In politics, Wall Street ignores history

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Wall street wants - and expects - President Bush to be reelected. And like business in general, the financial industry gives far more campaign funds to Republicans than Democrats.

That's odd, in a way. Looking just at history, Wall Street is backing the wrong horse. The economy has done better under Democratic presidents than Republican ones since the 1940s.

Surprised? Examine gross domestic product. Real growth in the measure of the nation's total goods and services averaged 4.0 percent a year with a Democratic president; only 3.1 percent with a Republican, according to an analysis by Merrill Lynch.

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The stock market? No contest. The Standard & Poor's 500 stock index rose 54 percent on average during a Democrat's term; only 32.3 percent with a Republican. Even unemployment fell with Democrats in the Oval Office (by 0.3 percentage points) and rose (1.1 points) with Republicans in charge. Republicans beat Democrats in one economic measure. Inflation under the Democrats increased 1.6 percentage points; it fell 1.1 points under GOP presidents.

The general view on Wall Street is that inflation damages financial markets. Yet bonds (which rise and fall with interest rates) have done better under Demo- crats. The value of 10-year Treasuries rose 1.2 percentage points under Demo- cratic presidents; they fell 0.5 percentage points under Republicans.

One shouldn't jump to conclusions. Economics may determine elections rather than the other way around.

Still, it seems a little puzzling that the securities and investment banking industry is giving George W. Bush five times the support it has pledged to John Kerry. (The latest numbers from the Center for Responsive Politics put their respective totals at $5.5 million and $1.1 million.)

One reason could be that Wall Street has lots to cheer about in the current economic recovery. While workers have seen incomes rise, corporations have reaped an unusually large share of the wealth, according to a study by the Center for Labor Market Studies at

Northeastern University in Boston. In the last two years, GDP increased about $800 billion. Corporations got $325 billion of that sum; employees got $310 billion, the study finds.

"This is really very disproportionate," says Paul Harrington, one of the economists who did the study. It's 2.5 times the usual share companies get in an economic recovery in the United States.

As he sees it, companies have reaped too large a chunk of the 7.3 percent increase in productivity in those two years. Business has relied on job outsourcing and cheaper contract employees to boost the bottom line. Labor, with weak unions and facing high immigration, has been relatively powerless to demand its share of increasing prosperity.

In turn, those extraordinary profits boosted stock prices, making Wall Street happy with the incumbent president. One bullish analyst, Edward Yardeni of Prudential Equity Group, says the S&P 500 could rise 20 percent this year.

There are also policy reasons why Wall Street prefers Bush. One is regulation. While the Republican-controlled Congress has tightened rules for corporate governance in the wake of recent corporate scandals, the finance industry generally trusts Republicans, with their enthusiasm for capitalism, more than Democrats to take it easy on regulation.

For instance, a Bush administration would do a more reasonable job of implementing Medicare and Medicaid regulations, including the new prescription drug benefit, than would a Kerry administration, says Alec Phillips, an economist with Goldman, Sachs & Co.

Apparently, the pharmaceutical and health-products industry thinks the same way. In the current political cycle, it has given $4.4 million, or 67 percent of its total political donations, to Republicans.

On taxes, Bush would seek to make his tax cuts permanent. That would benefit many Wall Street executives. Senator Kerry would seek to enforce many of the sunsets in the tax-cut bills. Also at risk: the planned elimination of the estate tax and the 15 percent top tax rate on dividends and long-term capital gains.

Further, Bush would probably pursue a partial privatization of Social Security, a measure that could swell Wall Street profits. Kerry favors keeping the existing system, perhaps tinkering with the retirement age and the benefits' inflation index.

Mr. Phillips and a colleague, Bill Dudley, wrote an analysis of the political scene for Goldman Sachs, which concludes that Bush is "likely" to be reelected, considering his advantages in campaign finances, his status as the incumbent, and the state of the economy.

Ray Fair, a Yale economist who tracks these things, agrees. For years, he has used a model of the economy to predict election results. It assumes that the economy is the biggest factor in an election. When cranked up in February, the model found Bush getting 58.3 percent of the two-party vote. Because of a likely slowdown in GDP growth this past winter, the predicted Bush share might drop to 57 percent when another estimate is made next month, figures Professor Fair.

But a couple of caveats are in order. First, the unprecedented slow increase in job creation in this recovery may affect votes. Fair's model doesn't take account of job growth. Nor does his model's parameters involve a troublesome war.

By the way, the last time Fair's model predicted a Bush reelection was in 1992. It didn't happen.

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