The Presidential Puzzle: Does the US Economy Perform Better under Democrat or Republican Presidents?

The Presidential Puzzle: Does the US Economy Perform Better under Democrat or Republican Presidents?

In this episode of 'Questions in Finance,' university professors Kate Holland and Veljko Fotak dive into an intriguing economic puzzle: why does public opinion favor Republicans as better managers of the economy, while macroeconomic indicators, corporate performance, and stock market returns generally show better outcomes under Democrat presidencies? And what explains some of the gap in performance?

The discussion, grounded in academic research, explores various metrics, at the macroeconomic, firm, and market levels and the strength and robustness of findings.

Kate and Veljko delve into common explanations, debunk the flawed ones, and emphasize the role of risk-aversion cycles and the timing of the Korean war and crude-oil shocks as having favored Democrat presidencies.

The episode concludes with an exploration of party identity and political polarization, touching on the complex factors influencing electoral success and public perceptions.

 

Timeline:

00:00 Introduction and Personal Anecdotes

01:17 Questions in Finance Podcast Introduction

02:08 Economic Performance Under Different Presidents

02:46 Public Perception vs. Economic Reality

05:04 The Presidential Puzzle

09:52 Diving into the Evidence

18:35 Corporate Performance Analysis

36:35 Exploring Explanations for Economic Trends

37:05 Cherry-Picking Time Periods: Valid or Not?

40:52 Impact of Crude Oil Shocks and the Korean War

43:51 Inherited Economic Conditions and Lead-Lag Effects

45:48 Risk Cycles and Economic Performance

50:36 Policy Explanations: Congress and Corporate Outcomes

59:34 Behavioral Explanations: Over-Optimism and Euphoria

01:03:20 Summarizing the Presidential Puzzle

01:06:06 Republican Electoral Success Despite Economic Trends

01:10:04 Party Identity and Political Polarization

01:11:45 Conclusion and Future Topics

 

 

Bibliography:

Alesina, Alberto and Howard Rosenthal. "Partisan politics, divided government, and the economy." Cambridge University Pres, 1995.

Alesina, Alberto, Nouriel Roubini, and  Gerald D. Cohen. "Political cycles and the macroeconomy." MIT Press, 1997.

Belo, Frederico, Vito D. Gala, and Jun Li. "Government spending, political cycles, and the cross section of stock returns." Journal of Financial Economics 107, no. 2 (2013): 305-324.

Blinder, Alan S., and Mark W. Watson. "Presidents and the US economy: An econometric exploration." American Economic Review 106, no. 4 (2016): 1015-1045.

Holland, Kateryna, and Esther Im. "Corporate Cash Flow Outcomes Across Presidencies: Still a Presidential Puzzle." Working paper.

Mian, Atif, Amir Sufi, and Nasim Khoshkhou. "Partisan bias, economic expectations, and household spending." Review of Economics and Statistics 105, no. 3 (2023): 493-510.

Potrafke, Niklas. "Government ideology and economic policy-making in the United States—a survey." Public Choice 174 (2018): 145-207.

Santa‐Clara, Pedro, and Rossen Valkanov. "The presidential puzzle: Political cycles and the stock market." The Journal of Finance 58, no. 5 (2003): 1841-1872.

Snowberg, Erik, Justin Wolfers, and Eric Zitzewitz. "Partisan impacts on the economy: evidence from prediction markets and close elections." The Quarterly Journal of Economics 122, no. 2 (2007): 807-829.

 

Online Sources:

EPI Report: https://epiaction.org/2024/04/02/economic-performance-is-stronger-when-democrats-hold-the-white-house/#full-report

Belfer Center Study:
that Kate and I are putting together.
Shortly after Joe Biden hadhis poor performance in the
debate with Donald Trump...

Kate (00:21):
that was June 2024.

Veljko (00:24):
Yes.
Yes.
He came to me, our youngest,that is, not Joe Biden.
He came to me and he asked "what, is thisgood news, now that we are more likely
to have a Republican, as a president?
Does this mean that the stockmarket is going to do well?"
I didn't necessarily agree with whereit was coming from, but I was proud of
him for even thinking in this direction.

(00:45):
So what do you think, Kate?

Kate (00:47):
That's a question of interest to many.
You know, actually Adam, the guy whowas remodeling our bathroom, which was
supposed to take two months and tooklike close to a year, but that's also

another story, asked me (00:57):
Do American firms and the economy, do better under
Republican or Democrat presidents?

Veljko (01:17):
Welcome to Questions in Finance,

Kate (01:20):
a podcast where we translate academic mumbo jumbo to answer
interesting questions in finance.
I'm Kate Holland.

Veljko (01:28):
And I'm Veljko Fotak.
Kate and I met when we were PhDstudents at the University of Oklahoma.

Kate (01:34):
Today we're university professors and we spend our days
teaching and researching companies,markets, and all things related.

Veljko (01:44):
When we're looking for topics for our podcast, our golden standard is
really something that academia understandswell and something where academia has
an interesting and clear contribution,but at the same time, something that
is not necessarily translating orpercolating to the general public.
And here, I think we're hittingthe sweet spot because there

(02:06):
is a very important disconnect.
On one side, we have a lot ofevidence that the economy does
seem to be performing betterunder Democrat presidents.
And with the economy, we mean macro.
We're going to be looking atthings like GDP growth and
other big-picture statistics.

(02:28):
We mean firms, firm profitability,and other metrics, but also
ultimately that translates intohigher stock market performance.
And we can discuss the strength androbustness of some of these findings
and discuss some of the underlyingcauses, but here comes the disconnect.
When you ask people who does abetter job at managing the economy,

(02:50):
is it Democrats or Republicans?
Most respondents rate Republicansas better stewards of the economy.
I did a little bit of digging here,surveys, opinion polls and you can
pick different times, different dates,the picture is fairly consistent.
I had to pick one, so I'm lookingat an NBC poll dated September 2023.

(03:14):
49 percent of respondents say they trustRepublicans more when it comes to the
management of the economy, 28 percentof respondents trust Democrats more.
So that is a whole 21 percentagepoint gap between the two parties.
Now to put this a little bit more intocontext, in general, Republicans tend

(03:36):
to poll higher with things like bordersecurity, national security and crime.
Democrats tend to poll higherwhen it comes to things like
healthcare and education.
But here we see, a veryconsistent Republican advantage
when it comes to the economy.
The evidence of performanceis at the presidential level.

(03:56):
The opinion polls here are vague, right.
They say Democrats or Republicansin, in a, in a general sense, but
this greater fate in Republicanmanagement of the economy does seem to
translate at the presidential level.
I have a Washington Post ABC jointpoll dated August, 2024, that
gives Donald Trump a 10 percentagepoint advantage over Kamala Harris

(04:21):
on the management of the economy.
One of the interesting thing hereis that in this particular poll,
90% of respondents indicate that theeconomy is the most important issue
when they're deciding how to vote.
And this is also somethingfairly consistent in other polls.
So I will also mention that Ilooked at little at how this

(04:43):
opinion gap evolves over time.
Republicans have had a substantialadvantage on the management
of the economy since 2010.
If you go back to the periodof 1990 to 2010, Democrats
were actually rating higher.
Before 1990, it flips againand again, it is, Republicans.

(05:04):
Now, as we said, this is an issue that issomehow misunderstood, but also one that
seems to be driving electoral decisions,which is why I think it's so important
and why I'm so excited about this beingthe topic of today's conversation, Kate.

