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Wonkbook: Do markets like divided government? And what will lame duck look like?


From a policy standpoint, it's hard to say much of anything until tomorrow, when we know the size of the GOP's gains. A world in which they control the House will mean something very different from a world in which they control both the House and the Senate. But either way, prepare for gridlock.

The question, is what sort of gridlock? One possibility is nothing controversial will happen, but Democrats and Republicans will pull off the essential functions of government easily, and even manage to make progress in areas where they agree, like trade and potentially some elements of tax policy. Another is that nothing will happen, and they'll just barely kept the government functioning. And still a third is that the Republicans will try to make things that happened over the past two years -- like health-care reform and financial regulation -- unhappen, and the resulting government shutdowns and market uncertainty will turn gridlock into a pile-up.

The markets like gridlock, or they think they do. 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. Further, a recent poll (pdf) of market participants fund that more than 60 percent thought things would get better under divided government, but a majority also allowed that they were looking for Republicans and Democrats to cooperate productively rather than tussle viciously. Of the three gridlock scenarios, that's the hardest to imagine. But it's not, of course, impossible.

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Corporations that worked with Democrats over the past two years will meet a cool reception if the GOP takes over, report Ylan Q. Mui and Jia Lynn Yang: "During a phone call with company lobbyists last year during the fight over the health-care bill, Camp bluntly reminded Wal-Mart of its unpalatable position on the issue, according to sources familiar with the conversation. Now, Wal-Mart's political team finds itself in an awkward position. Camp is poised to become the next chairman of the powerful House Ways and Means Committee...The pharmaceutical industry, in particular, worked closely with the Obama administration and Democrats on Capitol Hill to pass health-care reform...John Boehner, who is likely to become speaker should the Republicans win control of the House, blasted PhRMA in a scathing letter."

The lame duck session will be dominated by the Bush tax cuts, but will also be more unpredictable than most, reports Damian Paletta: "Capitol Hill aides said this lame-duck session could be more unpredictable than most, in part because Republicans will probably have control of the House. That means they will likely spend at least a week determining who will take leadership roles. Republicans could also be less likely to compromise on key issues just two months before assuming more power. Other issues from the midterms are also clouding the process. For example, if Mr. Reid loses his re-election bid to Republican Sharron Angle, Senate Democrats would have to quickly nominate a future Senate leader even if Mr. Reid stays in his post until January."

The stock market might want divided government, but it tends to perform better under unified government, reports Annie Lowrey: "Stovall studied the performance of the S&P 500 from 1900 until this year under three scenarios: total unity (one party controlling the House, Senate, and White House), partial gridlock (one party controlling both houses of Congress and the other controlling the White House), and total gridlock (a divided Congress). Over all years, the S&P rose at a 6.8 percent annual pace. During times of total unity, 67 of the 111 years analyzed, it gained 7.6 percent annual pace. During times of partial gridlock, accounting for 32 years, they gained 6.8 percent. And during the 12 years of a gridlocked Congress, the S&P gained just 2 percent per year. Looking at more recent years, since 1945, the pattern holds. Under total unity, stocks climbed at a 10.7 percent annual pace. Under partial gridlock, they gained 7.6 percent per year. And under total gridlock, which accounts for eight of the 65 years, they gained just 3.5 percent per year."

Health care reform is already expanding coverage for small business employees, reports Janet Adamy: "The number of small businesses offering health insurance to workers is projected to increase sharply this year, recent data show, a shift that researchers attribute to a tax credit in the health law. Many small businesses, however, remain opposed to the law...According to a report by Bernstein Research in New York, the percentage of employers with between three and nine workers and which are offering insurance has increased to 59% this year, up from 46% last year. The report relies on data from a September survey by the nonprofit Kaiser Family Foundation. A full tax credit is available to employers with 10 or fewer full-time workers and average annual wages of less than $25,000."

Neil Irwin and Alicia Parlapiano explain graphically how quantitative easing will work: "Because the Fed cannot cut short-term interest rates any further -- its targeted rate has been near zero for almost two years -- the central bank will use a less conventional, and less proven, technique called quantitative easing. The Fed will likely buy hundreds of billions of dollars worth of Treasury bonds on the open market, using money that it creates out of thin air. The newly created money is intended to energize the economy several ways."

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'80s college rock cover interlude: Patrick Stump plays "My Favourite Dress" by the Wedding Present.

Still to come: Robert Rubin is skeptical of further stimulus; Paul Volcker lays out his preferences on the Volcker rule; a conservative challenger for the chairmanship of the Energy and Commerce Committee; elements of the health-care industry tries to moderate the GOP's repeal strategy; and the Mad Men theme played on the base.


