POLITICAL CYCLES AND PROSPECTS FOR EQUITIES: TRENDS IN THE ANGLO-SAXON WORLD

Political renewal, reflected in the resurgence of a political party, opens new possibilities for

economic reform and can radically improve the prospects of performance of equities. Beginning

from the 1980s, political renaissance in both the conservative and the liberal worlds in the USA

and the United Kingdom was at the root of the substantially improved economic performance in

both these countries. The Reagan era was the harbinger of monetary stability and low taxes that

encouraged unprecedented entrepreneurial dynamism and stellar performance of equities after a

decade of destruction of wealth in the 1970s. A similar boom was witnessed in United Kingdom in

the 1980s under the aegis of Margaret Thatcher. This was followed by a robust performance of

the Democratic Party in the 1990s in the USA as the burden of welfare costs was lowered.

Similarly, the Labor Party returned to power in the late 1990s on the promise of improved public

services.

As we move into the second half of this decade, economic challenges are growing while political

vitality on either side of the political spectrum could get better. The rate of inflation has increased

over the comfort levels of 1-2%. To reign in inflation, fresh initiatives are required to lower the

barriers to increasing supply of energy and other commodities. In addition, the costs of

entitlements, health, social security, need to be brought down so that costs of doing business in

the USA is competitive with the rest of the world. While in the 1990s a strong dollar was passé,

this is no longer the case. Vibrant growth in Asia and lately Europe has opened export

opportunities which can take up the slack from slower domestic consumer spending and a

downturn in housing if the dollar is devalued. On the other hand, a weakening dollar lowers the

returns that foreigners can earn on capital invested in USA. In addition, a weaker dollar will

increase costs of imports and lower the spending power with consumers.

In the United Kingdom, growth rates have been lower than in the 1990s; the recent increase in

growth to 2% growth is fortuitous driven by exports rather than domestic factors. Meanwhile,

government expenditures have risen to unsustainable levels.

In USA and in the United Kingdom, governments have met with stiff resistance in their attempts to

implement crucial reforms. The Republicans in the USA have been unsuccessful in implementing

their professed goals to lower the costs of social security and health entitlements. Similarly, the

British Government has been unsuccessful in turning its universities as wellsprings of innovation1;

its efforts to raise fees and encourage commercialization of technology have made little headway.

While the incumbents in both these countries are losing ground, there is as yet little to show that

the opposition parties in these countries have programs compelling enough to capture the

imagination of the electorate. While the approval rating of the President in USA has dropped to

rock-bottom levels, Bush bashing has proved to be all consuming for the Democratic Party

unwilling to grow over the legacy of President Roosevelt.

An overview of the 2005 elections in UK, in a note written for the Australian Parliament,

concluded that “Labour’s 67-seat margin rests largely on 43 ‘supermarginals’, each of which

would be lost on a swing of 2.5 percent2’. The same research quoted a telling comment from The

Daily Telegraph which said: ‘People need to know that the Tories have a plan—not merely to

expel undesirables, but to transform the country’.

At this juncture, as the countdown to the November elections in USA begins, it would be

worthwhile investigating whether political cycles exist in voting behavior and a turn in outcomes of

elections could affect medium-term and long-term economic prospects in the USA and United

Kingdom. While there is no immediate prospect of a change in government in the United

Kingdom, the persistent rivalry between Gordon Brown, the Chancellor of the Exchequer, and

Prime Minister Tony Blair could well be the writing on the proverbial wall.

Election Cycles in the USA

We took the data on vote share of the Conservative and Liberal parties, in the Congressional and

Presidential elections, from 1928 onwards to identify cycles, if any, which could help understand

economic shifts. The data on the number of seats is affected by the arithmetic of electoral

colleges and would not reflect the popular perceptions driving policy. We will base our

discussions on the graphs while the detailed numbers can be found in the accompanying Excel

sheet.

1 British Government’s concerns about innovation in United Kingdom are expressed in the

document available at http://www.dti.gov.uk/files/file12093.pdf 2 Research Note No 51, 30

th May 2005, Parliament of Australia, Department of Parliamentary

Services.

19281936

19441952

1960 1968 19761984 1992 2000

20

25

30

35

40

45

50

55

60

Years

Elections for President: Cycles in Voting share of Democrats and

Republicans

Democrat (%) Republican (%)

The high watermarks of Republican performance in Presidential elections3 was the Eisenhower

era in the 1950s,the Nixon/Ford era in the 1970s and Reagan era in the 1980s and Bush in the

first decade of the current millennium. Democrats’ glorious decades were the Roosevelt years in

the 1930s and 1940s, the Kennedy/Johnson eras in the 1960s, and the Clinton terms in the

1990s. The peaks in the performances of these parties were marked by epoch making decisions.

