Democrat vs. Republican: Which is Better for the Economy?

In a recent post I suggested that we should pay attention to the market downturn that took place on the day after Barack Obama was elected to a second term.  I didn’t mean to suggest that we can judge his entire presidency by a day or two of economic activity, but only to suggest that there is something to be learned.  A friend whom I cherish questioned that post by stating that “the market has tended to perform better under Democratic administrations than Republican ones.”  Believing this statement to be correct, he wondered what the markets are telling us about Obama’s administration.

No source was cited for the statement, but it is an assertion I’ve heard before.  So I decided to do some research.  You, dear readers, are the beneficiaries of that research.

Let’s begin with a warning and some insight to the meaning of free markets.  To understand how politics affects market activity we must realize that politics isn’t the lone issue to be analyzed.  Quite literally, there are unlimited affects on markets.  Global affairs, national events, regional weather patterns, corporate decisions, and consumer choices all have an affect on what the markets do.  Taking one issue out of context and analyzing it separately from all other affects is a bad investment that will only provide poor returns if we’re looking for the truth.

I’m happy to admit that my original statement about the 200-point plunge in the stock market on the day after the election is easily misunderstood.  We can’t put too much emphasis on this single event, but I do believe we can draw one small conclusion:  the re-election of President Obama made the markets a bit jittery.  The reason is simple. Markets don’t function well in an atmosphere of uncertainty.

What in heaven’s name does that mean?  Simple.  Markets aren’t hard to understand if you understand people.  And the fact is that people don’t invest as quickly, or they don’t keep investing, when they are uncertain about what the political power players are up to. Investors have been nervous about Obama for some time now because of his rhetoric regarding the wealthy (the economically successful) and his tendency to pick corporate winners and losers by the way he doles out federal stimulus money. In other words, he uses the power of centralized planning to affect markets in ways that aren’t natural to the markets.  That makes investors nervous.  It’s tough enough to bet on the unpredictable markets.  It’s even worse when you add unpredictable politicians to the mix.

There is always someone in government looking for access to more of someone else’s money.  Both parties are guilty of this.  It was federal spending that chased me out of the Republican party during the administration of George W. Bush (though I returned a couple of years ago in the hope of pushing a constitutionalist reform agenda).  If I may use a homespun metaphor, the Democrats and Republicans are two irresponsible and out-of-control children with their their hands in the wallets of their parents.  No two children are alike–not even bad children.  And in the case of this metaphor, the Democrats are much more dangerous to the economy than Republicans.

The historical data is clear to me:  Republicans are better for the overall economy than Democrats–especially when we have a divided government.

By now you may be tempted to abandon this post.  Please don’t.  I promise to present this as simply as possible and without recourse to all sorts of technical economic jargon that even I probably wouldn’t understand!  Feel free to click on the links provided that take the reader to appropriate graphs, or skip that part if you prefer.

To understand the data, we have to make an important distinction between the presidency and Congress.  Of these two political entities, I would argue that Congress has a greater influence upon markets because it is the source for financial and economic control as enshrined in federal law.  Thousands of pages of laws are passed each year.  Nonetheless, as chief federal executive, the nation’s president has great leeway in how he and his administration approach the enforcement of those regulations.  When it comes to the economy, I believe that most of what our federal officials do is more harmful than helpful. For markets, the best situation is probably a deadlocked government that prevents excessive economic meddling by officials eager to seize more cash.

In analyzing the question at hand, most people probably take the easy route by asking who controls the White House during times of strong economic performance.  Corey Rosenbloom is a Chartered Market Technician with lots of stock-market experience.  He specializes in helping those who’ve been burned by previous investments.  He has developed a webpage that analyzes the presidential administrations since Jimmy Carter and how the markets have responded.  To see his data, click HERE.  His study leaves us wondering.  It’s inconclusive.  Markets have done well and have done poorly under Democrat presidents as well as Republicans.

So where do we go now?  Easy.  Let’s take a look at which party controlled Congress during particular periods of strong markets.  For this exercise we can use the data of Landon Swan from 1945-2009.  To see his information, click HERE.  As Swan shows us, in those years the average stock-market gain under a Democrat-controlled Congress was 9.8%. Under Republican control it was 30.1%.  Other statistics are interesting as well.

Gain under Democrat president and Democrat Congress:  13.2%
Gain under Democrat president with Republican Congress:  32.6%

Gain under Republican president and Democrat Congress:  6.6%
Gain under Republican president with Republican Congress:  25.3%

Seeing these numbers, some may argue that they prove the fact that Republicans are business “fat cats” who line the pockets of their wealthy donors.  That’s a stereotype–one that the Democrat party carefully manages to its benefit.  The real fact is that there are wealthy patrons on both sides of the aisle who benefit from the work of those to whom they grant their patronage.  The people they support in Congress, with their insider knowledge, are becoming very wealthy.

As my readers know, I’m a constitutionalist.  That doesn’t mean I believe that government is evil.  Far from it.  I believe government can be a positive good within the constraints of its social charter.  If government truly is “of the people,” then the people must establish boundaries for the operations of that government.

Governments are established because people must be protected.  Not just certain groups of people, but all the people.  Certain evils must be prevented, or punished when perpetrated. These include fraud, abuse, misrepresentation, and arbitrary abrogation of binding contracts.  Government has a vital role to play in these affairs and its involvement should be as impartial and broad as possible so that it neither gives advantage to one group nor destroys the moral incentive of another. That is what is missing among today’s powerful political elites who use taxes to punish, benefits to reward particular constituencies, and federal investment to gain political support from unions.

What do the statistics tell us about Democrats, Republicans, and the markets?  They tell us that markets are more comfortable under Republican control of Congress than Democrat. But those same markets are most comfortable when Republicans have Congress and a Democrat sits in the White House.

Why is this so?  Again, the answer is simple:  control.  When politicians spend most of their time arguing between parties, they have less time to think of ways to rob the successful citizens who make the nation run.  When those citizens make economic choices about spending money, hiring workers, adding inventory, taking financial risks or expanding a business, they are exercising freedom.

Free markets are nothing more than free people making such economic choices.  Let’s let them do it.  We’ll all be better off for it.

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