Sometimes they seem far apart and sometimes their philosophies seem similar. Historically, however, the Democratic and Republican parties have demonstrated a fundamental difference in how they deal with economic issues (or don't).

Key Takeaways

  • The Republican party supports limited government involvement in economic decisions.
  • The Democratic party believes the government is needed to regulate the economy.
  • In economic downturns, Democrats favor deficit spending to revive the economy, and both parties support looser monetary conditions.

Regulating the Economy Republican Style

The Republican Party is generally considered business-friendly and in favor of limited government regulation of the economy. This means favoring policies that put business interests ahead of environmental concerns, labor union interests, healthcare benefits and retirement benefits. Given this more pro-business bias, Republicans tend to receive support from business owners and investment capitalists, as opposed to support from labor.

Regulating the Economy Democratic Style

The Democratic Party is generally considered more willing to intervene in the economy, subscribing to the belief that government power is needed to regulate businesses that ignore social interests in the pursuit of earning a return for shareholders. This intervention can come in the form of regulation (such as limits on carbon emissions) or taxation to support social programs. Opponents often describe the Democratic approach to governing as "tax and spend."

Which Party is Better for the Economy?

Princeton University economists Alan Binder and Mark Watson argue the U.S. economy has grown faster when the president is a Democrat rather than a Republican. "The U.S. economy not only grows faster, according to real GDP and other measures, during Democratic versus Republican presidencies, it also produces more jobs, lowers the unemployment rate, generates higher corporate profits and investment, and turns in higher stock market returns," they write.

However, rather than chalking up the performance difference to how each party manages monetary or fiscal policy, Binder and Watson said Democratic presidencies had benefitted from "more benign oil shocks, superior [total factor productivity] performance, a more favorable international environment, and perhaps more optimistic consumer expectations about the near-term future."

Economic Downturn Strategies

During downturns, Democrats tend to believe that deficit spending is necessary to stimulate the economy. They might also enhance social programs to help the unemployed and other vulnerable citizens. Both Democrats and Republicans might seek to alter the money supply. Lowering the Federal funds rate and bank reserve ratios are monetary policy levers they can pull.

The Bottom Line

The reality is the lines separating what are considered Republican and Democratic approaches to the economy are often blurred. The U.S. government has run a budget deficit for nearly three decades, meaning tax revenues do not cover its expenditures. This has increased the role of government in the economy. Regardless of party, government spending has continued in good times and bad.

Of course, individual politicians might disagree with their party on how to manage the economy. Still, knowing their party affiliation can suggest which approach they might take in influencing the economy. (For further reading, see "Comparing the Economic Plans of Trump and Biden.")