Roosevelt defined the meaning of progressive politics of state intervention, Eisenhower lent

muscle to the Cold War efforts and to end the stalemate over the Korean war, Reagan’s agenda

was to end the Cold War and to reinvigorate economic growth, Clinton found a way to lower the

runaway growth in Government spending and George Bush confronted global terrorism.

Similar cycles can also be found in the elections to the Senate and the House elections but these

are much less pronounced as can be seen in the graphs below. The stability in these elections is

probably a reflection of the way districts are distributed which is biased in favor of the incumbents.

3 Information on individual presidents can be found at http://www.usa-presidents.info/

19301942

19461954

1962 1970 1978 1986 1994 2002

0%

10%

20%

30%

40%

50%

60%

Year

Elections to the Senate: Cycles in Voting Shares of Democrats

and Republicans

Democrat Republican

The numbers of the Senate elections reflect longer trends spreading over several decades. The

Democrats, for example, were dominant for the decades from the 1930s till the late 1970s and

their influence has declined in the years after the 1970s as Roosevelt era policy went out of favor.

By contrast, the Republican’s hold declined steadily, with brief periods of comeback in the 1950s

and late 1960s before a firm revival in the 1980s and 1990s and the current decade as the

conservative philosophy of individual responsibility gained credence.

The turning points in the longer term trends can be seen more clearly in the data for the House

which shows fewer fluctuations over the short-term. Republican performance improved in the

decades after the 1970s while the Democrats held sway from the 1930s to the 1970s. This

reinforces the notion that the electorate is influenced as much by cultural convictions, such as the

value of free enterprise, as much as shorter-term contingencies such as poor performance of an

individual president.

TRENDS IN VOTE SHARE IN THE UNITED KINGDOM

The United Kingdom has a Parliamentary System where members of the House of Commons are

voted by popular vote. We have, therefore, taken into account only the voting share in the House

of Commons. In addition, the United Kingdom has a three party system which means that the loss

in the vote of an incumbent party is a gain for two opposition parties. This often means that the

two major parties, Labor and Conservatives could have comparable vote share but different

numbers of seats.

The trends in voting shares do not show a clear pattern of cycles; there are periods when the

share of votes of Labor and Conservatives are running parallel. This happens when the liberal

party gains at the expense of one of the incumbent parties.

1930

1942

1946

1954

1962

1970

1978

1986

1994

2002

0%

10%

20%

30%

40%

50%

60%

Year

Election to the House: Cycles of Voting Share of Democrats and

Republicans

Democrat Republican

19

18

19

23

19

29

19

35

19

50

19

55

19

64

19

70

19

74

Oct

19

83

19

92

20

01

0%

10%

20%

30%

40%

50%

60%

70%

Years

Trends in Vote Share of Parties in United Kingdom

Conservative

Labor

Liberal

On the other hand, the trends in the seats garnered by the two main parties do show the familiar

cyclical patterns in their performance as shown below.

19

18

19

23

19

29

19

35

19

50

19

55

19

64

19

70

19

74

Oct

19

83

19

92

20

01

0%

10%

20%

30%

40%

50%

60%

70%

80%

Years

Trends in Share of Seats won by parties in the

United Kingdom

Conservative Labor Liberal

CONCLUSIONS: POLITICAL AND ECONOMIC PROSPECTS

We don’t expect major shifts in the political alignments in the USA just yet. In all likelihood, the

2006 November elections will lead to gains for Democrats in the Senate. This would inevitably

mean delays in decisions over issues of social security and health care as the two parties bargain

over especially the details of policy reform. The Bush Administration continues to lose credibility

as the situation in Iraq deteriorates and would find it hard to press for more market oriented

approaches to social security and health care. Similarly, it would find it harder to pass legislation

to water down the environmental regulations in order to increase energy supply. It would also find

it hard to lower estate taxes. The only lever it will be able to use to sustain growth would be to

lower the value of the dollar and let exports increase.

In the United Kingdom, Prime Minister Tony Blair will continue to lose support as his troubles in

Iraq persist. The Government’s success in foiling terrorist attacks will buy some breathing space

but will not affect the long-term fortunes of Mr. Blair. This is aggravated by the fact that his

government has achieved modest success in improving public services.