Cycles of Democratic-Republican Presidencies and Economic Performance – Why do Democrats Perform Better?

Presidents often like to take credit for stock market performance. During his term, President Trump, a Republican, frequently highlighted the rise in stock prices. The Trump administration achieved notable economic success, boasting annualized returns of 13.7%, placing him among the top performers compared to past presidents. However, one may be surprised to find that it is an anomaly for a Republican president to achieve high economic success, since Democratic presidencies have historically shown a pattern of significantly higher performance compared to Republican administrations.

This article discusses a 2020 research on stock returns and presidency conducted by the University of Chicago professors Lubos Pastor and Pietro Veronesi. It delves into the reasons behind the economy’s stronger performance under Democratic leadership, and discusses the research’s implications concerning the 2024 presidential election and beyond.

Why Stock Market and Economy Perform Better Under Democratic Presidencies

Contrary to the common belief that the economy performs better under Republican administrations, which typically focus on bolstering the private sector, past studies have shown that both the stock market and GDP have experienced more substantial growth under Democratic leadership. However, researchers have struggled to identify the reasons behind this trend, labeling it a “presidential puzzle.”

Building on extant literature, Pastor and Veronesi conducted a study to solve this presidential puzzle. It encompasses the time frame of 1927 to 2015, in which the stock market had 10.7% annual excess returns over three-month Treasuries under Democratic presidents compared to -0.2% under Republicans. During the same period, GDP grew by 4.9% annually under Democratic presidents versus 1.7% under Republicans. These figures might initially give one an impression that leadership under Democratic administrations is economically superior to that of Republican, but the study indicates that the factors determining the success of each administration extend beyond their specific leadership styles.

Pastor and Veronesi postulate that economic conditions, which influence voters’ risk aversion at the time of election, largely determine their presidential choice and future economic outcomes. During an economic downturn, voters have high risk aversion. They seek a Democratic president who provides them with a safety net, and redistributes wealth through higher taxes. During a crisis, the stock market plummets but increases the return potential from a recovery, contributing to Democratic administrations’ superior economic performance. In contrast, during a time of economic stability, voters have a low risk aversion and seek a Republican president who supports entrepreneurial activities through lower taxes. However, during an economic boom, the stock market has already reached its peak, leading to lower expected returns, which explains Republican presidents’ poorer economic performance.

Such tendency can be observed in historical Republican-to-Democratic regime changes. For example, in 1933 during the Great Depression, voters shifted towards the Democratic Party, which implemented the New Deal, a redistributive economic policy that helped the population struggling from lack of jobs and living under abject conditions. A similar shift occurred in 2008 during the Great Recession, when the unemployment rate reached 10%. It can also be argued that the 2020 pandemic, a profound crisis, also increased voter risk aversion, unfavorably impacting Trump’s Republican administration, and contributed to Biden’s victory in that year’s election.

The authors concluded that these regime changes to the Democratic Party under crisis were not mere coincidences as their research model aligns with actual political outcomes. It indicates that during economic downturns, more people become dependent on the government, and take less business risk. However, new entrepreneurs daring enough to start a business during a recession are better skilled than the average ones, and are equipped to succeed in a challenging environment. Their business endeavors are supported sufficiently by the enlarged government that leads to high economic growth.

As economic conditions stabilize, voters’ risk aversion returns to its average level. During a strong economy with low risk aversion, there will be a higher proportion of entrepreneurs compared to government workers. These conditions favor a Republican president who advocates for lower taxes and supports the private sector. However, taking over the country when the economy is at its peak, will eventually lead to slower growth and a recession, paving the way for a Democratic president, and this cycle continues over time.

The robustness of Pastor and Veronesi’s study can help us understand where 2024 stands in this political cycle, ahead of the election, and surmise possible future economic outcomes. Yet, there are also questions about the research’s explanatory power, given the changes the US has undergone since the study’s conclusion in 2015.

Implications for the 2024 Election and Beyond

As of mid-2024, the stock market has been rising and the economy is seemingly stable, a condition which typically favors a Republican presidency. Additionally, voter risk aversion appears to be relatively low, as inferred from figures like the unemployment rate, currently standing at a low level of 4%. However, despite these signs of stability, the economy remains fragile with over 70% of Americans living paycheck-to-paycheck, whose livelihood has been greatly strained by inflation. An external shock such as another public health crisis or a latent effect of high interest rate may send the economy into a recession. In such a scenario, those unemployed without any financial cushion may seek a Democratic president, who favors wealth redistribution through higher taxes compared to a Republican president. 

While Pastor and Veronesi’s study suggests only economic conditions influence voters’ presidential choice, non-economic elements may play a more significant role in the future. One of such potential factors that can influence future presidential elections is voter polarization, which has increased since 2015, the end of this study’s time frame. The Democratic Party has shifted further left since then, reducing common ground with the Republican Party, making voters’ partisanship more entrenched than in the past. Moreover, social conflicts in recent years have exacerbated this divide, leading individuals to adamantly pledge to “Vote Democrat no matter what.”

Additionally, the effect of the demographic shift, such as an increase of new Asian and Hispanic immigrants remains to be seen. These groups compose Democratic voters at a disproportionately higher rate than they do Republicans, and may play a more significant role in future presidential elections. Although the number of registered Democratic and Republican voters were almost equally split in 2023, Republicans could lose the edge they have enjoyed over Democrats during a time of economic stability, if the balance tips strongly in favor of Democrats. 

Notwithstanding these uncertainties, Pastor and Veronesi’s study shows the US has an effective political system capable of accommodating both highs and lows of the economic cycle by allocating resources accordingly. However, at present, regardless of the outcomes of the 2024 presidential election, it would be wise to view the stock market cautiously. It appears that it has risen significantly, largely helped by the high expectation for companies involved in AI developments, rather than on a realistic assessment of how this technology will generate profits for these companies and add meaningful value to the economy. Therefore, taking a non-reactive approach to the near-term economic and political developments will be crucial in navigating the uncertainties ahead.

Professor Pastor and Veronesi’s 2020 study discussed in this article can be purchased from the University of Chicago Press here.