Republican and Democratic Approaches to Regulating the Economy

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).

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.

The Republican Party did not produce a 2020 Party Platform, as is customary in election years, and instead advanced its 2016 platform. Its 2016 platform affirmed the party’s limited government position with respect to the economy, saying that “government cannot create prosperity.” The platform stated that tax code reform was a central goal, highlighting the party’s belief that lowering corporate tax rates would remove incentives for companies to move jobs abroad and would boost wages. The Republican platform also called for a commitment to a “Reagan Economic Zone,” or a partnership of countries committed to open markets and free trade.

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.”

In its 2020 Party Platform, the Democratic Party affirmed this approach. The platform indicates that Democrats believe economic intervention is necessary to “take care of our workforce.” This may include supporting state and local budgets, school districts, and other stakeholders with government aid. The platform also says Democrats aim to raise the federal minimum wage and pass legislation to strengthen unions and workers’ rights in an effort to boost the middle class.

The 2020 Party Platform also signals Democrats’ intentions to regulate corporations—through tax increases, reducing tax havens, and removing what the party says are rewards for shipping jobs overseas. Tax code reform could also include increasing the accessibility of tax breaks for families.

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 benefited 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.”

In the lead-up to the 2022 midterm election, Republicans attempted to characterize recent inflation as a problem associated with Democratic leadership under President Biden, while Democrats cited strong jobs and wage growth as economic successes in recent years. Perhaps as expected, the reality may be less cut-and-dry than a politician’s pitch. Research suggests that inflation is rampant in dozens of countries around the world, for example, and a variety of factors both within and outside of political control can impact jobs growth.

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 decades with only a few exceptions, 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.