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 aeffects 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.