Kate (05:22):
What is going to make this really interesting is, we're really
going to talk today about somethingthat's known as a presidential puzzle.
Literature that shows that a variety ofactual outcomes when we're talking about
economic growth, such as GDP growth orstock markets or corporate performance,
corporate outcomes, such as sales andexpenses, they're actually better under...

(05:46):
Democrat presidents.
So, it's puzzling that polling comes up sostrong in support of Republican influence
on the economy being more positive.
But when we look at the empiricalfindings, we see the opposite.
We see that the actual economicperformance, corporate performance,
stock-market returns are all higherduring Democrat presidencies.

(06:11):
So, it's a puzzle, obviously, becauseof this tension, and it's also a
puzzle because while this has beenvery consistently documented that
economic performance and stockmarkets do better under Democrat
presidents, we are still looking for anexplanation about why is that the case.

(06:31):
So this is why it remainsa puzzle, so to say.
And today we're going totake a look at this puzzle.
We should mention that we're going to betalking about US presidential elections
specifically and not dwelling too muchinto state level or mayor level elections.

Veljko (06:50):
I think those are important qualifiers.
Thanks, Kate.
It's a puzzle, as you say, partiallybecause we are yet short of a
good explanation and we're goingto go through the proposed ones.
But on the other side, I thinkit's a puzzle also because
this seems to challenge ourpreconceived notions in many ways.

(07:11):
I think many of us come at this withthe idea that Republicans are the
party of low corporate taxation.
Republicans are the party of deregulation.
Republicans in general have donea very good job at marketing
themselves as the pro-business party.
So, I think this finding, that the economyand firms in particular do better under

(07:34):
Democrat presidencies, will surprisemany and that's part of why I would
define it as an interesting puzzle.

Kate (07:41):
I think that adding to this is also the fact that whenever
you look at stock-market returnsaround Republican wins, it seems
that the stock market reacts morepositively to a Republican win.
Of course, it could be linked tothe tax expectations that you are
discussing because taxes are generallylower during Republican presidencies.

(08:02):
But, the initial stock-marketreaction is more positive.
It turns out that it's the later years,years two and three of the presidencies,
that flip and the performance across abroad range of categories is better under
Democrat, not Republican presidencies.

Veljko (08:19):
You're absolutely right.
Even before Republicans or, orsomebody on the right wins an election,
there are reactions by the market.
And again, I think that these reactionsshow that this issue is not just
misunderstood by the public at large.
It's also misunderstood by financialmarkets or rather by the people
who professionally manage money.

(08:41):
We have a paper by Snowberg,Wolfers, and Zitzewitz.
This was published in the QuarterlyJournal of Economics in 2007, where they
actually look at how markets respond toa higher likelihood of an election being
won by a Republican versus a Democrat.
And what they're actually doing isthey're looking at betting markets

(09:02):
to infer shifts in probability.
And they actually find that when theprobability of a Republican winning goes
up, the stock market reacts positively.
And when the probability of a Democratwinning a presidential election goes up,
the stock market has a negative reaction.
They estimate the overall magnitudeof the effect to be at about two to 3

(09:22):
percent of market capitalization, shiftingfrom a certainty of Democrat victory
to a certainty of Republican victory.
Girardi has a paper in 2020, wherehe shows very similar mechanisms
extending around the world as well.
Whenever right-wing parties seemto, be winning national elections,

(09:43):
stock markets react positively.
It's an issue that even professionalsdon't seem to be pricing accurately.
That I think makes it evenmore interesting for us.
It's probably time to dive alittle bit into the actual.
Evidence, right?

Kate (09:56):
Let's take a look.
Let's, let's, you know, do the waterfall.
Let's start at the top and talkabout, the economy, the stock
market, and then finally firms.

Veljko (10:07):
Yes, absolutely.
And you're right because there aredifferent layers of evidence here.
So we start with the macroeconomy, right?
There's a very interesting paper byBlinder and Watson published in the
American Economic Review in 2016, wherethey are actually looking at data

(10:27):
spanning a fairly long time period.
They start all the way in 1949and they go all the way to...

Kate (10:38):
Truman.

Veljko (10:39):
That's correct.
Right?
So, so we, we are really goingquite, quite a ways back and
they're going all the way to 2013.
They have 64 years in their sample andwithin the 64 years, one of their main
findings is that average GDP growth,average growth of growth domestic
product, how we measure the overallsize of the economy, it's about three

(11:03):
point 33 percentage points per year,on an annual basis that is, but there
are big differences depending on thepolitics of the president in power.
When a Democrat president isin power, we see average growth
of 4.33 percent per year.

(11:23):
That's 4.33.
When a Republican president is inpower, we see average growth of
2.54 percentage points per year.
So that's, quite a significant difference.
1.79 percentage points.
Now, if you extrapolate from theseover a four-year presidency, that means

(11:45):
that on an average, under a Democratpresident, we see average growth of 18.5
percentage points, under a Republican,we have 10.6 percentage points right
over a four-year presidential term.
Quite a big difference here.
We are talking aboutsome substantial effects.

Kate (12:06):
And I think, visually, it makes it very clear, if somebody would pick
up the paper and take a look at thegraphs that they present there, they
just color code the bars red and blue.
I think visually thisdifference stands out even more.

Veljko (12:20):
But Kate, why would anybody pick up the paper?
That's what we are here for.
So they don't have to pick up the paper!
And now, jokes aside,you're absolutely right.
I think that, it's one of the weaknessesperhaps of the audio model, but when
you're talking about 18 percent versus10 percent, the fact that these are

(12:41):
pretty stark differences, right?
And, Blinder and Watson are alsotelling us this is not just a mean
effect driven by a few outliers.
One of the things that they do, totry to convince us there are real
differences, is that they note thatduring their sample, there are 49 quarters
of recessions, as per the NationalBureau of Economic Research definition.

(13:04):
And they note that out of these 49recession quarters, 41 fall under
Republican presidencies and eight fallunder Democrat presidencies, despite
the fact that there is a similarnumber of, years and quarters in power.

Kate (13:22):
This is going to make somebody think that this better performance
during Democrat presidencies is becausethere's more recessions that are
occurring during Republican presidencies.
So it's kind of leadingone in that direction.
But I think what's important is topoint out that, even if you exclude
the recession years, so if you, ina way, what we say control for the

(13:43):
recession years, the results stillstays, economic performance is still
stronger under Democrat presidencies.

Veljko (13:51):
Absolutely.
You're absolutely right.
I think that is an important qualifier.
It's not the number of recessionsthat's driving the results.
Even when you throw those yearsout, you still get the same.
They do have a lot of othernumbers in this paper.
Some of the things that they do find isthey don't seem to find big differences
in terms of fiscal or monetarypolicy and their direct consequences.

(14:15):
They do find some differences in theunemployment rate, but they claim
they're not necessarily significant.
Although they do claim that when youlook at the change in employment,
there are some differences.
When a Democrat gets elected, theunemployment rate tends to decline.
When a Republican gets elected, theunemployment rate tends to increase.

(14:38):
But again, the differencesthey find are not major.
I did find however a different study,by the Belfer Center at Harvard, that
actually does have slightly strongerconclusions when it comes to the
unemployment rate, they find underDemocrat presidents, on an average,

(14:58):
job creation at the rate of 1.
7 percentage point a year.
And then under Republicans,it's just 1 percent per year.
So they're finding almost a doubling ofthe pace of job creation under Democrats.
Now, of course, this is a first layer ofevidence that's macro economic, right?

