Are Democrats or Republicans Better for Equities?

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If you invested in stocks whenever there was a Democratic president and bonds when there was a Republican one, since 1949, your return would be 20 times greater than the opposite strategy. Most of that gap occurred after 1980, when the divergence between Democratic and Republican fiscal and tax approaches widened.

Historically, the Republican Party has been associated with big business, capitalism and business-friendly policies. Over recent decades, its platform has included the promotion of lower tax rates on corporations and individuals. In addition, it has advocated balanced budgets and smaller governments with the argument that a smaller and more fiscally responsible federal government will accelerate growth, incentivize the private sector and lead to broader wealth creation. Republicans have also tried to restrict the growth of entitlements on the argument that these are both unaffordable and create outright disincentives to individual participation in the private economy.

Statistically speaking, one could describe the historical Republican economic strategy as an effort to raise the median income and wealth by increasing the extremes of income and wealth in any given period. The idea being that the upper extreme will increase more than the lower one. Over time, it will raise the lower end in a process described as “trickle down” as well as through incentive effects.

The Democratic fiscal and tax policy strategy has been quite different over most of the last half century, with a significant parting of ways after 1980. For the most part, the focus of the Democratic approach to economic growth has been to directly raise the living standards of the lowest income and wealth deciles of our distribution through programs designed to supplement incomes and offset costs. These have included unemployment benefits, the supplemental nutrition program for women, infants and children (WIC) and Medicaid. They have also promoted initiatives designed to retain members of disadvantaged groups in the economic mainstream including sentencing reforms, more lenient treatment of narcotics convictions and the like. These were to be paid for by increasing tax rates on higher income deciles. In general, the Democratic platforms have been more fiscally expansive where the prospect of deficit financing has been concerned, if that was necessary – although as I discuss in my conclusions, that distinction has been more a feature of platforms and rhetoric than of reality.

From a distributional standpoint, one could characterize the Democratic strategy as focused on raising the median by reducing the extremes and using tax funding to outright raise the bottom and, hopefully, invest enough in the lowest deciles to create an “escape velocity” that would allow people to pull themselves out of poverty.

From the perspective of non-tax business regulations, the Republican Party is usually thought to be a promoter of less onerous regulations. The Democrats have been accused of being too prone to impose costly regulations and to interfering excessively with markets, to the detriment of business and the economy.