Monday, November 08, 2010

Divided Congress Bodes Well for Economy

If the recent past is any indication, the American economy will prosper in the next few years with the new Congress divided between the two parties.


“Since 1970, the levers of federal government — the White House, Senate and House of Representatives — have been in the hands of one party, whether Republican or Democrat, 30 percent of the time,” observes Bloomberg News columnist Kevin Hassett.  “By most any measure, the U.S. economy has been healthier the other 70 percent of the time.”
Since 1981, median GDP has increased 3.3 percent in years when Washington was divided — as it will be now with Republicans in control of the House and Democrats controlling the Senate and White House — and 2.8 percent when it was unified.
Median unemployment has been 6.1 percent under one-party rule since 1970, and 5.7 percent when rule is divided. Since 1993, the spread is even greater — 6 percent compared to 4.9 percent.
Divided rule has proved a boon for the stock market as well. Since 1970, the Standard & Poor’s 500 Index has risen at a median rate of 13.5 percent per year when Washington is divided, and just 9 percent when it is unified. Since 1993, the spread is again greater — 19.5 percent compared to 9 percent.
Hassett, director of economic policy studies at the American Enterprise Institute and an adviser to John McCain in the 2008 presidential election, offers two possible explanations for the phenomenon:
  1. “Under the ‘politicians are idiots’ view, divided governments tend to be gridlocked, and gridlock is good,” he writes. “A paralyzed government is a boon to the economy because the changes that politicians contrive tend to be harmful.
  2. “Under the ‘politicians are sensible’ view, divided governments produce better lawmaking because only sensible policies can achieve the necessary bipartisan support. When government is controlled by one party, common sense is cast aside as those in power use their muscle to reward friends and punish enemies.” 


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