Kate (15:17):
I'm ready to jump into finance as well and talk about some things
that relates to stock markets.

Veljko (15:23):
Well, yeah.
Fair enough.
We are finance people andultimately we want to make money.
So we want to know howdoes the stock market do?
There is literature on this startingall the way in the early 1980s that is
documenting that for all the past centuryalready, we see a stronger stock market
performance under Democrat presidents.

(15:44):
I'll focus on some of theslightly more recent evidence.
We have a paper published in 2003...

Kate (15:51):
A highly quoted paper.
So it's like one of thosethings that everybody generally
knows about, in academia.

Veljko (15:58):
By, by all means.
This is a paper published in 2003by Pedro Santa Clara and Rossen
Valkanov in the Journal of Finance.
What they're doing is they actuallylooking at the period 1927 to 1998.
And they're looking at stockmarket performance, let's
say, above the risk free rate.

(16:19):
So they take market returns, equitymarket returns, they subtract returns
on treasuries, to get the equitypremium, or the realized equity premium.
And they find that under Republicans,returns above the risk free rate
average two percentage points per year.
Under Democrats, we have 11 percent.

(16:44):
This is even more astonishingthan the evidence that we've seen
that's macro economic, right?
You have 11 percentage point returnsper year under Democrat presidents, only
two percent per year under Republicans.
When you see results that are thisstrong, it's okay to be skeptical.

(17:04):
So you may be thinking perhaps theyare cherry-picking timeframes here
in their analysis, selecting years inwhich their story holds true, or this
is some other artifact of statistics.
Well, there is a lot offollow-on research on this.
That's the beauty of the scientificmethod, at the end of the day.
And these findings have reallyheld to scrutiny over time.

(17:27):
Probably the most cited paper is byLubos Pastor and Pietro Veronesi.
Their paper was published in theJournal of Political Economy in 2020.
They are extending theseanalyses and effectively they
look at the period 1999 to 2015.
And they find an even larger difference.
So, their bottom line numberis a whole 17% per year.

(17:52):
That is, the difference betweenstock market performance under
Democrats and Republicans is a whole17 percentage points, again, under
Democrat and Republican presidents.
So, truly astonishingly strongresults and truly robust results.
We know from these two layersof evidence, at this point, that

(18:14):
the macro economy does better.
And we know from the last coupleof papers that we discussed that
the stock market performs better,during Democrat presidencies.
Now, somehow I'm hoping you're goingto help us connect stock markets to the
macro economy by looking at firms, Kate.

Kate (18:34):
Yeah, let me try.
So, let's now look at firms andtalk about corporate performance.
I have a paper on this with EstherIm, but before we jump into that,
I would like to explain a littlebit how stock market returns are
related to corporate performance.
I mean, ultimately stock market returnsgo up if a firm valuation goes up and they

(18:57):
go down if a firm's valuation goes downand at its very basics, firm valuation,
which is what we teach in our financeclasses, really depends on the cash flows
of the firm and Cash flows again, atis most basic have two main components.
Operating cash flows, which reallyare your revenues minus costs,

(19:20):
what you bring in minus whatyou spend to sell your product.
And the second element is investment,or your reinvestment really in the
business to maybe purchase equipmentfor the products that you're buying.
So these two elements, operating andinvestment, creates a core of cash

(19:40):
flows, actually for multiple yearsforward in time, and then we translate
those into today's dollars by what wecall discounting them at an appropriate
discount rate that accounts for theriskiness of the firm and the cash flows.
Basically, what I'm going to betalking about are corporate outcomes.

(20:01):
You might think what do theyhave to do with returns?
Well returns move around givenchanges in firm valuation.
And firm valuation largely dependson these corporate outcomes
related to revenues, related tosales, related to investment.
So that's the link.
So I wanted to mention that first.
Does that make sense?.

Veljko (20:21):
Oh, absolutely, Kate.

Kate (20:23):
The question that we ask is, what happens to corporate outcomes
across various presidencies?
We go back to Eisenhower, to 1950s,and that's because accounting data
becomes more available or better atthat time and all the way through 2021,
so, some of the more recent data, andwe start out replicating, or, finding

(20:44):
a result that's closely related toreturns on the corporate sphere.
And that's going to be what we callthe market value of equity, also
known as market capitalization,which is really just a price per
share, a price of the stock, timesthe number of shares outstanding.
What we find is that, this market value ofequity, and also we look at their scaled

(21:06):
measures, like market to book, they'relower during Republican presidencies
than during Democrat presidencies.
So this creates some consistencywith the previous literature.
And then we jump straightinto corporate outcomes.
We started out with, I would saythe sexiest ratios on the market.
Hence those are going to be yourprofitability ratios and examining firms

(21:28):
profitability, just because so much ofvaluation depends on profitability and
there's so many profitability ratios,there's gross margin, operating margin,
net profit margin, ROA, which is returnon assets, ROE, which is return on equity.
So we look at the variety of thoseand we find that, pretty much all,
profitability metrics are lower,during Republican presidencies.

(21:52):
I have to also mention that we are lookinginside of the firm, across presidency.
So this helps control for a variety of.
related to the industry and so on.
To put some numbers to it, we find thatoperating margins, are about seven and
a half percent lower during Republicanpresidencies compared to Democrat

(22:14):
presidencies and ROA is about 4 percentlower, which is return on assets.
Those are also pretty significant numbers.

Veljko (22:24):
I'm not sure that everybody will necessarily appreciate the
strength and importance of lookingat within firm effects here.
And I think the way I'm looking at this,and correct me if I'm mistaken, I think
that when we compare across parties, wehave some preconceived notion that some

(22:44):
parties favor certain industries, right?
That Republicans might be more,friendly to oil companies and Democrats
might be pushing for green energy.
And that, perhaps some of thesedifferences in performance might be driven
by the fact that, well, Republicans aresimply backing the wrong horse, right?
Republicans are bettingon oil and dirty energy.

(23:06):
The world moves to green energyand their bets don't pay out
in terms of economic growth.
That's a plausible...
hypothesis, but it seems to me thatyour findings are disproving that.

Kate (23:20):
I think, looking within the firm allows us to really zoom in on the
actual effects of what's happening.
And concentrate on thatfirm level environment.
So, yeah, thanks.
Thanks for pointing out.
I'm not gonna be tooting my own horn,so to say, but I think that, yeah,
looking within firms, gives you a veryprecise understanding of what really

(23:41):
goes on to corporate outcomes in reality.

Veljko (23:45):
I guess the point that I was trying to make is that, it's
not just econometrics, right?
It leads to cleaner econometricanalysis, but there's an important
shift in interpretation once we realizethat this is the same firm, performing
differently under different presidents.

Kate (24:00):
Thank you.
And we've established thatprofitability is lower.
So, you might be wondering,well, why is profitability lower?
Well, profitability can belower if either sales are lower
or expenses are higher, right?
Because at its base, profitabilityis just sales minus expenses.
Whatever you bring in money wisefrom the sales of your products or

(24:22):
services, minus the expenses thatyou incur in the process of sale.
The big question is, whyis profitability lower?
We look at revenues and expenses.
And what we find is that sales growth,revenue growth is significantly
lower during Republican presidencies.
Specifically, we find about a 3.

(24:45):
4 percent difference in salesgrowth from 1994 to 2021, and
about one and a half percent,difference, between 1950 and 2021.
So sales growth is lower, and this isan extremely important result because
sales growth influences many decisions.