The GOP could work with Obama on a corporate tax overhaul:

Paul Volcker has specified how he wants his namesake reform implemented, reports Deborah Solomon: "In a letter to the new Financial Stability Oversight Council, Mr. Volcker said 'clear concise definitions, firmly worded prohibitions, and specificity in describing the permissible activities will be of prime importance for the regulators as they implement and enforce this law.' But he also urged regulators to preserve flexibility in the so-called Volcker rule and said some terms 'should be defined broadly so as not to limit the supervisors' examination of trading activities.' The financial overhaul passed earlier this year sought to prevent banks from putting a firm's capital at risk by prohibiting proprietary trading and banning certain relationships with hedge funds and private-equity funds."

The debt commission might recommend raising the Social Security payroll cap:

Robert Rubin is skeptical of further stimulus: "I agree with the administration’s targeted budget additions that might be particularly powerful economic catalysts, such as small business support, or might meet other immediate imperatives, such as extending unemployment insurance and state aid for teachers. Hopefully, other targeted proposals will be developed with especially strong economic impact or hardship relief. More broadly, a major new stimulus could well be constructive, if it is tied to real, trusted and enacted long-term structural deficit reduction. Otherwise, a major new stimulus is likely on balance to be counterproductive, initially or over time. It could seriously increase business uncertainty about future economic conditions and policy, or change market psychology unexpectedly and dramatically, causing serious market disruptions. Or, even if a major new stimulus worked initially, it could fail to generate lasting momentum due to the headwinds, leaving us worse off than we would have been, with more debt but no greater gross domestic product."

The coming gridlock will hurt America, writes Steve Rattner:

Income inequality is a policy outcome, writes Bob Herbert: "The authors, political scientists Jacob Hacker of Yale and Paul Pierson of the University of California, Berkeley, argue persuasively that the economic struggles of the middle and working classes in the U.S. since the late-1970s were not primarily the result of globalization and technological changes but rather a long series of policy changes in government that overwhelmingly favored the very rich...The book describes an 'organizational revolution' that took place over the past three decades in which big business mobilized on an enormous scale to become much more active in Washington, cultivating politicians in both parties and fighting fiercely to achieve shared political goals. This occurred at the same time that organized labor, the most effective force fighting on behalf of the middle class and other working Americans, was caught in a devastating spiral of decline."

Adorable animals playing board games interlude: A dog rolls a Large Straight in Yahtzee!


A conservative challenger is seeking the chairmanship of the House Energy and Commerce Committee should the GOP win the House, reports Tony Romm: "Rep. Cliff Stearns hopes his conservative credentials can help guide him straight to the top of the House Energy and Commerce Committee next year...'I have an American Conservative Union rating of 96 percent, and you can’t get much better than that,' Stearns said in an interview, adding his ratings have increased over time...The congressman’s plan for the committee draws heavy influence from the general goals of his party: He hopes to scale back government regulation, question federal energy leaders, begin the repeal of Democrats’ health care law and watch the Federal Communications Commission with a skeptical eye."

Seafood from the Gulf is now safe:

The GOP will likely use the House Natural Resources Committee to expand drilling, reports Robin Bravender: "Republican efforts to expand oil production on public lands, ramp up oversight of the Obama administration’s domestic energy policies and scale back efforts to expand national parks would begin in a committee that hasn't had much respect lately. The House Natural Resources Committee has a broad jurisdiction - overseeing federal lands, oil and gas drilling policy, and endangered species laws, for starters - but hasn't flexed its muscles under the Democrats for the past four years...West Virginia Democrat Nick Rahall, the panel's chairman since 2007, has won kudos from the environmental community for his efforts to shepherd a host of wilderness bills through the committee and to overhaul federal onshore oil and gas and geothermal stream leasing systems."

Ten races that will have a major impact on energy policy:

The Interior Department hired the company responsible for safety at the Deepwater Horizon for another job, reports Steven Mufson: "The Interior Department is planning to pay Det Norske Veritas (DNV) $1.3 million to conduct the autopsy of the 60-foot high, 380-ton blowout preventer, which is now sitting on a dock at the NASA Michoud assembly plant in Louisiana. But some government and industry officials say that the firm's earlier work for Transocean, the owner and operator of the Deepwater Horizon, poses a conflict of interest...The American Bureau of Shipping, a nonprofit organization that classifies marine vessels and offshore rigs, did not submit the firm's name to do the blowout preventer autopsy because of its earlier work on the Deepwater Horizon."

RJD2 cover interlude: The Mad Men theme song played only on bass.

Domestic Policy

The health industry is seeking to influence the GOP's health care reform repeal strategy, report Janet Adamy and Jonathan Weisman: "Insurers want to reverse tax increases and loosen restrictions on insurance premiums, and several groups hope to tack on medical malpractice protections. At the same time, the health-care industry is concerned that Republicans want to remove the requirement that most Americans carry health insurance--a provision that rewards health-care providers with millions of new customers...The insurance industry is working to persuade the next Congress to roll back a roughly $70 billion tax on insurance companies that takes effect in 2014, saying it will disproportionately hit small businesses that insure their workers."

