Sometimes they seem far apart and sometimes their philosophies seem rather similar. However, historically, 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 relies heavily on the government to regulate the economy.
  • In economic downturns, Democrats favor deficit spending to revive the economy, whereas Republicans hope to alter the money supply to revive it.
  • Studies have shown that the economy has done better under Democratic presidents since World War II than under Republican presidents.

Regulating the Economy Republican Style

Generally speaking, the Republican Party is considered business-friendly as it favors limited government regulation of the economy. This includes restrictions that might seek to decrease the pursuit of profits in favor of environmental concerns, labor union interests, healthcare benefits, and retirement payouts. Given this more pro-business bias, Republicans tend to receive support from business owners and investment capitalists, as opposed to the labor component that constitutes workers and their interests.

Regulating the Economy Democratic Style

Democrats are said to rely more heavily on government intervention to influence the economy's direction and keep the profit motive of businesses more at bay – subscribing to a belief that businesses are more focused on earning a return for shareholders and willing to cut corners in terms of protecting the overall social good. Higher regulation comes with increased costs, which Democrats believe in supporting through higher taxation. As a result, the party's approach is often described as "tax and spend."

According to Princeton University economists Alan Binder and Mark Watson, "The superiority of economic performance under Democrats rather than Republicans is nearly ubiquitous; it holds almost regardless of how you define success." Based on their extensive research, they posit that the US economy performs better under Democratic control than under Republican control. Also, many studies find that the stock market performs better under Democratic control. In agreement, the Joint Economic Committee finds that economic conditions, such as growth, job creation, and industrial production, have fared better under Democratic presidents since World War II

Economic Downturn Strategies

During economic downturns, Democrats, therefore, tend to believe that deficit spending is necessary to help stimulate the economy until private business prospects improve. They might also look to enhance and extend welfare programs to help citizens that have lost their jobs or are more in need due to more challenging economic conditions. Republicans would tend to rely less on government intervention but might seek to alter the money supply. Lowering the Federal funds rate and the banking reserve ratios qualify as monetary policy levers they can pull.

The Bottom Line

The reality is that the lines between what are considered traditional Republican and Democratic approaches to regulating the economy are more blurred. The US has run a budget deficit for nearly three decades, meaning it has spent more than it has taken in. This has increased the role of government in the economy and has meant that spending has continued in good times or bad and under both parties' administrations.

Of course, government politicians also have personal differences in how they manage the economy. Still, knowing their party affiliation can be a solid indicator in the approach they may take in influencing the economy.