(25:05):
John Graham from Dukeuniversity has a survey of CEOs.
And, it's a very popular CEO survey.
CEOs, told him they use revenues orsales growth projections for a variety of
decisions, including those on investment.
For us, sales growth andrevenue projections are really

(25:26):
key to making many, many decisions.
So I think this is avery important result.
And it's also important from thatperspective of valuation, because it
influences future sales, the futuregrowth rate applied to those cash flows
which is at the heart of valuations.

(25:47):
To understand the magnitude.
I mean, what is this 3.
4%?
Is that a lot?
Is it not a lot?
To understand the magnitude,we decided to compare it to
what happens during recessions.
We find that during recessions,sales growth is about seven
and a half percent lower thanduring non recessionary periods.

(26:07):
So what happens during Republicanpresidencies at about 3.
4 percent is half to one thirdof the impact that we see during
recessions in terms of sales growth.
So it's an important result.
Sales growth is lower.
Therefore, profitability islower, but it's also possible
that maybe expenses are higher.

(26:31):
So next we look at expenses.

Veljko (26:32):
This is starting to paint a bit of a consistent picture, right?
Businesses and consumers spendless, sales growth goes down, sales
growth is important to valuation.
This ends up translatinginto stock market outcomes.

Kate (26:47):
So I think this is providing a mechanism underlying the stock returns.
And I agree that everything seems tobe coming in consistently throughout
multiple aspects and within corporateperformance too, once you drill into it,
we keep finding these very consistentresults jumping quickly back to some
of the other corporate outcomes.
Expenses.

(27:08):
There's some politicallymotivated expenses.
Politically motivated expensesthat firms incur are taxes.
Taxes usually are going to be lowerduring Republican presidencies
because Republican candidatescampaign on promises of lower taxes.
Another politically motivated expendituresthat firms are subject to are salaries.

(27:31):
Because it relates to employment andemployment, receives bipartisan support
and interest, but generally, democraticcandidates will campaign, with promises
of job growth, job support, et cetera.
Also, expenses that firmsincur can be fixed or variable.
Fixed ones are usually moredifficult to reduce whenever you're

(27:53):
trying to address lower sales.
What we see, what we find is thatindeed, politicians walk the talk, so
to say, and, effective tax rates arelower during Republican presidents.
This is consistent with Pastorand Veronesi's 2020 study.
Also with previous research thathas already documented this.
So we're not opening anything new, butwe're just showing, yes, within the

(28:15):
firms, we also see this results, taxes areindeed lower, but remember while taxes are
lower, we still see lower profitability,meaning that this lower tax rate,
this lower expense is unable to offsetthe lower sales that they experienced
during Republican presidencies.

Veljko (28:36):
I think this is a point worth pausing on for a second, right?
Republicans really are the partyof lower corporate taxation.
And despite that, firmsseem to underperform, right?
So If we just go by this result,it's a bit of a lose-lose.
I mean, we are losing interms of corporate payouts and

(28:59):
distributions to the private sector.
We are losing in terms of,public sector financing, right?
I mean, we have lower, tax revenues.
This does remind me, Kate, that weshould have mentioned upfront that
we try to stay apolitical, right?

Kate (29:17):
Definitely.
Yes, we should havedefinitely mentioned that.
We really are looking at, academicresearch out there and the data.
So we're trying to stayas apolitical as possible.
While I'm discussing my papernow, I have another paper that
actually finds better innovationoutcomes under Republican governors.
We are trying to just presentthe outcomes and the data here.

(29:39):
You're right.
That's a very important point.

Veljko (29:42):
In some sense, it's almost unfortunate that because as we are
trying to stay apolitical, if youwill, in this paper, there are such
strong effects that you're havinga hard time, not using hyperbole.
Some of these numbers are truly,truly massive and hard to ignore.

Kate (30:03):
Yeah, I agree.
I agree.
So let me throw out a coupleof other big numbers here.
It's interesting to look at whathappens to employment and therefore
the salary expense, cross presidencies.
So what we find is that employmentgrowth is lower by about 5.
1 percent during Republican presidenciesas compared to Democrat presidencies.

(30:24):
What that means is that firmscan pay less in salaries, so
their salary expense goes down.
So firms see lower tax expenseand lower salary expense
under Republican presidencies.
But, when we look at their overallexpenses, we see that those are still
becoming a higher proportion of theirsales, meaning that the reduction in

(30:45):
taxes and salaries is not enough tooffset the lower sales and we see that
profitability continues to suffer.
So there's lower profitabilitydue to lower sales.
We see some reductions in certaincategories of expenses, especially those
that are politically motivated, but,profitability continues to be lower.

(31:07):
And we find that this first big,important measure of these cash
flows, which is the operating cashflow is lower during Republican
presidencies, and specifically, itcomes in at about 6 percent lower.
If you compare that magnitudeto recessions, during
recessions, it's about 15.
7 percent lower.

(31:28):
So again, about a third of themagnitude for operating cash flows,
During Republican presidenciesas compared to recessions.
So that kind of summarizes thisfirst big element of cash flows.
The next thing is investment, becauseif cash flows are lower, firms could
offset them by lowering investment andthen keeping their cash flows intact.

(31:52):
We actually see that firms do that.
Remember managers mentioned to JohnGraham's that they use sales growth
as their guiding principle for manydecisions, including investment.
So what is investment?
Investment is a firm buyingequipment, building factories also
participating in acquisitions.
And it really influences thefirms, total assets or the

(32:17):
physical size of the firm.
This investment element is an importantcomponent of firms' total assets.
We find that investment is lowerduring Republican presidencies.
When we look at capitalexpenditures, we see that they're 11.
6 percent lower.
We also find lower acquisitions, again,consistent with this lower investment.

(32:39):
And all of this actually pointsto firms shrinking themselves
or reducing their total assets.
They do shrink themselves by about 5.
3 percent during Republican presidenciesas compared to Democrat presidencies.
So, investment in tangible items islower during Republican presidencies.

(33:00):
Well, but what about intangibles,like research and development?
We didn't see any significant differencesin R and D growth across presidencies.
So it's quite similar across Democrat andRepublican presidencies at a big scale.
Besides operating cash flows andinvestment, operating activities
are important for firms to.

(33:20):
Things such as inventorymanagement, management of customer
payments and supplier payments.
And when we check those, we don't findsignificant differences across time.
All together, we see reduced operatingcash flows, reduced investment.
And, when we look at firms, cashholdings, firms, liquidity, we actually

(33:42):
find that liquidity goes up duringRepublican presidencies and firms
hold the higher proportion of theirassets in cash during those times.
Somewhat of a flightto safety as you might.
This summarizes, some of theseoperating cashflow investment,
outcomes that we found.

(34:03):
I have to say that we are lookingat contemporaneous, outcomes.
We also would, as you say, lagsome of our, control variables.
So we ensure that theseresults, are really, specific to
What we're looking at, notkind of the other way around.

Veljko (34:21):
In many ways, Kate, you beat me to it.
I was just going to ask you,are you guys thinking about the
chicken and the egg here, right?
Is it that sales go down and then firmsare cutting everything they can cut
to stay afloat, or are firms in someway, less optimistic about the future,

(34:44):
so they are investing less and thattranslates into future lower growth?.
Or is this again, somethingthat we cannot disentangle?

