The stock market does much worse when filibusters are not available. Since 1934, in the 15 years whenever the Senate Democrats held a filibuster proof majority, the Stock Market (using just the price change of the S&P 500 Index to measure) went up on average by 2.6 percent. In contrast, in the 60 years where the minority could successfully filibuster, the market appreciated 7.6 percent, an annual difference of 5 percent.
One of the big risks many businesses face today is political risk. This is a newly top of mind risk for American investors. With its push towards healthcare “reform” Congress now proposes to centrally plan 16 percent of the American economy with a reconciliation vote in the Senate requiring a mere majority. If successful, this form of governance will mean all segments of the economy are subject from now on to a new dramatic change by mere majority votes. Investors would have to worry more that their business models could be changed by the government quickly. Given the stock market’s current value of about $15 trillion, the loss of 5 percent per year in potential appreciation would amount to $750 billion. This would be roughly enough in lost wealth to pay off everyone’s credit card debt in one year. As you could guess, this will NOT be good for employment, or our lifestyles. Over the course of ten years, the average family would be looking at missed investment growth of $ 75,000, a shocking number.
When people lose out in investment success, they don’t spend as much, and the slowdown of the economy becomes a self-reinforcing phenomena. If the stock market had in the past only grown at 2.6 percent during the 38 years there was a unified government since 1934, the Dow Jones Industrial Average would be about 3,800 instead of the 10,600 it is at today.
As bad as this would be, Congress is trying its best to make it worse. The example above is based on a hypothetical, but a hypothetical from the good old days, when even though there might not be a filibuster to slow things down, laws had to be written, and published, and read, and debated, and passed by both chambers of Congress before they could become law.
The proposal by Speaker Pelosi that the House could pass a rule “deeming” the Senate’s mere majority reconciliation of “health care reform” the law of the land is abhorrent given the vastness of the sector affected. It is made worse by its 2,700 page monstrous central planning approach. It didn’t work for the Russians, and it won’t work for us. We have travelled into whole other dimension. As Rod Serling would say, it is a “dimension not only of sight and sound but of mind….your next stop, the Twilight Zone.” In this Twilight Zone, exactly as stated by the Speaker in her own bizarre words, “we have to pass the bill so that you can find out what is in it, away from the fog of controversy.” Unfortunately, that will be of true of the stock market too.
If we lose the filibuster as a restraint on government expansion, we can expect further sub-par returns like the ones we’ve had since the beginning of this century. If we press down on the accelerator by using ever vaguer and less transparent legislative procedures, and ratchets requiring super-majorities to undo the government’s grasp, we can expect negative returns. That is what happened in places like Argentina as they said good bye to the rule of law. In addition to the damage already suffered in the stock market in the last few years, an unrestrained majority government would dramatically increase Congressional wealth destruction. Someone once described democracy as “two wolves and a lamb voting on what to have for dinner.” When Ben Franklin was asked at the end of the Constitutional Convention “what have you given us,’” he replied, “a Republic, if you can keep it.” With the sleight of hand of using reconciliation and “deeming” rules to pass a centrally planned health care system, Congress will have defined governing down for all future legislative battles. The pressure to find common ground will be less, and we can expect all these battles to become more, not less, partisan. We will all be much poorer as a result.
Eric Singer, Portfolio Manager of Congressional Effect Management which focuses on the general effect of Congress on daily stock prices.