Listener: Stock market does better under Democrats! Hermanator: Let me explain a thing or two . . .

A caller named Eddie was pretty sure he had me yesterday when he called to inform me that the stock market does better under Democrats. Why, people have researched it and everything!

It's always tricky as a radio host when someone calls and makes a claim and insists that research backs it up, because you can't sit there while you're on the air and try to verify or refute whatever this research might be. But needless to say, I suspected that either the claim was dubious or that there was more to the story. First, let me put in perspective these claims about the stock market. The stock market isn’t necessarily an indicator of a strong or a weak economy, because the stock market can be very volatile. It’s not driven by the same economic factors by which we typically evaluate the strength of the economy. Second, the current stock market is being driven by people who have money who are making zero interest on savings and CDs, so they’re risking it on the stock market. That tends to drive the stock market up, but it's not a sign of a healthy economy.

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Now, having said that, there have been some articles recently that say historically economic growth is higher when a Democrat is in the White House. This is dealt with in a number of places, including this piece from Patrick Brennan published in National Review just last month. But when you read past the headline and go into the details, you'll find that a true analysis of the question doesn't serve as the endorsement of Democrat policies that Eddie and other liberals want it to be:

That’s the question two Princeton economics professors set out to answer in a new study. The answer: The impressively large gap seems to have little to do with the presidents and policies themselves. There happen to have been fewer oil shocks under Democratic presidents, consumer confidence has been higher, and something called “total factor productivity” has been higher (it reflects the value the economy produces on top of the labor and capital inputs). Those things, according to Alan Blinder (a former member of President Clinton’s Council of Economic Advisers) and Mark Watson, explain the majority of the difference between the average economic performances of Republican and Democratic presidents (which is huge: economic growth under Democrats has been 1.8 percentage points higher than under Republicans) – the rest, they decide, has to be due to other, unexplored factors or just random variation.

In other words, we're talking about correlation without causation. The party that controls the White House isn't necessarily a determining factor for how the economy is doing. If you want to view possible connections, though, I would point something out. Rich Lowrie and I detailed in the book 9-9-9: An Army of Davids that economic growth in Bill Clinton's second term was very strong, especially after he made a deal with then-Speaker Newt Gingrich to cut the capital gains tax. So you had a Democratic president embracing a Republican idea pushed by a Republican Congress. If you want to say that government policy helped bring on the growth, was it Democrat policy or Republican policy? It's not so simple as just who's sitting in the White House. By contrast, growth was decent but not great during most of the George W. Bush presidency, and unemployment was much lower than it is now for almost the entire Bush presidency. The deficit in 2007, under a budget passed in 2006, was less than $200 billion. But Democrats took control of Congress in 2007 and the economy first contracted in December of that year. In 2008, thanks in part to the refusal of Democrats Christopher Dodd and Barney Frank to allow reforms to Fannie and Freddie, that mortgage market imploded and the economy tanked. There was a Republican president in office - the same Republican president who had presided over those years of low unemployment. So can you clearly attribute what happened in 2008 to him? We've now had a Democrat in the White House for five years and we still haven't seen a real recovery of the GDP or of the job market. What does it all mean? It means a lot of things. The stock market and the economy are not the same thing. There are a lot of factors that determine how the economy is doing - not all of them controlled by the government. And to the extent government policy does affect it, you need to take a close look at which government policies are having the greatest effect and why - and who is responsible for them. It's clear in my mind that the high-tax, high-debt, heavy-regulation, central-control policies of the Obama Administration are hampering economic growth. But I need to show you the causation, not just make the correlation, in order to have really made my case.

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