Kate (34:55):
Yeah., it's the sales growth, the slower sales growth.
That's an important factor here.
And that's why I was saying alsoearlier that that's quite important.
So sales growth is lower during Republicanpresidencies, sales growth influences
your future projections as well.
What's important to point out is thatvaluations oftentimes depend on the
expectations of future corporate outcomes.

(35:18):
But we are recording a lot ofcontemporaneous, very consistent
evidence, nonetheless, contemporaneous.
We do have one window of lookinginto the future, where we can look at
analyst projections of what's going tohappen to the firm over the next year.
When we undertake that analysis, wesee that firms expected earnings are

(35:39):
projected to be lower, in the followingyear for under Republican presidencies
as compared to Democrat presidencies.
So we also find some consistency withfuture cash flows, for our results.
To summarize, if you look under thefirms, you find lower sales, lower
profitability, lower investment.

(36:00):
These are consistent with them beingmechanisms for lower returns documented
by Santa-Clara and Valkanov in 2003.

Veljko (36:07):
And all of which you're citing is under Republican presidents, right?

Kate (36:11):
That's correct.
That is correct.

Veljko (36:14):
A very consistent picture, the macroeconomy, the market firm
level evidence, and frankly, I thinkthat it's hard to not be convinced
by the bulk of the evidence, right?
I think that what's more controversialhere is trying to explain why, right?
Why are we seeing thesekind of big numbers?

Kate (36:35):
I think that is a big, interesting question.
What can explain all of this?
What are some of the explanations?

Veljko (36:42):
Absolutely.
And so, let's dive a little bit becauseall of these papers, all try, now we're
going to see by the end of this discussionthat perhaps they don't, necessarily
succeed, in explaining what's happening.
But let's dive intowhat they're telling us.
First of all,

Kate (37:02):
Let's look at explanations.

Veljko (37:04):
Absolutely.
So, one of the things that we keep hearingas a possible, let's say, objection
slash explanation to what's going onis, "well, you might be just cherry
picking your time periods here," right?
That perhaps this evidence is basedon, finding the right window of
time during which the results hold.

(37:26):
I will say that first of all, all of thisresearch is based on fairly long samples.
So, first of all, that alreadyseems to disprove some of these
cherry-picking allegations.
I will also note that most of the researchthat has extended the initial studies
has found very consistent results.

(37:48):
For example, Blinder and Watson,they're looking at 1949 to 2013.
They're finding this bigGDP growth advantage.
But then the EPI, has recently publisheda report that extends these to 2024
and finds comparable, if not slightlystronger effects in terms of the economy.

(38:09):
I will also say that, as I was preparingfor this discussion, I did decide I'm
going to dig a little bit and let'ssee if I can find any evidence that
contradicts this main narrative, right?
And I did actually find onearticle, published in an
online outlet, called The Hill.

Kate (38:29):
So, hold on.
I am gonna show my total ignorance here.
I am unaware of the source.

Veljko (38:35):
It's an online magazine, it's an online publication that
focuses specifically on US politics.
And so, Kate, it is not apeer-reviewed journal, if that's
what you were going to ask.
But they make a point andperhaps it's worth looking into.
They actually had a headlinethat attracted my attention,

because the headline said (38:55):
The U.
S.
economy does better under Republicanpresidents, and I was taken aback
by this, being so contradictoryto what we're talking about here.
So then I went to look into what they'reactually doing and they're looking at
GDP, but they're dropping everythingprior to Nixon, prior to President Nixon.

(39:18):
So they are starting at a laterpoint And now they don't offer
any raw numbers, so I couldn'tquite replicate their conclusions.
I crunched the numbers on my own, andtruth is, yeah, when you look at from
Nixon onwards, you actually do finda very slight, Republican, advantage.

Kate (39:38):
You are talking about the economy and about GDP growth.
If you're going to look at stock-marketreturns from Nixon forward, you will
still find that stock market returns arestronger under democratic presidencies
than a Republican presidency.
So if you're looking at stockreturns, they'll still be worse
during Republican presidencies.

Veljko (39:59):
Oh, you're absolutely right, Kate.
One constant here is that all the resultsare strong, but the stock market returns
are the strongest and most robust, right?
Well, I, I actually should saythat compared to the macroeconomic
results, the stock market resultsare stronger and more robust.

(40:20):
I don't know about firm-level evidence.
That's certainly moreyour domain than mine.
But I, I will say so, if you, startat a slightly later time period,
the GDP and GDP growth results, seemto become a little weaker or not
significant, maybe even flip signs.
But still, the stock market is stillpainting a very, very consistent picture

(40:44):
of, stronger performance under Democrats.
Does the window that we choose, matter?
To some extent it does.
Blinder and Watson themselves ultimatelyconclude that, lucky timing has
at least something to do with it.
In particular, they talkabout two sets of events.

(41:05):
They talk about crude oil shocks andthe timing of crude oil shocks in
the seventies and eighties havingfavored, Democrat presidents.

Kate (41:13):
Crude oil prices were lower during those times.
They're going to say these weremore benign crude oil shocks
during Democrat presidencies.

Veljko (41:24):
Absolutely.
And there are shocks that,you know, in some sense are
coming from the outside, right?
I mean, if a crude oil shock is tankingyour economy, it's bad luck, right?
In some sense.
Perhaps oil is not entirelyexogenous to American policy...

Kate (41:39):
This is a whole other episode.
I think that's, that's the case inthe more recent timeframe, since 2010,
oil production has become extremelyimportant in the US, but we're looking
at a really long timeframe here.
So yeah, it's true oil shocksor crude oil prices are lower
during Democrat presidencies.
That's what seems to beone of the explanations.

(42:00):
And the second,

Veljko (42:01):
The second is, the Korean War.
They find that, the Korean Warhad at different points of time,
both, benign, effects on the U.
S.
economy by stimulating demand and negativeeffects by imposing fiscal pressures.
When you look at the timing of theshocks, it seems to have favored some
of the early Democrat presidents.

(42:23):
And it seems to have, really,really affected negatively, some of
the early, Republican presidents.
So, in some sense, what Blinder andWatson are, are concluding is that, the
fortuitous timing of the Korean war andof oil shocks has, at least to some
extent, favored Democrat presidents.

(42:44):
But I will also say that ultimatelyit is early on in our sample, it's
really when you're compare when you'rein the Truman years in the Kennedy
and Kennedy Johnson years, that you'reseeing some of the biggest differences
in Republican versus Democratperformance from a macro economic...

Kate (43:06):
Right.
I was just going to stress, we're nottalking about the stock market here.
Stock market resultsremain very consistent.

Veljko (43:13):
Consistently lower

Kate (43:14):
During Republican presidencies.

Veljko (43:15):
I was ready for your objection, Kate.
I was ready for it.
But anyways, I don't know where we ratethis time period window cherry picking.
I wouldn't call it a valid explanation forthe results, certainly not on the stock
market, but there is at least some...

Kate (43:32):
Pointing to a bit of this luck of explanation,
especially with crude oil, right?

Veljko (43:37):
Correct.
But Kate, there are other papers herethat are telling us that this is not
necessarily about the "luck" of economicperformance, but it's "luck" in terms of,

Kate (43:48):
Yeah.

Veljko (43:49):
The economic situation you've inherited, right?

Kate (43:51):
I've heard this, asked from me a lot, people say, well, you know,
it's very possible that the policiesfrom one administrations have passed
on to the next administration.
So this lead leg possibilities thatthese high growth policies from
a previous administration are nowenacting or reliving themselves
in the new administration.

