And it’s not even close.
“It’s the economy, stupid.” James Carville – strategist for Bill Clinton’s 1992 presidential campaign
Ten Out Of Ten
Here’s the big deal. Read this paragraph and the next and then read further if you want more detail. In a 2016 study by Blinder and Watson, updated this year in a publication from Harvard University, they showed that since WWII, there have been 10 times when a president was succeeded by a new president from the other party. Ten switches from Republicans to Democrats or Democrats to Republican, and actually, there were 5 of each. Five times that the White House changed from Republican to Democrat and five times that it changed from Democrat to Republican.
What happened each time was fascinating. Every time a Republican came into office, the US economic growth rate went down. No exceptions. And Every time that a Democrat succeeded a Republican the growth rate went up. No exceptions.
I’ve written about this on several occasions. I keep coming back to it because it’s important. Somehow Republicans have managed to cement themselves in the public’s mind as the better party for the economy. It’s a myth that’s really far from the truth and understanding this could be very important to your financial health.
How have Republican’s done this? That’s a real head scratcher. But the present might be instructive. It’s a little crazy but follow me for a moment.
In October of 2020 Donald Trump said that “The policies of the left would unleash an economic disaster of epic proportions.” He further went on to state that a Democratic win would lead to sharply higher taxes and would “destroy our country.”
What actually happened? The economy grew and it grew faster under Biden than it had under Trump.
I’m going to start here by doing Trump a favor and remove 2020 from our analysis since it’s pretty hard to blame a worldwide pandemic on one person. So during 2017, 2018 and 2019 the economy grew by a pretty good average annual rate of 2.7%. That’s actually pretty robust growth for the largest economy in the world.
But during 2021, 2022 and 2023 under Biden the economy grew by an average annual rate of 3%.
Somehow the Republicans want you to believe that 2.7% annual growth is better than 3% and somehow tens of millions of people believe them. Why?
Because the rate of inflation in the US went from 1.8% in 2019 to 8% in 2022. It’s now down to less than 3% but while the rate of inflation has slowed, prices remain high. Is this the fault of Biden and the Democrats?
Well, according to the Council on Foreign Relations worldwide inflation was 1.9% in 2019 and 7.9% in 2022. Hmmm… nearly identical to US inflation. What happened?
In short, the pandemic. The pandemic caused global bottlenecks in the supply of almost everything driving prices of almost everything up.
In other words, the recession during the Trump administration was caused by the pandemic and so was the inflation of the early Biden years.
Either the recession was Trump’s fault and the inflation was Biden’s, or they both get a pass. I vote for giving them a pass, but, don’t forget the 3% average annual growth under Biden. Once again, a Democratic administration presided over faster growth than their Republican predecessor.
One Hundred And Twenty Five Years of History
While the Republicans have somehow become known as the better party for the economy, they’ve actually been making a mess of it. During the last century – 100 years! – a recession has begun under every single Republican president. Every one. No exceptions.
Democrats are not immune to recessions but the last one that began under a Democratic president was in 1980, 44 years ago.
So if you want a recession, vote Republican. It’s been a sure bet for over a century.
In other words, having a Democrat in office is not a guarantee of avoiding recessions, but the odds have been much better under Democrats.
What’s Going On?
The US economy is extremely complex and diversified. It’s very hard to credit one person with its success or failure. But it’s also very hard to ignore such a long history of failure by the Republican party when it comes to managing the economy.
But why have they failed so consistently? Here’s a radical idea. It might be by design. Recessions are not bad for everyone. They are actually good for some people. If you run a large business, some of your smaller competitors might go out of business during a recession and that can mean more market share for you. If you have a lot of money and want to buy something expensive, like a vacation property or something similar, during a recession you might be able to buy it cheaper.
Who gets hurt in recession? It’s almost always lower wage earners. When companies lay people off during a recession, it’s rarely the high paid managers. It’s the lower paid line workers.
So could it be that recessions are engineered to the benefit of large companies who want to gain more market share and wealthy people who want to be able to buy assets cheaper? It sounds far fetched. I really don’t believe that it’s true, but then again, there’s the Republican’s perfect record of slower growth and recessions to consider.
Giving More Money to People Who Already Have Enough
I think the explanation is less likely a conspiracy and more likely a difference in philosophy. For the last 44 years, since the beginning of the Reagan administration, Republicans have believed that the best way to stimulate the economy is by cutting taxes.
In other words, for roughly half of the time since WWII Republicans have relied on tax cuts. In 2001 when GW Bush was inaugurated, his VP, Dick Cheney famously said that Reagan proved that deficits don’t matter.
Tax cuts do have a history of stimulating the economy but it’s not the most efficient way to do it. The reason is that taxes are paid by people with money. Seems rather obvious. When taxes are cut a large portion of the people that benefit are people that already have enough money. That means that in those households little or no additional spending takes place as a result of a tax cut. The treasury just collects less money without any benefit.
The Republicans love to complain that the Democrats are the party of spending. Another obvious statement here but unlike tax cuts, government spending is 100% spent. In other words, every penny of government spending gets into the economy.
I can think of no bigger reason to explain the dramatically different economic performance of the Republicans and the Democrats.
Hal Masover is a Chartered Retirement Planning Counselor and a registered representative. His firm, Investment Insights, LLC, is located at 508 N 2nd Street, Suite 203, Fairfield, IA 52556. Securities offered through, Cambridge Investment Research, Inc, a Broker/Dealer, Member FINRA/SIPC. Investment Advisor Representative, Cambridge Investment Research Advisors, Inc., a Registered Investment Advisor. Investment Insights, Inc & Cambridge are not affiliated.
Comments and questions can be sent to hal.masover@emailsri.com These are the opinions of Hal Masover and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. Past performance is no guarantee of future results.