Why Democrats have the best economic vision for 2016

Why Democrats have the best economic vision for 2016

In this debate series, GRI asked whether the Democrats or Republicans have a less politically risk vision in the 2016 presidential election. Lawrence Katzenstein presents why the Democrats offer the best policies for addressing voter concerns about the distribution of wealth, employment opportunities, and economic growth. Read the Republican side here.

Political commentators have commented at how atypical the 2016 U.S. presidential race appears at this point. The chief difference from previous races is in the broad support enjoyed by populist candidates in both parties. This reflects continuing voter concerns about distribution of wealth, employment opportunities and economic growth.

Economic issues in the forefront

Financial problems continue to gnaw at a large swath of the U.S. voting population. While the economy seems to have stabilized since the dark days of the 2008 financial crisis, many continue to struggle. Record numbers of people are involving themselves in the nominating process and voting in caucuses and elections.

The key economic issues continue to be limited employment opportunities for much of the population and reduced wages for those who remain at work. There is also concern about the rising costs of healthcare, despite the Affordable Care Act, and the large student loan debts carried by new college graduates. While the formal unemployment rate has been reduced to pre-financial crisis levels of under 5% , and GDP growth has generally been positive if sluggish, this data masks deeper problems.

While unemployment rates are low labor force participation rates are very low. The labor participation rate of 62.4% in 2015 marked the lowest rate in 38 years. This means that a record 98,610,000 Americans were not in the labor force in 2015. While some of this might be by choice, or retirement, it still means that nearly a 3rd of the population isn’t working.

The current distribution of wealth is skewed and hardly equitable. The top 0.1% of Americans now control a 23% share of national wealth, which is nearly identical to 1928 levels. Since wages have been falling just as they did before the Great Depression, there could be continuing problems ahead.

The Gini index, which is a measure of income inequality as distinguished from share of wealth, is also problematic. The U.S. score has been hovering between 40 and 45, which often marks the starting point for political instability. This could be the impetus that gave rise to the Tea Party and Occupy movements. It also could explain the high opinion survey numbers reported for both Trump and Sanders.


Since the election of President Reagan, Republican economic views have been dominated by an emphasis on the role of a self-regulating free market. They favor a smaller government that will require less tax revenue. Many of the functions that Democrats have brought to the national government since the New Deal would be delegated to private interests. An example of this was President Bush’s unsuccessful attempt to change Social Security from a government run pension program to a privatized program based in securities similar to a 401K.

The intellectual roots of the Republican approach are from Chicago School neoclassical scholars like Milton Friedman. This approach was based in part on the work of Friedrich von Hayek. Hayek believed that government economic planning and intervention would lead to authoritarian control and limits on economic and political freedom.

The central belief of this approach is that capitalist markets are self regulating. There’s no need for regulation since the market will assure efficient firms will replace failures. Lower taxes and small government will free up capital for new and existing businesses, which will lead to innovation and grow the economy.


Democrats are best viewed as reform capitalists. Hillary Clinton’s recent remark that we sometimes have to “save capitalism from itself” summarizes this view. The Democratic position is rooted in FDR’s recovery plans after the Great Depression. He spent government stimulus funds to “prime the pump” and get America moving again. This included public works projects meant to create jobs for the unemployed, and a host of social welfare programs to provide for less fortunate or aging citizens. The intent of these plans was to create stability and growth.

These government expenditures put more money in the hands of citizens and help guarantee higher aggregate demand. It also had a multiplier effect on the economy since more companies were needed to address this demand.

John Maynard Keynes was the intellectual father of this approach. The Nobel laureate Paul Krugman currently writes in this tradition.

Why the democrats offer the best hope for the U.S. economy

Since this is a partisan debate we begin with a graphic showing GDP growth rates under Democratic and Republican presidents. There are a few independent studies with similar findings. It also doesn’t hurt to point out that the two biggest economic crises in contemporary U.S. history happened during the Hoover and Bush presidencies.