Veljko (44:13):
Democrats are just benefiting from the smart policy of the
Republicans coming before them.

Kate (44:18):
That is correct.
Yes.
This has first been addressed byBlinder and Watson in their 2016 paper.
So they dissuade that idea that lead likepossibility because they show that, the
inherited growth by Republican presidentsis about four and a quarter percent, while
that by Democrat presidents is about 1.

(44:41):
94, close to 2%.
So Democrats inherit lower growth rates.
When we take a closer look at corporateoutcomes, we find that corporate
outcomes are the lowest during thesecond and third year, or the middle
years of the Republican presidencies.
This is consistent with Belo, Gala,and Li, 2013, who finds stock-market

(45:03):
returns to be lower again during themiddle years of Republican presidencies.
So that, kind of helps dissuade abit of that lead lag association
and inherited conditions.
So I'd say that's probablynot the explanation.

Veljko (45:18):
I will say that this puzzle, it's a tough nut to crack, right?
It feels to me that every time wecome up with an explanation and
we start digging into it, it seemsto, lead to an even deeper hole,
because, we can hypothesize Democratsinherit better conditions, but then
we look at it and Democrats inheritworse conditions, and despite

(45:39):
that, they do better afterwards.
And instead of getting an answer tothis puzzle, the puzzle just seems
to be getting even more puzzling.

Kate (45:48):
I think the next thing in this puzzling puzzle, we're going
to talk about is risk cycles.

Veljko (45:55):
Yes, absolutely.
And I think what you're hintingat here is the Lubos Pastor
and Pietro Veronesi story.
They had a paper published in 2020in the Journal of Political Economy.
And this is, mostly a theory paper withsome, empirical evidence in support,
but it's mostly a theoretical paper, andthey're trying to provide an explanation

(46:20):
that relies on the idea that, riskaversion changes over time, and they claim
that risk aversion correlates both toelectoral outcomes and with stock-market
outcomes, effectively inducing some sortof spurious relationship here, right?
And so, let's walk our way back.
You know, there's some big words here.

(46:41):
So let's look at what they reallymean, first of all, risk aversion is a
metric of how afraid we are, you know,

Kate (46:49):
it's an attitude towards risk.

Veljko (46:51):
Thanks for bailing me out, Kate.
Pastor and Veronesi, are tellingus is that when risk aversion is
high, when people are concernedabout the status of the economy,
they tend to vote Democrat, right?
And again here, Democrats are the partythat in general promises higher levels
of distribution, stronger social-safetynets, stronger welfare programs, and

(47:16):
there's some evidence that people valuethose more when things get rough, right?
At the same time, when risk aversionis high, we have a very large
asset pricing literature, showingthat subsequently corporations
have to offer high returns, right?
And again, the logic here is thatwhen people are afraid, you have

(47:41):
to offer them higher returns toincentivize them to invest, right?
So effectively, after a spike inrisk aversion, subsequently, we
see higher returns on markets.
You have this higher risk aversion,Democrats get elected and subsequently
the stock market does better.
If you buy this Pastor and Veronesi story,this relationship has nothing to do with

(48:08):
actions taken by Democrat politicians,rather it's just, spuriously, induced by
the fact that, risk aversion correlateswith both electoral outcomes....

Kate (48:18):
This is an important explanation that they provide, but I would like to
say that it is a theoretical explanation.
And they do have some empiricalfindings there in their paper to
support their theoretical explanation.
But they mostly look at the periodsof transition in terms of presidency.

(48:41):
So they're not looking at fullpresidential cycles there.
They're looking at transition periods.
But yeah, important explanation.
Theoretical explanation largely.
And, the empirical evidence ismostly on the transition side,
not on full, presidential cycles.

Veljko (48:59):
And then they will say that they do, extrapolate from that, they try to
generalize the results, but you're right,the evidence is coming from transitions.
Now, there's something else about thispaper that, I won't say it bothers
me, but I find this paper fairlyconvincing when it comes to explaining
what's happening with stock markets.

(49:20):
The problem is that while it explainsthat piece of the overall puzzle, I
still fail to understand how these higherlevels of risk aversion are actually
leading to better real world outcomes.
Why is the macroeconomy doing better?
Why are firms doing better?

(49:40):
I understand the market offeringhigher returns, but if anything
higher risk aversion to me soundslike higher cost of capital for firms
and higher cost of capital generallymeans worse performance down the road.
They do have a section of the paperwhere they claim their model explains
what happens in the real economy.
But I have to admit that I'mjust not smart enough to truly

(50:03):
follow and I have to admit thatI haven't been fully convinced.

Kate (50:07):
Well, I think, it's an important explanation saying that
this could be just a spurious result.
Other typical explanationsare going to be policy based.
Are there certain policies undertakenduring Democrat presidencies
that can explain the result.
And finally, the last explanation isoverconfidence or, so to say, euphoria.

(50:30):
Perhaps that can explain,findings that we've discussed.
Let's jump to the policy explanation.
Is there something fundamentallydone better from a policy side
under Democrat presidencies?
Multiple papers have looked at Congressbecause oftentimes, Congress is perceived
to have more power than the president.

(50:50):
And perhaps the results are due toa Republican or Democrat Congress.

Veljko (50:55):
Economic power is probably what you mean?

Kate (50:58):
Right.
Right.

Veljko (50:59):
And I think that this plays to, I mean, we know that the power
of the presidency when it comesto economic matters is limited.
I think it surprises most observers,or at least it surprised me, how strong
effects we are seeing here with theshift of President when we know that
the President is only one of the,agents determining economic policy.

Kate (51:24):
Several papers have looked at Congress because of that.
Blinder and Watson is one such paperand they do not find that Congress can
explain better, GDP growth, higher GDPgrowth under Democrat presidencies.
I have looked at it from afirm outcome perspective.

Veljko (51:43):
When you're saying Congress can't explain...

Kate (51:46):
They're looking at political alignment between
Congress and the White House.
So you can either be politically alignedor have a divided government or misaligned
government when the Congress and, thePresident are misaligned politically.
So they find that both periods ofalignment and misalignment see worse

(52:07):
performance with Republican presidents.
This has been exploredbefore by Alberto Alesina.
Alesina and Rosenthal back in 1995explain this ideas that divided government
or misaligned government or wheneverCongress is not of the same political
party as the President allows formilder policies to be implemented, more

(52:32):
balanced policies to be implemented.
And the economy benefits from that.
And if you look not only as theeconomy, but down inside firms, what
we see is whenever there's misalignmentbetween Congress and the President,
corporate outcomes are indeed better.
And that's true for bothRepublican and Democrat presidents.

(52:56):
So political misalignmentbetween Congress and the White
House seems to benefit corporateoutcomes and be better for firms.
Nonetheless, this doesn't explain, thelower corporate outcomes for Republican
presidents because, we continue tofind lower corporate outcomes for
Republican presidents, even whenaccounting for congressional alignment.

(53:19):
So this was an interesting policy result.
Nonetheless, it doesn't providean explanation for the puzzle.
So another thing to look at herewith policy is, perhaps, some
industries are politically favored.
For example, industries that receivegovernment contracts might benefit
more on the Democrat presidents.

