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Status Quo We Can Believe In

Why last night’s election results will help the economy

By Peyton R. Miller

Having made considerable gains in both houses of Congress, Republicans will soon undertake their much-anticipated attempt to improve the economy by getting the government out of the way of the private sector. True, the current occupant of the White House and a strong Democratic presence in the Senate will sharply limit the GOP’s ability to cut taxes and regulation, but the new members of Congress will inevitably contribute to a recovery over the next two years merely by reducing government activity and thus economic uncertainty.

On Sunday, economist Kevin A. Hassett published an analysis of America’s economic health during periods of unified and divided government, the latter of which occurs when at least one chamber of Congress is controlled by the party opposite the president’s. Since 1970, divided government has witnessed median GDP growth of 3.3 percent and median unemployment of 5.7 percent in years of divided government, compared with three percent GDP growth and 6.1 percent unemployment during one-party rule. Equity markets, Hassett says, have “practically jumped for joy at political division” since 1970: The Standard & Poor 500 has grown at a median rate of 13.5 percent per year under divided government and 9 percent per year during unified government, and the spread is more than twice that amount since the beginning of the Clinton administration.

This is presumably because the government doesn’t accomplish as much when the two parties share control. Bolstering this hypothesis is data indicating that equity markets do better when Congress is out of session and thus passing no laws. A 1997 University of North Carolina at Charlotte study found that almost the entire advance in the stock market since 1897 corresponds to the periods when Congress was in recess and that cumulative returns, throughout the year, during recesses are thirteen times those experienced while Congress is in session.

But is the government less active when it is divided between the two parties? One way of answering this question is by examining the “Congressional Quarterly” presidential success score, which quantifies the percentage of congressional votes on which the president’s position prevails—if this entails passing a bill, the president will sign it. Success scores tend to be higher during one-party control of government, a pattern that has been reaffirmed during the current Congress: Obama’s 2009 score was 96.7 percent, higher than that of any other president since Congressional Quarterly began keeping track over fifty years ago. The next closest score is Lyndon B. Johnson’s 93 percent in 1965, at the beginning of which Democrats enjoyed more than two-thirds majorities in both the House and the Senate.

While this metric might be dismissed on the grounds that it counts defeats of bills opposed by the president as successes, such votes are unlikely to be frequent when the president’s party controls the congressional agenda. This is certainly true of the current Congress, which has spent most of its time debating President Obama’s economic program.

The problem with a Congress that has a serious chance of enacting legislation with sweeping economic consequences is that investment decisions must be based in part on what the government is likely to do, making individuals less likely to take the risks needed to generate growth. Hiring and investment were surely deterred by the uncertain prospect of higher taxes and the employer mandate during the yearlong debate over healthcare reform as well as the new regulations in the Dodd-Frank financial oversight bill that became law during the summer.

Irrespective of the impact of healthcare reform and Dodd-Frank, private actors now know the rules of the game, and those rules are unlikely to change for the next two years since most of the president’s economic proposals will no longer be on the agenda. Republicans can now easily block the Employee Free Choice Act, which would have established mandatory government arbitration for organized labor contracts and made it much easier for employees to unionize. Another casualty of the elections is the Paycheck Fairness Act, currently under consideration in the Senate, which would facilitate pay discrimination lawsuits. Also off the table are the proposed tax increase on carried interest and the bank tax, or “Financial Crisis Responsibility Fee,” both of which would have hampered investment by making risk taking less profitable. Perhaps most significantly, there is little if any chance the government will ration fossil fuel use through a cap-and-trade system, or approve more stimulus spending that would affect interest rates and ultimately require higher taxes. Holding other factors constant, the economy should improve during the next Congress since investors and employers no longer have to account for how these policies would affect their bottom line.

Thanks to Republican electoral victories, private sector decisions over the next two years will be made based on how consumers—and not the government—are likely to behave. Perhaps after its members are sworn in, Congress could simply adjourn until 2012. It wouldn’t be the worst thing.

Peyton R. Miller ’12 is a government concentrator in Winthrop House. His column appears on alternate Wednesdays.

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