The reason that Democrats do better goes back to first principles and a major contradiction in Republican thought. Republicans of late have been supporters of larger arms budgets and more international interventions. At root these polices are based on a negative view of human nature. In a global system without central authority, realists believe it wise to maintain superior military power to protect against those who want to expand their power at our expense. This view of human nature is not carried into the domestic marketplace.

The classical economics of Adam Smith was based upon early, small scale capitalist ventures. Small entrepreneurs grew by providing good service to their customers and their communities. They were also considerate of their workers who knew people throughout these same communities. These small capitalists needed protection against chartered royal companies seeking monopolies. The state was a threat to economic freedom.

Modern large scale capitalism reports to stockholders and lobbies the government to do its bidding. The emphasis is on quarterly profits and not necessarily on community needs or the common good. Employees are commodities. It doesn’t preclude contributions to the common good as we see in firms like Costco, or Trader Joe’s, but it doesn’t guarantee it. Firms can sell bad mortgage for commission, bundle them in securities for further commissions, or export jobs to cheaper labor markets to save on wages. Government regulations can help prevent bad acts and government intervention can help save an economy when company actions undermine fundamentals.

The economy does better under the Democrats because they regulate, intervene and provide social welfare to help guarantee demand, stability and growth. Unlike Republicans, they don’t believe all businessmen are nice.

Which democrat?

We have a difficult choice. Hillary Clinton proved herself as an excellent consensus builder and legislator in Congress, but a less wonderful Secretary of State. Her foreign policy choices have been questionable. She supported the Iraq invasion, the overthrow of the Qaddafi in Libya, and when out of office called for U.S. intervention in Syria. Not only have her choices helped destabilize the region, but they could have resulted in yet another expensive quagmire. On the other hand, Sanders seems to know even less about foreign affairs. At least his opposition to the Iraq War seems to signify an aversion to expensive and strategically questionable adventures. This is one economic point for Sanders.

With respect to direct economic issues Sanders, despite his socialist declaration seems fairly close to traditional Democrats like FDR and more recent activists like Elizabeth Warren. He favors the reinstitution of Glass Steagall regulations that created walls between banks, securities brokers and insurance companies. Had this remained in place, it would have prevented commercial bank exposure to bad derivatives and mortgage securities thus limiting the 2008 crisis. This legislation has also drawn support from John McCain and Mike Huckabee.

By contrast, Hillary has more conservative New Democrat views. She favored the Volker rule in Dodd Frank, which amounted to a weaker version of Glass Steagall. She calls Sanders’s call for single payer healthcare unrealistic despite its success in most other advanced countries. Clinton wants to make public college tuition affordable but not free. She implies that this too is unrealistic. Here too we have the precedent of free tuition from 1847-1970 at the campuses of the massive City University of New York. Simply put, Hillary is “Bernie light” in most of her positions.

As Bernie said in a recent debate, both he and Hillary would be preferable to any of the Republicans. However, at this time it seems that Sanders’ policies would be better for stability, fairness and growth. Perhaps it takes a socialist to be a real Democrat.

GRI Debates provide critical insight into the world’s most challenging political risk topics. Through well-balanced opinion based articles, GRI Debates offer a forum for deeper discussion into how major political decisions and security challenges affect markets, investment, and economic growth across the globe.

Categories: North America, Politics

About Author

Lawrence Katzenstein

Lawrence Katzenstein has taught at the University of New Orleans and the University of Minnesota. Through an affiliation with the Humphrey Institute he was one of the trainers for the initial Chinese WTO delegation. He has been an exchange professor at the Consolidated Universities of Shandong Province and an embedded social scientist with the U.S. Army in Iraq. He earned a B.A. in political science from CCNY and an M.A. and Ph.D in political science from Rutgers University. While at the University of Minnesota he also completed a teaching post doc in International Business.