(53:41):
And there's actually a paper by Belo,Gala, and Li, 2003, who shows that indeed
stock market returns are better forfirms with more government contracts.
And that's more specificto Democratic presidencies.
But when we look inside of the firmand their corporate outcomes again,
this is back to sales, expenses,profitability and investment,

(54:07):
we don't find that corporateoutcomes, for firms with more or less
government contracts differ that much.
No matter how many government contractsa firm has, they see lower corporate
outcomes during Republican presidencies.
Besides firms and industries withmore government contracts that could

(54:28):
be policy influenced, is those firmsthat produce more domestically or
firms that perhaps export more.
You would think that firms that exportmore are less subject to domestic policies
and perhaps see different outcomes.
When we check firms with differentlevels of exports, we see that

(54:48):
all of them, with higher or lowerexports, still have worse performance
during Republican presidencies,compared to Democrat presidencies.
So again, not much ofan explanation there.
interesting outcomes, but notreally an explanation there.

Veljko (55:04):
I will also say that I keep hearing this hypothesis, that all of this
is somehow something to do with trade.
But I think it's basedon a bit of a fallacy.
You know, people are approaching theseas, well, since Republicans are so
much against trade, and since we haveall this evidence that trade makes...
Yeah, that's, that's,

Kate (55:24):
That's a loaded statement there, right?
It is.
Because if we look back to BushJr., he was, very pro- trade.

Veljko (55:32):
Yeah, I mean, that's exactly where I was going with this.
In some sense, we've had a bitof a regime shift under the Trump
administration, where we startedseeing, Republican hostility to
trade and international commerce.

Kate (55:44):
Which is completely opposite of what was there in the previous
Republican president, George Bush.

Veljko (55:51):
Correct.
And if you go back even further,Democrats had their own regime shift in
the sense that prior to the nineties,Democrats were the party that was valuing
union labor, domestic employment...

Kate (56:06):
Clinton was very open to globalization and trade.

Veljko (56:09):
Correct.
So I think that for our youngerlisteners, it's easy to think of
Democrats as the pro-trade party andRepublicans as the anti trade party.
But from an historical vantage point,you know, that, that's utter nonsense.
And, that cannot possibly explain what wesee here happening in the past century.

Kate (56:29):
It seems like, these policy explanations are super interesting,
but, not quite providing an explanationfor the presidential puzzle.
What we do see is that policy doesprovide some explanation at the
state or at the gubernatorial level.
There's a very significant policy effectassociated with Republican governors
and Democrat governors, where Democratgovernors are usually associated with

(56:52):
more spending on education and healthcare.
And the Republican governors areusually associated with more spending
on infrastructure and parks andrecreation, hunting facilities, et cetera.
So, that definitelyexists at the state level.
That meaning the policy explanation,but then when you drill down
to a finer level at the city,mayors, political affiliation

(57:15):
doesn't seem to explain anything.
So, we think that there could bea possibility with a presidential
explanations related to policy, butwe can't really pinpoint what it is.
Those are interesting findings, but thereare some results at the state level.
So, while the policy explanations areinteresting, they don't provide the

(57:36):
total explanation for the puzzle.
And then there's alsolabor policies, right?

Veljko (57:41):
Clearly there are very different political priorities here when it
comes to labor between the two parties,and those could, in some way shape,
ultimately, productivity and we know,productivity leads to wealth and growth.
Blinder and Watson dig into it alittle bit and they have some numbers
that seems to suggest the totalfactor of productivity is slightly

(58:04):
higher under Democrat presidenciesthan under Republican ones.
But they, they put forth a strongdisclaimer saying the results are
not strong and not statisticallysignificant at conventional levels.

Kate (58:17):
Right.
And it's tough to disentangle.
I also saw some evidence showing thatblue collar workers actually work more
hours during Democrat presidencies.
So is it really productivity oris it a certain number of hours?
But the question is, if therewas a better safety net provided,

(58:38):
would people work harder?
That's kind of what we're thinking here.

Veljko (58:41):
It's an intriguing hypothesis, right?
Neither of us is a labor economist,so I don't exactly know what the
literature says, but I have alwaysbeen under the impression that most
of the economic literature relieson incentives, both the carrot and
the stick, as driving productivity.
The idea that you can provide greatersafety nets to people, lower the level of

(59:07):
risk, and that will somehow lead to higherlevels of effort and productivity...
that's not entirely consistent withhow most economists think about this.
From a human, and even, psychologicalintuition standpoint, you could see
how somebody who's less worried, lessafraid for the future, perhaps, is a

(59:27):
little bit more efficient and productive.

Kate (59:30):
Right.

Veljko (59:31):
And yet those are at best hypotheses.

Kate (59:33):
Right.
So let's switch, and talk about one morepossible explanation for the puzzles
that has been examined, and that'sover optimism or euphoria, so to say.
There's been recent literature thatexamines this, really a behavioral
explanation in a way where, peoplefeel more euphoric, more optimistic

(59:54):
about the future whenever theirparty representative is in power.
And it comes through in multiple ways.
So people actually have morechildren, whenever their
presidential party is in power.
Analysts.
will rate the same company differently.
So, you know, if you were, for example,a Democrat analyst, and I was a

(01:00:15):
Republican analyst and we were ratingthe same firm, you would give it a
higher ranking, if the president inpower was aligned with your party, even
though we're looking at the same firm.
So this kind of shows that peopleare indeed more optimistic, whenever
their chosen party is in power.
There's Mian, Sufi, and Khoshkhou,2023, the Review of Economics and

(01:00:39):
Statistics, who questions that somewhat.
They indeed look at the Gallupdata and find that Gallup data
strongly shows more economicoptimism about future performance.
Specifically, they show that Republicansreport higher spending after the
election off Donald Trump in 2016.

(01:01:01):
Again, they're just reporting it.
But when they look at the administrativedata, actual spending patterns, they find
no evidence of increased spending, alongthese political partisan alignment lines.
So, is it just talk or is thereactual action behind there?
Who knows?
But it will be interesting to look atthis explanation because then you would

(01:01:24):
think that areas that are politicallyaligned with the president and firms
located in the areas that votedDemocrat for a Democrat president or
Republican for a Republican president,would see better outcomes, more sales
during this political alignment.
We took a look at this and basicallywhat we find is that likely-Democrat

(01:01:46):
firms have worse outcomesduring Republican presidencies.
They have lower profitability, lower salesgrowth, and lower investment as well.
So far so good.
It's going right to long asthis euphoria explanation.
But what we find is that likely-Republicanfirms, firms located in those areas

(01:02:08):
that vote Republican, also see worseoutcomes during Republican presidencies.
They also see lower salesgrowth and lower investment.
This explanation is only partiallysupported, so to say, by data.
But Results are interesting, nonetheless.

Veljko (01:02:24):
Yeah, I would say, two things come to my mind when I hear about this over
optimism or euphoria, type of explanation.
One is, it seems to contradict, whatPastor and Veronesi are saying, right?
I mean, Pastor and Veronesi arefinding greater degrees of risk
aversion, to correlate with Democratpresidencies, which, again, risk

(01:02:46):
aversion is not the same as pessimism,but for all practical purposes, I
think they correlate highly, right?
The other thing I will say about thisoptimism euphoria, explanation is that for
it to really explain why the economy isgrowing at a faster pace when a Democrat
is in power, you need to assume thatthe majority of electors are Democrats.

(01:03:11):
I know that the popular vote has beenfavoring, the Democratic Party over the
last decades, but I'm not sure that wasnecessarily the case in the past century.

