Republicans: The Party of Big Government?

What should investors do about this month’s elections, in which control of Congress went to the Democratic party for the first time in a dozen years?

I suppose the first thing is to say “Thanks” to the guys who got booted from office on Tuesday. Be grateful — it’s been a nice run for investors since the Democrats lost control of Congress in 1994.

The compound annual total return for the S&P 500 over those 12 years was 11.3%, compared with an average of 10.3% over previous history. Inflation only eroded your winnings at an average annual rate of 2.6% during those 12 years, compared with 3.1% over previous history.

So “Thanks.” We investors got to make more money than usual, and what we made was safer from inflation.

But now voters have decided to give the other team a chance at bat. Seems odd, since today about 55% of voters are direct owners of stocks, either in brokerage accounts, IRAs or 401(k)s.

Perhaps this election wasn’t about the economy at all, but rather about the war in Iraq, or about corruption. Could be, but I see some patterns in the results that tell me that voters were very much thinking about economic issues.

And not in the way you might expect for an election in which Democrats seized power. Democratic politicians and pundits have made a lot of noise this year about “income inequality” and “stagnating wages” and “economic insecurity.” Their solutions are usually some form of government intervention, greater regulation, or a more extensive welfare state. But those aren’t the things that people voted for this week.

If voters wanted bigger and more intrusive government, more regulation, and more welfare, they should have voted for Republicans in a landslide. It was a Republican Congress that put the regulatory nightmare of Sarbanes-Oxley in place, that outlawed online wagering, and that created the catastrophically expensive Medicare prescription drug benefit. The Republican Congress also presided over a massive increase in overall government spending.

Voters may hate the war in Iraq. They may hate corruption. But I think they also hate the way the party that historically talks about smaller government and fiscal responsibility has gone on a regulating-and-spending binge.

According to a poll conducted by Basswood Research in 15 key battleground congressional districts, 39% of voters labeled the Republicans “The Party of Big Government” — only 28% gave that label to the Democrats. In those districts, Republican candidates got slaughtered on Tuesday.

But consider what happened in seven other districts, where the Club for Growth — a political organization dedicated to small government, lower spending, and lower taxes — financed the congressional campaigns of eight Republican newcomers dedicated to the Club’s ideals. Seven out of eight of them won on Tuesday — Iraq or no Iraq, corruption or no corruption.

A number of so-called “Blue Dog” Democrats were elected on Tuesday, too. Those are Democrats whose economic agenda is more like what the Republican one is supposed to be — smaller government, less spending, and more fiscal sanity.

Twelve states had ballot propositions that would limit state power to seize private property under “eminent domain.” Those propositions passed in 10 states, a clear message that voters want to contain the scope of government’s power to interfere in the economy.

Ballot propositions that would raise the minimum wage also passed in a number of states. There, at least, voters seemed to prefer more, not less, government interference. But that’s just a small extension of something already in place, which thankfully affects very few workers or businesses.

More symbolic of the voters’ mood, in my judgment, was what happened to a ballot proposition in my home state of California that would have slapped a tax on oil companies for every barrel of oil they produce. The money would be used to finance a massive state program to develop alternative-energy sources. Wisely, this massive usurpation of private enterprises was soundly defeated by voters.

Here’s how I read it. Voters prefer the kind of economics that Republicans used to stand for — but mostly don’t anymore. Republicans who still do got elected on Tuesday. Democrats who stand for that agenda got elected, too. Ballot propositions that adhered to those principles passed; those that didn’t, flopped.

So investors should be comforted that, even after a Democratic sweep, it just could be that both the Republicans and the Democrats have moved a little closer to economic principles that are good for growth — and good for investing.

The situation isn’t without risk, though. In my judgment, the Democratic congressional leadership doesn’t share the same pro-growth agenda as an increasing proportion of the rank-and-file. We’re going to hear a lot from them about more regulation, new government powers and new spending programs. None of it will probably go anywhere — but you never know.

With a little luck and a little wisdom, this could be a great time to be an investor.

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