Partisan Bias, Economic Expectations, and Household Spending

Individuals who support the winning candidate in U.S. Presidential elections become significantly more optimistic about the economy after the election, a phenomenon we utilize to measure the effect of partisan bias on economic expectations. The well-documented rise in political polarization among the electorate over the past 20 years has been accompanied by a substantial increase in the effect of partisan bias on economic expectations. The culmination of this trend is the unprecedented 1.8 standard deviation increase in relative economic optimism for those supporting the candidacy of Donald Trump after November 2016. The Trump effect is six times larger than the increase in relative economic optimism for those supporting George W. Bush in 2000. We investigate spending behavior using a variety of measures, and we are unable to find evidence that those most likely to support the winning candidate increased spending after any of the elections. For example, despite the substantial rise in economic expectations among those most likely to support Donald Trump since November 2016, we are unable to detect higher actual spending among this group after the election. Partisan bias is exerting a stronger influence on economic expectations over time, but shifts in economic expectations driven by partisan bias do not appear to affect household spending. ∗A previous version of this manuscript entitled “Government Economic Policy, Sentiments, and Consumption,” was initially made public in June 2015. This research was supported by funding from the Initiative on Global Markets at Chicago Booth, the Fama-Miller Center at Chicago Booth, and Princeton University. We thank Tu Cao, Seongjin Park, Jung Sakong, and Xiao Zhang for excellent research assistance. For helpful comments, we thank Fernando Alvarez, Bob Barsky, Guido Lorenzoni, Claudia Sahm, and seminar participants at Chicago Booth, the Federal Reserve Board of Governors, the Federal Reserve Bank of Chicago, Northwestern (Kellogg), NYU (Stern), Princeton, and the World Bank. Any opinions, findings, conclusions, or recommendations expressed in this material are those of the authors and do not necessarily reflect the view of any other institution. Corresponding authors: Mian: (609) 258 6718, [email protected]; Sufi: (773) 702 6148, [email protected]. Link to the online appendix. How do individuals develop expectations about future economic activity, and how do those expectations affect economic behavior? Economists have long believed that household expectations are crucial to understanding economic activity and the effect of government economic policy. One line of research on economic expectations examines responses to survey questions. For example, the University of Michigan Survey of Consumers asks individuals the following question: “Looking ahead, which would you say is more likely – that in the country as a whole we’ll have continuous good times during the next 5 years or so, or that we will have periods of widespread unemployment or depression or what?” What determines how an individual responds to such a question, and how might their answer be related to their future spending behavior? Economists typically treat an individual’s answers to these questions as a reflection of the individual’s expectations of future income growth. The evolution of such expectations could reflect information the household receives on fundamental changes in the economy. Alternatively, household beliefs about future income growth may reflect sentiment, or changes in expectations that are orthogonal to future economic conditions. A large body of research in economics has focused on these issues (e.g., Barsky and Sims (2012), Azariadis (1981), Benhabib and Farmer (1994), Lorenzoni (2009), and Angeletos and La’O (2013)). Political scientists have taken a complementary approach by showing that partisan identity may shape views on the state of the economy. For example, research shows that individuals have a more positive assessment of the economy when the White House is occupied by the party they support (e.g, Bartels (2002)). The idea of a “partisan perceptual screen” has been present in the literature since the seminal work by Campbell et al. (1960); Gerber and Huber (2009) summarize the idea succinctly by writing: “In short, this evidence portrays partisan voters as individuals who tend to see what they want to see.” A further question in the political science literature is whether survey answers about economic activity driven by political partisanship affect the partisan’s actual spending behavior (Palmer and Duch (2001), Gerber and Huber (2009), and McGrath (2016)). A separate but related line of research in political science documents a large increase in social and affective polarization across political parties (e.g., Iyengar et al. (2012); Mason (2013); Mason (2015); Gentzkow (2016); Boxell et al. (2017)). Political parties are increasingly homogeneous in the ideology of their members, and partisans show increasing hostility toward members of the opposite political party. A natural question emerging from this literature is whether the rise in