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How Governments Manipulates the Economy

Posted By Barry Ritholtz On March 27, 2004 @ 1:24 am In Finance,Politics | Comments Disabled

More good stuff from the nonpartisan Stock Trader’s Almanac [1] :

Bull markets tend to occur in the third and fourth years of presidential terms while markets tend to decline in the first and second years. The "making of presidents" is accompanied by an unsubtle manipulation of the economy. Incumbent administrations are duty-bound to retain the reins of power. Subsequently, the "piper must be paid," producing what we have coined the "Post-Presidential Year Syndrome." Most big, bad bear markets began in such years-1929, 1937, 1957, 1969, 1973, 1977 and 1981. Our major wars also began in years following elections-Civil War (1861), WWI (1917), WWII (1941) and Vietnam (1965). Post-election 2001 combined with 2002 for the worst back-to-back years since 1973-74 (also first and second years). Plus we had 9/11, the war on terror and the build-up to confrontation with Iraq.

Some cold hard facts to prove economic manipulation appeared in a book by Edward R. Tufte, Political Control of the Economy (Princeton University Press). Stimulative fiscal measures designed to increase per capita disposable income providing a sense of well-being to the voting public included: increases in federal budget deficits, government  spending and social security benefits; interest rate reductions on government loans; and speed-ups of projected funding.

Federal Spending: During 1962-1973, the average increase was 29% higher in election years than in non-election years.

Social Security: There were nine increases during the 1952-1974 period. Half of the six election-year increases became effective in September eight weeks before Election Day. The average increase was 100% higher in presidential than in midterm election years.

Real Disposable Income: Accelerated in all but one election year between 1947 and 1973 (excluding the Eisenhower years). Only one of the remaining odd-numbered years (1973) showed a marked acceleration.

   These moves were obviously not coincidences and explain why we tend to have a political (four-year) stock market cycle.

Under Reagan we paid the piper in 1981 and 1982 followed by eight straight years of expansion. However, we ran up more deficits than the total deficits of the previous 200 years of our national existence.

Alan Greenspan took over the Fed from Paul Volker August 11, 1987 and was able to keep the economy rolling until an exogenous event in the Persian Gulf pushed us into a real recession in August 1990 which lasted long enough to choke off the Bush re-election effort in 1992. Three other incumbents in this century failed to retain power:

• Taft in 1912 when the Republican Party split in two;
• Hoover in 1932 in the depths of the Great Depression;
• Carter in 1980 during the Iran Hostage Crisis.

   Bill Clinton, warts and all, presided for two terms over the incredible economic expansion and market gains of the nineties. Mr. Clinton was keen to have former Goldman Sachs chief, Robert Rubin, run the treasury for a stretch, helping his administration create a smooth and beneficial relationship with Wall Street, Main Street and the Fed.

As we go to press [August 2003] George W. Bush is fresh off success in Iraq and focused intently on stimulating the economy and the stock market. Major tax cuts have already passed including a bone to Wall Street in a dividend tax cut. Pre-election year 2003 is delivering as promised with strong market gains after a recession and war plagued 2001-2002. Though no strong Democrat has come forward yet, Mr. Bush will have to do all he can to avert economic set backs and market declines as the election approaches.

   

Interesting stuff. Its amazing how ALL Presidents, regardless of party affiliation, go therough the same process. From day one, they are all thinking about the same thing: re-election. It gets reflected in the stock market’s reactions to their policies . . .

Source:
Stock Trader’s Almanac 2004 [1]


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