The Review of Economics and Statistics

The well-documented rise in political polarization among the U.S. electorate over the past 20 years has been accompanied by a substantial increase in the effect of partisan bias on survey-based measures of economic expectations. Individuals have a more optimistic view on future economic conditions when they are more closely affiliated with the party that controls the White House, and this tendency has increased significantly over time. Individuals report a large shift in economic expectations based on partisan affiliation after the 2008 and 2016 elections, but administrative data on spending shows no effect of these shifts on actual household spending. ECONOMISTS have long believed that economic expectations are crucial to understanding economic activity. But how do individuals actually form economic expectations? One line of research in economics 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?” 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 & Sims, 2012; Azariadis, 1981; Benhabib & Farmer, 1994; Lorenzoni, 2009, and Angeletos & La’O, 2013). Beyond the academic literature, Received for publication May 15, 2020. Revision accepted for publication March 25, 2021. Editor: Shachar Kariv. ∗Mian (corresponding author): Princeton & NBER; Sufi (corresponding author): Chicago Booth & NBER; Khoshkhou: Synchrony Financial. 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, Pranav Garg, Seongjin Park, Jung Sakong, and Xiao Zhang for excellent research assistance. For helpful comments, we thank Fernando Alvarez, Bob Barsky, Anthony Fowler, Matthew Gentzkow, Christian Gillitzer, Guido Lorenzoni, Claudia Sahm, Jesse Shapiro, Danny Yagan and seminar participants at many places. We also thank Shachar Kaviv (the editor) and four anonymous referees for comments and suggestions that improved the study. 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. A supplemental appendix is available online at https://doi.org/10.1162/ rest_a_01056. the answers to such survey questions receive widespread coverage from the financial press, which likely reflects the view that the answers contain valuable information for predicting income and spending growth.1 However, research in political science suggests caution when evaluating responses to surveys on economic conditions because of potential partisan bias. For example, it has been shown that individuals have a more positive assessment of current economic conditions 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 separate but related line of research in political science documents a large increase in social and affective polarization across political parties (e.g., Iyengar, Sood, & Lelkes, 2012; Mason, 2013, 2015; Gentzkow, 2016; Boxell, Gentzkow, & Shapiro, 2017). Political parties are increasingly homogeneous in the ideology of their members, and partisans show increasing hostility toward members of the opposite political party. This line of research suggests that partisan bias in evaluations of the economy may be growing over time. In this study, we investigate three related questions. Does partisan bias influence an individual’s assessment of future economic conditions as reported in surveys? If so, has partisan bias in expectations formation risen over time? And finally, do movements in economic expectations driven by partisan bias influence household spending? We find that partisan bias exerts a significant influence on survey measures of economic expectations, and this bias is increasing substantially over time. Using two independent data sources (the University of Michigan Survey of Consumers and Gallup), we show that individuals who affiliate with the party that controls the White House have systematically more optimistic economic expectations than those who affiliate with the party not in control. This has been true at least since the Reagan administration in the 1980s. Further, the bias is becoming larger over time. For example, Republicans have economic expectations since January 2017 that 1For example, the release of the August 2017 consumer sentiment index from the University of Michigan was covered by CNBC, the Financial Times, and the Wall Street Journal. The Review of Economics and Statistics, May 2023, 105(3): 493–510 © 2021 The President and Fellows of Harvard College and the Massachusetts Institute of Technology https://doi.org/10.1162/rest_a_01056 494 THE REVIEW OF ECONOMICS AND STATISTICS are on average 1 to 1.5 standard deviations more optimistic than Democrats. The difference was less than one-half a standard deviation prior to the first Obama administration. The explanatory power of party affiliation on economic expectations, as measured by the R2 from a linear regression, has risen fourfold from 0.07 to 0.28 from the George W. Bush to Trump administrations. How does the rise in partisan bias in economic expectations affect household spending? To answer this question, we focus on changes in economic expectations right around Presidential elections, which give us the “cleanest” estimates of the pure effect of political outcomes on economic expectations. Following the 2008 and 2016 Presidential elections, we find that individuals supporting the party of the winning presidential candidate witness a substantial relative rise in optimism about the economy immediately after the election. The relative change in economic expectations is particularly large after the 2016 election. Individuals identifying themselves as Republicans see a 1.5 standard deviation increase in economic optimism from November 2016 to January 2017, whereas Democrats see a 0.75 standard deviation decline in economic optimism. One hypothesis is that economic expectations of partisans are driven by the party controlling the White House because the actual economic condition improves for partisans if their party is in control. We examine county-level and state-level measures of tax rates, personal income growth, and transfers around elections, and we find little evidence that economic circumstances change to the benefit of areas supporting the new President after elections. We also test this hypothesis using a simple assumption: individuals living in the same zip code should be similarly affected by whatever economic factors are associated with the occupant of the White House. Using the data set from Gallup, which contains large samples and detailed geographic identifiers, we show that our estimates of partisan bias are unchanged with the inclusion of zip code by month fixed effects. For example, Democrats and Republicans experience sharply diverging views on the economy after the election of Donald Trump in 2016 even if they live in the same zip code. As a further test, we examine answers to a question in the Gallup survey on whether the firm for which an individual works is hiring or letting go of employees. We find substantial partisan bias in the answers to these questions right around elections, and this bias is also unchanged with the inclusion of zip code by month fixed effects. In other words, after the election of Donald Trump, a Republican is much more likely to report that her firm is hiring workers while a Democrat living in the same zip code is much more likely to report that her firm is firing workers. Taken together, these results lead us to the conclusion that the sharp relative changes in economic optimism around Presidential elections are pure partisan bias as opposed to a response to changes in economic circumstances of partisans. To measures the effects on spending, we utilize two types of data: survey questions where individuals report information on their spending, and administrative data that records actual spending at the county and zip code level. We find mixed evidence on spending in the survey questions. In the Michigan data, we find weak evidence of a change in spending patterns based on questions on whether it is a good time to buy major household items or a car. In the Gallup data, Republicans report higher spending after the election of Donald Trump in 2016, but they do not report lower spending after the election of Barack Obama in 2008. In the administrative data, we find no evidence of a change in spending driven by changes in economic expectations due to partisan bias. The evidence for the 2016 election is most striking. Through October 2017, there is no relative increase in auto purchases or credit card spending in U.S. counties or zip codes where individuals voted in the highest proportion for the Republican candidate, even though the increase in optimism on the economy in these areas is large. The overall evidence on spending lead