The Left, the Right, and Income Growth

Which political party is better at improving living standards?

A commonplace view is that Democrats favor policies that boost the well-being of the poor while Republicans’ policy preferences are more conducive to economic growth and rising incomes. Debates about high vs. low taxes, generous vs. stingy social programs, and heavy vs. light regulation of business often are framed in terms of a tradeoff between compassion and growth. Should government do more to assist the poor? Or should it intervene less, thereby helping the economy to grow more rapidly?

For the most part this debate is a battle of rhetoric and assumptions. Many on the right assume that lower taxes, less regulation, and less generous social policies must be good for economic growth. Some on the left accept this assumption but argue that growth will fail to trickle down to the poor. Others dispute the assumption.

Evidence can help. There is a great deal of it that is potentially relevant. Here is one piece. Using tax records and surveys, the Congressional Budget Office has compiled good data on household incomes from 1979 through 2005 (here). The presidency was held by a Republican from 1981 to 1992, by a Democrat from 1993 to 2000, and by a Republican since 2000. The following chart shows average rates of income growth (adjusted for inflation and with taxes subtracted) for each of the five quintiles (fifths) of households during these three periods.

Income growth for each of these groups, from the poorest to the middle to the richest, has been faster during Democratic administrations than Republican ones.

Does this prove that Democrats are more effective than Republicans at promoting income growth? No. A government’s ability to affect income growth is limited, Democrats controlled one or both houses of Congress during Republican presidencies and vice-versa, and each of these periods has idiosyncratic features (see here, here, and here, for instance). Still, the data offer reason for skepticism about the notion that policies favored by the right are better at raising living standards.

Nor is this peculiar to the American context. Here is a counterpart chart showing income growth in the United Kingdom over the same period. The Conservative party held the government from 1979 to 1997; the Labour party has held it since. The data are from the Institute for Fiscal Studies (here).

Incomes of the richest fifth increased slightly more rapidly during the years of Conservative government, but most British households have fared as well or better under (New) Labour.

11 thoughts on “The Left, the Right, and Income Growth

  1. Very interesting! and certainly not what I would have predicted. Is there similar data that goes farther back. That would make the analysis far more compelling. As it is, its Clinton vs. the Bushies and Reagen. Certainly a worthwhile comparison, but one that is laden with confounds.

  2. In the US comparison you are forgetting the technology boom that occurred during the Clinton Administration. This event had very little to do with the Clinton Administration but completely changed the economy. One could probably argue that the boom took place because of the economic policies of the Reagon/Bush administration. As often the case, the evidence can be misleading here and perhaps a longer analysis of the two policies is necessary.


  3. In the US comparison you are forgetting the technology boom that occurred during the Clinton Administration.

    You detract points from Clinton for a free-market expansion, but not for Bush’s socialist expansion built on 0% real interest rates and his massive expansion of the federal deficit.

  4. This topic is handled in detail over on the Angry Bear blog http://angrybear.blogspot.com/ . Contributor “cactus” has been assembling data mostly from the Bureau of Economic Analysis National Income and Product Accounts (NIPA) and laid it out showing the preformance of presidents since Ike, on various measures.

    I gather a book is on the horizon, more info available here:
    http://www.presidentialperformance.com/ The large, brightly coloured graphs make things easy to evaluate.

    Noni


  5. I’m thinking the Dems (like me) might not come out looking so good.

    Yeah, unless you compare them to the Republicans. Then they look great.

  6. Is it really valid to do an analysis with a sample size of 3? Also, Clinton followed conservative economic policies, the proof of this being that Arthur Laffer is a big fan of his. So you have studied three economically conservative periods in order to compare conservative and liberal policies?

  7. Considering the extent to which policy impacts on income growth will be buried beneath business cycles and delayed by everything from price stickiness to implementation delays, it seems safe to discard this data for the purposes of determining which team is better on the economy. Factor in the variations in party control at different levels of government and the variation of policy viewpoints within parties (Clinton vs. LBJ?, Reagan vs. Bush?) and we’re plainly on a fool’s errand.

    I DO find the data interesting for the commentary it makes on American voting trends as a response to economic conditions. Does rising income and stability engender a more socially conscious worldview amongst the electorate? Do lean times bespeak a popular preoccupation with ostensibly “tough-guy” leadership? This seems to be the relevant question to ask the data.

  8. An interesting post, but for a different reason altogether. Please note that in England the quintiles have largely increased at similar rates for the past 30 years (especially during Labour control), while in the US the top quintile has pretty much exploded while the lower quintiles mostly rot. Even during the 90’s boom the richest made out like bandits. So much for trickle-down

  9. Pingback: Free Markets and Labor « Vox Nova

  10. Yes this data absolutely holds up over time. Go to http://blueorred.atspace.com/email.htm to see graphs from 1948 to 2005 and from 1968 to 2007, both with very similar results to those posted here. And none of these are hand-picked years — the graphs simply use whatever data is available, and as you can see, whatever data is available always provides similar results.

    At that same site you can also see graphs (again with similar results) for unemployment, national debt, GDP, corporate profits (yes, even corporate profits!), the stock market, etc. And all this data goes back to the 1940’s.

    Perhaps most important: statistics professionals have found these results “statistically significant,” which means, in plain English, that the results are not the result of random chance. That outside variables (such as control of Congress, business cycles, etc.) cannot explain these results. That the results are scientifically proven to be correlated directly with who is in control of the white house. You can read more about the import of this statistical significance at http://blueorred.atspace.com/skeptic.htm

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