democrat state government control (governors and unified governments) also are positively and significantly correlated with GDP growth, suggesting that high national GDP growth may have preceded Democrat victories in state elections (Pastor & Veronesi, 2020).Footnote 12

In Table

Table 11 Explaining the D-R-growth gap with state government ideology and alternative lag assumptions. BW model
Full size table

11, we investigate the sensitivity of our results that follow the BW methodology (Table 10) to different assumptions about when a newly elected politician can begin to affect the economy. The explained portions of the D-R presidential growth gap for the state politics variables are negative, large in magnitude, and statistically significant when we instead assume that a new politician starts to have an effect in the quarter of the election, or in the quarter of the inauguration. For lags longer than one quarter, the explained portions of the D-R presidential growth gap become somewhat smaller in magnitude and attain lower levels of statistical significance, although they remain large and negative in all specifications and statistically significant in some of them. In any event, the share of Democrat governors does not explain the D-R presidential growth gap, providing additional evidence that the Democrat performance advantage with respect to the partisan balance of the state governments is a separate effect from the D-R presidential growth gap. One final consideration (for future research) is whether GDP growth would be modeled better as a moving average process exhibiting persistence, in line with Higgs’s Crisis and Leviathan (1987).

See Figs. 2 and 3.

Fig. 2
figure 2

Source: Klarner (2013b), own calculations

The share of state legislatures that were controlled by the incumbent president’s party also decreased in the course of the presidential term (though not as consistently and not as drastically as in the case of control of governorships).

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Fig. 3
figure 3

Source: Klarner (2013a, 2013b), own calculations

Newly elected presidents enjoyed many copartisan governors and unified state governments—but tended to lose them over time.

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Cahan, D., Potrafke, N. The Democrat-Republican presidential growth gap and the partisan balance of the state governments. Public Choice 189, 577–601 (2021). https://doi.org/10.1007/s11127-021-00912-y

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