The incoming GOP class will be tougher on immigration:

Governor's races will have a major effect on health care reform, reports Kelly Evans: " The GOP may well go from controlling fewer than half of governorships to roughly 60%. That may make friendlier conditions for health-care companies as they look to 2014. Right-leaning states aren't only expected to set up smaller, less ambitious exchanges, but could add to private insurers' rolls by shrinking public programs like Medicaid. Little wonder shares of some large health providers, like UnitedHealth Group Inc., have rallied by more than a quarter since July."

Appeals hearings suggest that the Justice Department's lawsuit against Arizona's immigration law could fail, reports Jerry Markon: "Judge John T. Noonan Jr. grilled administration lawyers at a hearing before the U.S. Court of Appeals for the 9th Circuit. He took aim at the core of the Justice Department's argument: that the Arizona statute is 'preempted' by federal law and is especially troublesome because it requires mandatory immigration status checks in certain circumstances...'We are dependent as a court on counsel being responsive...You keep saying the problem is that a state officer is told to do something. That's not a matter of preemption...I would think the proper thing to do is to concede that this is a point where you don't have an argument."

GM's IPO will make about $10 billion, and put the US ownership stake below 50 percent:

The Supreme Court refused to hear a case that could have lead to weaker campaign finance rules, reports Robert Barnes: "On Tuesday, in Keating, et al v. FEC, the court turned down a challenge from, which opposes candidates who favor restrictive campaign finance laws. The group won a big victory when the U.S. Court of Appeals for the District of Columbia said it could accept unlimited donations to fund its ads. But the group appealed another part of the decision, which said it must comply with the disclosure requirements that come with being registered as a PAC...As is customary, the court gave no reason for declining to hear the challenge."

New GOP-related lobbying services are already sprouting up:

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews, Mike Shepard, and Michelle Williams. Photo credit: Ricky Carioti.

By Ezra Klein  | November 2, 2010; 6:44 AM ET
Categories:  Wonkbook  
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Next: What will a GOP win mean for health-care reform?


"Corporations that worked with Democrats over the past two years will meet a cool reception if the GOP takes over, report Ylan Q. Mui and Jia Lynn Yang."

Well, color me very confused. All I've heard Democrats whine about lately is how "Citizens United" opened the flood gates for corporate money to influence and corrupt elections that otherwise would be pure as the driven snow if the only outside contributions were from labor unio....errrrr, "concerned citizens".

But now, this morning, Ezra posts this blurb from another WaPo article about the GOP looking to penalize all those companies who sided with Obama. If you read the article, you find an interesting fact cited....that of all the 'corporate money' that flooded elections this year, 53% WENT TO DEMOCRATS!

Does that not leave the obvious question....if corporate donations to elections is 'corrupting', and most of it went to DEMOCRATS, then what does that say about the corruption of the donkey party?

Posted by: dbw1 | November 2, 2010 9:14 AM | Report abuse

"The stock market might want divided government, but it tends to perform better under unified government, reports Annie Lowrey"

How come I don't ever remember stats like this being trotted out when the Republicans held the congress and the Whitehouse? Strange, that. ;)

Posted by: Kevin_Willis | November 2, 2010 10:05 AM | Report abuse

"The stock market might want divided government, but it tends to perform better under unified government, reports Annie Lowrey: "Stovall studied the performance of the S&P 500 from 1900 until this year under three scenarios: total unity (one party controlling the House, Senate, and White House), partial gridlock (one party controlling both houses of Congress and the other controlling the White House), and total gridlock (a divided Congress). Over all years, the S&P rose at a 6.8 percent annual pace."

As I said yesterday, this is 100% factually incorrect.

There was no S&P 500 in 1900 nor for many years after, in fact it's questionable whether or not there were even 500 legitimate business stocks trading on the exchange in 1900. You can't simply go back and choose companies arbitrarily to create data, saying well these companies WOULD have been a similar representative index had such a thing existed. It impossibly skews your data.

This is why you can never trust an economist when they try to overwhelm you with mountains of data.

Posted by: 54465446 | November 2, 2010 10:38 AM | Report abuse

"How come I don't ever remember stats like this being trotted out when the Republicans held the congress and the Whitehouse? Strange, that. ;)"


Strange indeed.

The stock market did turn in a solid performance under a unified Republican government (Jan03-Jan07).

Was it because of a unified Republican government? Or was it because the economy was doing well and the market had finally gotten over the dotcom crash and the scandals?

A Democrat might suggest that the 2007-2009 equity market rout was a result of policies pursued under a unified Republican government. Right or wrong, that suggestion shows just how silly such a study is.

Posted by: justin84 | November 2, 2010 11:18 AM | Report abuse

A good wonkbook post:

Remember how it was news that the top earners had quintupled their earnings to $519 million? That was actually a result of two pranksters - top earners actually saw their incomes fall by 7.7 percent to $84 million each.

"The debt commission might recommend raising the Social Security payroll cap:"

Failed to catch this earlier, but some catfood commission, huh?

Posted by: justin84 | November 2, 2010 2:59 PM | Report abuse

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