Working Paper: NBER ID: w21273
Authors: Marina Azzimonti
Abstract: American politics have been characterized by a high degree of partisan conflict in recent years. Combined with a divided government, this has led not only to significant Congressional gridlock, but also to spells of high fiscal policy uncertainty. The unusually slow recovery from the Great Recession during the same period suggests the possibility that the two phenomena may be related. In this paper, I investigate the hypothesis that political discord depresses private investment. To this end, I construct a novel high- frequency indicator of partisan conflict. The partisan conflict index (PCI) uses a semantic search methodology to measure the frequency of newspaper articles reporting lawmakers' disagreement about policy. I find a negative relationship between the PCI and aggregate investment in the US. Moreover, the decline is persistent, which may help explain the slow recovery observed since the 2007 recession ended. Partisan conflict is also associated with lower investment rates at the firm level, particularly in firms that rely heavily on government spending and in those who actively engage in campaign contributions through PACs.
Keywords: Partisan Conflict; Private Investment; Political Uncertainty; Investment Rates
JEL Codes: C11; C26; E02; E22; E32; E62; H3; P48
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Partisan Conflict Index (PCI) (D74) | Aggregate Investment (E22) |
| Partisan Conflict Index (PCI) (D74) | Investment Rates at Firm Level (G31) |
| Partisan Conflict Index (PCI) (D74) | Investment Rates for Firms with Higher Political Engagement (H32) |