Partisan Conflict ∗

American politics have become extremely polarized in recent decades. This deep political divide has caused significant government dysfunction. Political divisions make the timing, size, and composition of government policy less predictable. According to existing theories, an increase in the degree of economic policy uncertainty results in a decline in economic activity. This occurs because businesses and households may be induced to delay decisions that involve high reversibility costs. In addition, disagreement between policymakers may result in stalemate that adversely affects the optimal implementation of policy reforms, and may result in excessive debt accumulation. Testing these theories has been challenging given the low frequency at which existing measures have been computed. In this paper, I provide a novel high-frequency indicator of partisan conflict. The index, constructed between 1891 and 2013, uses a search-based approach that measures the frequency of newspaper articles reporting lawmakers’ disagreement about policy. I show that the trend in partisan conflict is related to polarization and income inequality. Its short-run fluctuations are highly correlated with elections, but unrelated to recessions. The lower-than-average values observed during wars suggest a “rally around the flag” effect. I use the index to study the effect of an increase in partisan conflict, equivalent to the one observed since the Great Recession, on business cycles. Using a simple VAR, I find that an innovation to partisan conflict increases government deficits and significantly discourages investment, output, and employment. Moreover, these declines are persistent, which may help explain the slow recovery observed since the 2007 recession ended. JEL Classification: E3, H3. ∗I would like to thank big data analyst Iker Huerga for his invaluable support in the design and construction of the series, and Rudy Bachmann and Rafael DiTella for insightful discussions. I thank Alberto Alesina, George Alessandria, Scott Baker, Nick Bloom, Brandice Canes-Wrone, Steven Davis, Ben Lester, Guillermo Ordonez, Pricila Maziero, Guido Menzio, and Scott Richard as well as participants at the Wharton Brownbag, The Causes and Consequences of Policy Uncertainty conference (Princeton), the NBER Political Economy Meeting (April), and the Macroeconomics Across Time and Space conference (NBER, Philadelphia) for very helpful comments. Michael Chimowitz and Sam Wascher provided excellent research assistance. Thanks to Cris McCallum and her library staff for continuous support and the libraries at the FRB of Philadelphia, the U. of Pennsylvania, and Stonybrook U. for granting me access to their newspaper databases. A previous version circulated under the title “The political polarization index.” The author can be contacted at [email protected]. †Stonybrook University. Part of this project was developed at the FRB of Philadelphia. The views expressed in this paper are those of the author and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia or the Federal Reserve System.