Gridlocked Congress: Great for Markets, Bad for America?

A look at what happens with a divided government

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Election day, at long last, is upon us. The consensus among analysts is that Republicans will likely take the House, could take the House and Senate, and certainly will sweep in plenty of new blood into both chambers of Congress. In any event, power is going to be redistributed, split between the two parties where legislation is concerned. So what can we expect from this new faceoff?

  • Gridlock Coming  Whether the GOP controls just one house of Congress or two, Ezra Klein sees gridlock ahead. "The question," he writes, "is what sort of gridlock?" There could be a passable move towards negotiations and progress, the government could come to nearly a complete standstill, or Republicans could focus on repealing many of the Democratic laws of the past two years.
  • What That Means for the Markets  Klein continues to point out that "The markets like gridlock, or they think they do." But it's more complicated than that.
They tend to rally when midterm elections come around. But those rallies correct themselves, and researchers have found that the S&P 500, big-company stocks, and small-company stocks all perform worse under divided government than under unified government.
  • Why the Markets Likes Midterms: Less Meddling  "They really want the gridlocked Congress to avoid doing anything at all," explains Annie Lowrey at Slate, to whom Klein linked. "Markets generally smile on the diminished possibility of legislative meddling." Businesses and investors don't actually want Republicans to try to repeal the health care bill and similar legislation. But Lowrey also points out that studies show gridlock to hurt stocks, particularly stocks of small companies.
  • 'Gridlock Will Be Bad for America'  This prediction comes from Steve Rattner, former "car czar" of the Obama administration, who thinks "the most important" change coming out of the midterms "will be a switch in control of influential Congressional committees, giving rise to fears that the administration will soon be subjected to a stream of distracting, innuendo-filled investigations." Writing at the Financial Times, he also argues that though "the business community will find something to like in this fortified position, inferring that little unfriendly legislation will emerge," the kind of "ugly" environment in those two years of the Clinton administration--which "included a shutdown of the government"--suggest that "in the long run, such gridlock cannot be good for America."
  • What If the Senate Is Split?  Republicans might be disappointed if that happens, acknowledges Jeremy Lott at conservative publication The American Spectator. But he still sees five reasons for conservative cheer, should the midterms bring a 50-50 split. His fifth is particularly fascinating, given the source:
One, the rules of the Senate favor an energized minority over a bare majority. ... Two, Democrats will be disorganized. ... Three, with such a divided Senate, the coming conservative House would be the engine that drives the legislative process. ... Four, political scientists have found that blame sharing makes difficult legislation more palatable. ... Five, Republicans don't deserve to win. Under George W. Bush they presided over a federal government whose budget grew from $2 to $3 trillion annually. They got mired in scandal, launched one more war than they probably should have, began the bailout binge, and Osama bin Laden, that icon of the September 11 atrocities, avoided the grasp of the greatest military superpower the world has ever known. ...  Voters today are poised to express their displeasure with the Republicans' opponents. They are not saying, "All is forgiven." It would be useful for the next Congress to have a permanent reminder of that fact.
This article is from the archive of our partner The Wire.