The Argument: “The stock market proves democrats are better for the economy than republicans”

Splitting time between liberal Berkeley and Marin, I’ve been frequently hearing a propaganda piece that goes something like this:

“Democrats are better for the economy because the stock market goes up more when we have a democratic president”

Now, I don’t want to get into the debate about which party actually is better for the economy, but I want to discuss why this argument is juvenile and exceptionally flawed.

The image at left, from a particularly insidious NY Times article, pretty much sums up the 2-step logic, which goes like this:

Premise/Assumption: The stock market has historically gone up more for democratic presidents than republican ones

Conclusion: Therefore democratic presidents are better for the economy than republicans

There are quite a few questionable implicit assumptions in the argument (i.e. the more the stock market rises the better the economy is doing), but there are two that particularly bug me:

There is no time delay between policy changes and stock performance

Stock performance is independent of world events

I think that almost everyone will agree that the above statements are obviously false, but anyone who makes the claim in question is building their argument on these very assumptions.  Let me explain… I took it upon myself to do a bit of rearranging of the fancy New York Times graphic so that instead of displaying returns in order of performance, they are listed in order of time:

As you can see, when the data is organized by year, the story is very different.  While the democrats have had the highest returns, the state of the economy that each president has inherited/left behind has greatly affected the performance of their successors.  For example:

• Herbert Hoover got hit with the Great Depression; not even the biggest liberal would blame him solely
• Nixon had to deal with the effects of the 1973 Oil Crisis
• Bill Clinton sold out at the peak of the dot.com crash

Now let’s extrapolate to Barack Obama; the big crash we had over the past month or two could easily have held off until January, and Obama would be in a similar position to where Bush was when he took office at the peak of the dot.com boom. If that happened you know as well as I do that every liberal would rightfully be saying that it wasn’t his fault.

On that same vein, are Obama’s supporters claiming that he can get the stock market back to 14,000 overnight?  Would it be fair for Republicans to blame Obama if foreclosures rise in 2009?  No, of course not; policy changes can take years to affect the market, and using out-of-context historical stock returns to say one party is better for the economy than the other is just as juvenile.