Why Political Polarization Is Bad for the Economy

Political polarization isn’t just toxic for us culturally — it’s also bad for the economy.

Many economists are predicting an economic slowdown, which increases the risk of another recession, but nobody has a crystal ball. What is certain, however, is the arrival of the 2020 presidential election season. And in the coming months, political polarization and the uncertainty elections bring will spike even more.

Presidential elections have become a tug of war in the United States. Every time an administration turns over, policy changes drastically. We saw Barack Obama undo everything George W. Bush did. We see Donald Trump undoing everything Obama did. Without a long-term, bipartisan vision for the country’s future, every four years people will feel anxious about what the future holds, not only for the country, but for themselves.

Economists call that pit in our stomachs “economic policy uncertainty.” When people don’t know what politicians will do next, they don’t know what financial decisions to make. On the micro level, that could mean a young couple choosing to continue renting instead of buying a house. On a bigger scale, it becomes Amazon backing out of plans to open a second headquarters in New York City.

Academics have studied how uncertainty affects decision-making for years. As a result, we know that our anecdotal and instinctual take is true: Spikes in economic policy uncertainty foreshadow economic slowdowns. We get nervous and sit on our wallets.

A trio of economists from Harvard, Stanford and the University of Chicago added more detail on this front with groundbreaking research in 2015. The team studied nearly 20,000 articles from the top 10 newspapers in the country from 1985 on to track the tone of news coverage, looking in particular for combinations of words such as “economic,” “uncertainty” and “congress.” Their findings showed economic uncertainty spiked around events such as the Lehman Brothers bankruptcy and TARP legislation, as well as the 2010 midterm elections. Adding to the body of research on how uncertainty affects markets, Purdue University economists Huseyin Gulen and Mihai Ion estimate that approximately two thirds of the 32% drop in corporate investments observed during the 2007-2009 crisis period could be attributed to policy-related uncertainty.

When there’s uncertainty about who will be making policy decisions, what those decisions will be and how they will affect the economy, individuals and businesses who have money to spend will likely pause before writing a check. When growth is already low, as it is today, a small slowdown in market activity can turn the economy on its head.

Right now, political uncertainty at the federal level is centered on the possibility that Mr. Trump may face impeachment, as well as ethical concerns regarding Democratic frontrunner Joe Biden. The latest news surrounding the Ukraine controversy is part of a larger tug of war between Mr. Trump and Democrats. Even before Trump assumed office, the primary political tension in Washington stemmed from the gridlock between Trump and a large number of Democrats who are, for the most part, pushing for higher and higher taxes.

Trump took office on a mandate to cut taxes. He succeeded in doing that, but today he continues to push for new and higher tariffs, which continue to have detrimental effects on major U.S. industries as well as the market as a whole. Most Democrats continue pushing for higher and higher taxes and more regulation. Facebook CEO Mark Zuckerberg told employees recently that if Democratic presidential frontrunner Elizabeth Warren wins in 2020, her call to break up tech giants such as Amazon, Apple and Facebook creates an existential threat to the future of their business.

This gridlock means the prospects of growth for the U.S. economy before and after the 2020 election are not very good, regardless of who’s elected. Indeed, every time the president so much as tweets about the prospect of a change in U.S. tariff policy, the markets react negatively. And the Democrats’ focus on higher taxes and spending does nothing to inspire business leaders to expand and hire. Nothing stifles innovation and growth more than tax increases.

Eighty-five percent of the public — including nearly equal shares in both parties — said the political debate in this country has become less respectful in recent years, according to a June poll from the Pew Research Center. That’s not surprising when you consider the behavior we witness daily.

A group of Republicans in July dubbed Democratic Reps. Alexandria Ocasio-Cortez, Rashida Tlaib, Ayanna Pressley and Ilhan Omar the “Jihad Squad.” Texas Democratic Rep. Joaquin Castro declared open season on San Antonio business owners who donated to Mr. Trump by tweeting out their names and declaring these donors “are fueling a campaign of hate.” The president has taken to Twitter to threaten U.S. companies numerous times, most notably in late August when he wrote, “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing … . your companies HOME and making your products in the USA.”

Despite a heightened sense of animosity between the extremes of both parties, the June survey from Pew indicates Americans crave civility — 68% of U.S. adults said it’s very important that elected officials treat their political opponents with respect.

The further both parties move away from the center, the worse this polarization becomes. The truth is that most people live somewhere in the middle. The two parties’ inability to work together is preventing a serious conversation about the future of our country that brings everyone to the table. Bipartisan policy solutions could provide a sense of continuity between administrations, mitigating the increase in policy-related uncertainty and reducing the likelihood of unnecessary economic contractions.

In other words, a little civility and cooperation might just put a little more money in everyone’s pockets.

Dr. Orphe Divounguy is chief economist for the Illinois Policy Institute. Hilary Gowins is vice president of communications for the Illinois Policy Institute.