Hoisted from comments, Brad deLong-style. This is a comment Spencer posted both here and at Washington Monthly’s Political Animal. (I note the Political Animal post on Democrat v. Republican differences is worth checking out… they’ve got a chart up showing differences in job growth rates by administration going back to 1921).
Under democrats the economy does significantly better than under republicans. That is pretty solid. So why? I do not buy the argument that it is long and variable lags. Rather, I think the difference is in the impact of Keynesian policies as compared to supply side policies. Generally, democrats implement Keynesian type policies. This is based on the premise that you use deficits to give consumers extra income and they will go out and spend it. This generates strong corporate profits and strong markets that in turn lead to strong capital spending. Supply side policy, in contrast is based on the premise that you use deficits to give tax cuts to the wealthy, or the investor class, and they will investment their extra income and this will generate capital spending that pulls the economy up.
So both are based on the premise that using deficits to give different groups extra income will lead to greater capital spending and a stronger economy. If you look at the record of what happens to capital spending you see that democratic or Keynesian stimulus is followed by very strong capital spending so this thesis seems to work. In contrast, supply side tax cuts are followed by weak capital spending so at best the supply side argument is unproven.
So why the difference? Look at the source of nonresidential capital spending. Some 82% stems from the corporate side of the economy while only 11% is accounted for by S corporations, partnerships, households, etc.. that are subject to the individual income tax code. The remaining 7% is from nonprofit organizations.
Second look at why people or corporations invest. It is because they think they can make a profit by selling the output of the new capacity when it comes on stream not because they have money burning a hole in their pocket. this is clearly what Keynesian type policies assume about human nature why supply side policies assume they invest because they have investable fund. So which one seems more realistic?
Third, look at what has happened to savings. For a quarter of a century we have implemented supply side type policies on the premise that it would lead to greater savings and investments — in a closed economy they are suppose to be equal. But again, look at the record. The major tax incentives we have implemented to encourage savings has been accompanied by a collapse in personal savings. It has to be the one of the greatest examples of a policy that completely failed that anyone can ever find.
So it seems pretty clear to me that the reason the economy does better under Democrats than under Republicans is that Keynesian policies clearly work while their is little or no evidence that supply side type policies have worked.