Who does a better job at managing the American economy: Democrats or Republicans?

Whose policies help the country and whose policies hurt it? Who should get credit when things are going well and who should take the blame when the economy slips?

But before we use the EPI to answer the question, we have to figure out how to measure the problem. It is impossible to break down every piece of legislation to see how it affected the performance of the overall economy. We can examine a few key policies, but that doesn’t really answer whether one political party does a better job altogether; it only sheds light on that particular piece of legislation—one small piece of a very big puzzle.

So how do we measure the effectiveness of one party’s politics?

THE INDEX OF POLITICAL POWER

It stands to reason that the more policy-making positions one party holds, the more policies that party will implement. If one party controls a majority of Congress, for example, then more of that party’s policies will likely get passed than the other party’s. Therefore, we could measure how many positions each party held, and then use that as a proxy to assume that more of that party’s ideas were being enacted.

Obviously, such a measure should include the legislative bodies of the House of Representatives and the Senate. Since the president signs or vetoes legislation into law, that position should be included, too. Even though the Supreme Court can overturn a law, we should not include the judicial body. Many of its decisions are related to social policies rather than economic ones; its impact on the economy, as far as this Index is concerned, is negligible.

However, there is another area outside of legislative control that we should include in this proxy measure: the monetary policy. As we explained earlier, the country’s monetary stance is a critical component of the economy’s performance. But Congress does not control monetary policy—the Federal Reserve does. By tradition, the Fed follows the decisions of its chairman. In effect, the nation’s monetary policy is determined by one individual. Logically, then, we should include the political party of this position, too.

If we calculate the IPP for each year since the Fed was established in 1914 and then graph it, we can trace the balance of power between the two political parties:

This graph tells us visually what we already know historically. Before the Great Depression, Republicans dominated national politics. But in one of the largest shifts ever in political power, Democrats were overwhelmingly elected after the collapse of the economy. They held power until about the 1970s when the Republicans briefly returned to power during the Nixon and Ford years before turning pro-Democrat again. From the 1980s until 2000, power balanced between the two parties, with the IPP hovering around 0. For the better part of the following decade, Republicans held sway in national politics under the presidency of George H.W. Bush. However, during the 2008 election, though, power once again balanced around 0.

THE IPP VS. THE EPI

Now that we have a proxy measure of each party’s influence, we can compare it against the EPI to see how they scored while in power:

There does not seem to be a clear correlation just from looking at the graph. The economy did quite well under Republican policies in the Roaring Twenties, but also did quite well during the Golden Era in the 1950s and 1960s while Democrats dominated national policies. The economy did well under pro-Republican policies in the early decade of 2000 before sliding into the Great Recession.

Instead of attempting to establish a trend, let’s simply look at the EPI score under each combination of political power, i.e. the average score when the IPP was -3, -2, -1, 0, +1, +2, and +3. When we tally and average the EPI score versus each scenario, this is what we see:

When Republicans held more power—that is, when the IPP was above 0—the average EPI score was 90%. When Democrats held more power—that is, when the IPP was below 0—the average score was 85%. When the balance of power was neutral at 0, the average score was 88%. At the extremes, when each party controlled all four components of the IPP, the difference in performance was only 5% (93% for Republicans vs. 88% for Democrats).

SO DEMOCRATS ARE WORSE

We look at the differences in economic scores between Democrats and Republicans and judge it to be a draw. The Democrats’ score may reflect that they had to manage the economy under difficult circumstances, including the Great Depression and the Great Recession. Then again, Republicans enjoyed a booming economy during the Roaring Twenties and the late 90s. If we could control for those shocks, we might find the two parties’ positions switched. Moreover, our approach cannot establish causality (whether Republicans or Democrats were the cause of the economy going up or down). All we can view is the correlation (when one party was in power, the EPI score was X%).
However, we could use a regression analysis to look for time connections between one party coming to power and the subsequent performance of the economy. This approach would actually allow us to look for empirical causality. We wanted to isolate economic policies from exogenous shocks, so that we were truly comparing apples to apples. Democrats would not be docked for the Great Depression and WWII, while the Republicans would not get a boost from globalization, etc.

To do this, we subtracted the smoothed trend from the EPI scores. Then, we conducted a regression of the EPI deviation from its trend against the IPP.

In short, if the EPI score was higher than the trend, then economic policies were good in spite of short-term shocks that might have pulled the immediate performance of the economy down, the overall trend of the economy was good. If the EPI score was below the trend, then economic policies were bad in spite of short-term boosts that might have pushed the score up, the general effect of policies was bad.

This way, there could be no disputing whether the economy was up or down because of factors beyond the respective party’s control.

Our regression analysis found no statistically significant causality. Which is fine and happens often.

Therefore, we cannot conclude that either party does any better (or any worse) than the other when it comes to managing the economy.