Kate (01:03:20):
So, let me summarize a bit.
What we've discussed here today is that,economic outcomes, GDP growth, stock
market performance and corporate outcomessuch as sales and investment are all
lower during Republican presidenciescompared to Democrat presidencies.
There have been a number ofexplanations examined for it.

(01:03:41):
We've listed some, but it's,it's really a long list.
It's not outliers.
It's not the monetary or fiscal policy.
It's not lead/lag.
It's not the Congress.
It's not unemployment.
It's not the wars.
It's not some industry affiliations.
It's not firms' alignment withpresidential economic approval rating.
It's not a risk aversion really there.

(01:04:04):
There's some evidence for more benigncrude oil shocks, a bit on worker
productivity and consumer optimism.
But, we're still lacking a strongexplanation for this very consistent
results, for economy, stock markets,and firms across presidencies.

Veljko (01:04:22):
Absolutely.
When I walk away from it, I thinkthat lucky timing and the crude-oil
shocks that you mentioned hasdefinitely something to do with it.
Otherwise, there seems tobe something behavioral.
under the surface, thisoptimism that leads to higher
levels of economic activity.

(01:04:42):
Ultimately, Kate, I think we dohave to recognize that when it
comes to explanations, we don'thave a nice, elegant statement
of what exactly is going on here.
Is that a fair conclusion?

Kate (01:05:00):
I think so.

Veljko (01:05:01):
If we cannot ultimately come up with an explanation, does that
mean that we cannot fundamentallyestablish causality here?

Kate (01:05:13):
Petrovsky 2017 has a good review and that's one of his biggest criticisms
of these studies on presidential parties,Democrat and Republican, is that it's
very difficult to establish causalities.
There's not too manyexogenous changes here.
So I guess this leaves us in a searchof an explanation still for the result.

Veljko (01:05:37):
So, we cannot really say that the Democrat president is causing
better economic outcomes, right?
But at least....

Kate (01:05:46):
we just know that they exist.

Veljko (01:05:48):
Correct.
But at least one thing that we cando here is ruling out the alternative
hypothesis that a Republican presidentcauses better economic outcomes.

Kate (01:06:02):
They just don't exist.

Veljko (01:06:03):
We are not seeing that . Okay, fair enough.

Kate (01:06:06):
I'm going to throw in one more question on top of our unresolved puzzle.
The puzzle does show very strongeconomic results and stock-market
performance during a Democrat presidency.
So that leaves me wondering, what canexplain the Republican's electoral
success when economic performance has beendocumented to be better under Democrats?

Veljko (01:06:29):
And we know that the economy matters to electors, or
at least that's what they tell us.
So there is here, a bit of apuzzle also in, what explains
Republican electoral success.
At some point, we do have to recognizethat Republican policies, or outcomes

(01:06:50):
under Republican presidents, perhapsdo not lead to better economic
outcomes for the country as awhole, for, for workers as a whole.
It is entirely possible that Republicanpolicies lead to better economic outcomes
for the rich, the wealthy, the powerful.

(01:07:11):
When you lower corporate taxes, thepeople who tend to benefit are the
shareholders and shareholders are peoplewho are wealthy to start with, right?

Kate (01:07:24):
Well, share ownership, ownership and firms has become a more widespread
phenomenon over the last few decades.

Veljko (01:07:32):
Fair enough.
Share ownership is more widespread.
That doesn't mean the rich don't own moreshares as a proportion of their overall
wealth, Nevertheless, perhaps, that'snot the right road to go down because,
corporate outcomes are not better, right?
I guess what I'm really pointing atis that perhaps the fact that people
with higher levels of income haveunequal levels of political power

(01:07:54):
has something to do, with, the factthat Republican economic policies
are still not being penalized.

Kate (01:08:01):
Fundraising is a significant part, perhaps related to advertising
or some type of marketing and so on.
Yes.

Veljko (01:08:07):
Yeah.
I think that as we weresaying, individuals do not have
equal political power, right?
Money matters.
That translates into fundraising.
But somebody like Elon Musk has influencethat goes beyond the pure economic, right?
He owns formerly Twitter, now X,

(01:08:29):
which allows for changingsome of the messaging.
At the end of the day, we have thisepisode on the presidential puzzle.
What we are asking is why arepeople still rating Republicans
as better stewards of the economy?
So if you're asking, why is itthat Republicans still do well
electorally, even though theeconomy doesn't necessarily do

(01:08:50):
well under Republican presidencies?
I think one piece of the puzzle here is,most people simply do not know, right?
So I would say, Kate, let's seeif this changes after our episode.

Kate (01:09:04):
We'll see.
We'll see.
But you were talking mostly aboutthe richer part of the population,
providing some financial supportfor the Republican party.
In a very puzzling manner, I'm goingto switch out and go to a completely
opposite set of population here.
And what's very interesting is that.
Areas that have really suffered severe joblosses, areas that have been significantly

(01:09:29):
hit with losses of jobs related to freetrade, the manufacturing jobs lost to
factory closures, coal mine workers, steelworkers, those experiencing severe job
losses due to more open and free trade.
Actually, those areas have been leaningin their votes, very Republican.

(01:09:52):
So here you're looking at the verydifferent segment of the population,
perhaps with lower education, thathas still chosen, to vote Republican.
So that's a really interesting puzzle.
And, I think a lot of it isgoing to bring us into a whole
other topic of party identity.
Party identity is actually seen asa form of social identification.

(01:10:15):
And it's an emotionalconnection to a political party.
What's even more interesting, thisparty identification is more stable,
or so to say, trumps the principlesof equal opportunity, limited
government, traditional familyvalues, and even moral tolerance.
So it's a very importantidentity for people.

(01:10:35):
There's been a big shift over the last 20years, even 10 years, which has brought
us to changes in political polarization.
We have seen a big increasein polarization in the U
S starting around 2010.
So the topic of partisanship,polarization, and populism is
really interesting and it belongsin the area of party identity.

Veljko (01:10:58):
What I get from this is that, part of the story is that people
don't just vote on the economy.
And that I think over time, increasinglysocial issues are becoming important.
But I will also say that once more,at the cost of sounding like a broken
record, I do believe that, somehowRepublicans have done a better job

(01:11:19):
at selling their side of the story.
The fact.
That people still rate the RepublicanParty as better stewards of the economy,
at some point we have to recognizethat they've just done a better job
at convincing people that that's true.

Kate (01:11:32):
Yeah.
I think so.
I, you know, I, I think that, tosummarize things, We've given our
listeners, ample ground for a gooddinner conversation, what do you think?

Veljko (01:11:42):
I hope so.
I certainly hope so.
But I will also mention that what youwere talking about at the very end,
this, emergence of populist politics,or re- emergence of populist politics
in the United States and these increasedlevels of polarization, are of course
political science topics, but we'veseen over the last 10 years, a lot
of research showing strong economicconsequences to increase polarization

Kate (01:12:08):
and populism

Veljko (01:12:09):
and populism as well.
And I think that those would makefor extremely interesting future
episodes and extremely interestingconversations for us, going forward.
To our listeners, stay tunedfor our future episodes.
This is the moment, in the episodewhere we should invite you to like

(01:12:30):
us, to subscribe to our podcast.
But I will admit we don't exactlyknow what we are doing here.
So, click on something, like us,love us, hug us, subscribe to us.

Kate (01:12:42):
Listen to us again.

Veljko (01:12:44):
By all means.
And if you can find a way to give usmoney, we would really appreciate it
and stay tuned for our future episodes.
Cheers.

Kate (01:12:52):
Cheers.