political control and stock market performance

From Donald Luskin in the WSJ, one more piece of evidence on the usefulness of NOT having federal government power held by one political party...

This is a somewhat counter-intuitive result backed up by theory and empirical results on government spending from Public Choice economics. Especially when trying to guard a narrow majority in Congress and a narrow electoral win by a President, it is tempting to try to use our money to buy our votes. If one parties controls all, the incentives are greatly enhanced; if control is divided, then the incentives are greatly reduced-- in addition to the difficulties introduced by trying to pass legislation in that setting.

Let's get something settled once and for all. Have the stock markets and the economy historically done better under Democrats or Republicans?

There is no shortage of exaggerated claims on both sides. But on the surface, the Democrats would appear to have statistics on their side....

So there you go. Forget about the tax increases. Forget about the regulations, the protectionism, the union influence. Democrats are great for growth. The study proves it!

I've run the numbers myself. Superficially at least, the Democratic claims are true: Since 1948, the Standard & Poor's 500 total return (capital gains plus dividends) has averaged 15.6% when a Democrat was in the White House and only 11.1% when a Republican was in the White House.

You get a similar result if you look at growth in real gross domestic product. Under Democratic presidents, the average since 1948 has been 4.2%. Under Republican presidents it has been only 2.8%.

But it's not so simple when you study that "study." First, not all Democrats act like Democrats, and not all Republicans act like Republicans. John F. Kennedy, for example, was an enthusiastic supply-side tax cutter, and George H.W. Bush raised taxes. Bill Clinton promoted free trade, and Richard Nixon imposed wage and price controls.

If you assign those four presidents to the opposite party based on that -- make the two Democrats into Republicans and the two Republicans into Democrats -- the numbers completely reverse. Now stocks average 14.7% under Republicans and only 10.5% under Democrats....

But then who ever said that the president alone determines the economy or the stock market? It's Congress that makes the laws. The president just signs them. Based on congressional control, the study results look very different. Under Republican Congresses, stocks have averaged a 19% return, while under Democratic Congresses only 11.9%. Real GDP growth, lagged two years, has averaged 3.7% under Republican Congresses, and only 3.2% under Democratic ones....

If the electorate were really smart, it would elect a Democratic president and a Republican Congress. Under that deal, stocks have averaged a 20.2% total return, and real GDP averaged 4%. That tells us that economic and stock market success isn't really about partisan politics at all. Sadly, nobody has a political incentive to conduct a study about that.