Two Cheers for Divided Government

There's been a lot of buzz on the blogosphere lately regarding this chart in the October 14, 2008 New York Times showing that since 1929, the stock market has done far better under a Democratic President than a Republican President (even if you exclude the Herbert Hoover years).

The annualized rate of return under Democrats was 8.9% where as under Republicans was 4.7% (excluding Hoover) and 0.4% (including Hoover).



However, this article in the Wall Street Journal shows that although the figures are true, the stock market has actually done best under a divided government -- and specifically when the President is a Democrat and the Congress is Republican.

This makes sense to me. Under a divided government, each party tends to moderate some (although not all) of the worst excesses of the other party. Furthermore, a divided system seems to work better with a Republican Congress restraining a Democratic President, rather than the other way around. For a variety of reasons, Republicans are better in the opposition than in power and will then sometimes even fight for fiscal responsibility. On the other hand, when we've had a Republican President and a Democratic Congress, the President often tries to be "more altruist than thou" in outspending the Democrats, so as to avoid looking mean and selfish.

Yaron Brook once said that we've seen the least growth in government when we've had this pattern of divided government with a Democratic President and Republican Congress. It's good to know that this also is the best combination for the stock market and economic growth.

Unfortunately, it seems pretty unlikely that we'll have that particular combination in 2008. But depending on how the next 2 years turns out, we could easily see this relatively desirable combination in 2010 (just as Democratic control of both branches in 1992 turned into the "better" divided government in 1994.)