How Active Government Chills Markets: Echoes

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By Amity Shlaes and Ilan Kolet

This week, we looked at the so-called Congressional Effect, the phenomenon whereby stocks rise more when Congress is out of session. The data underlying that effect suggest that active government chills markets. Another way to consider the same dynamic is to ask: Was the federal government more active or less active in the most recent recession than in preceding ones?

The answer is more active, going back at least as far as the Great Depression. As the federal government created the National Recovery Administration and a number of other "alphabet" agencies in the 1930s, markets slowed and unemployment stayed high. For the entire decade, neither stocks nor employment returned to 1920s levels. This chart shows a similar effect this time around: the recovery in stock prices has been far weaker than the average for post-war recessions. And unemployment remains stuck at around 9 percent.

This suggests that, in addition to Congressional holiday schedules, the level of government behavior when Congress is in session also affects markets.

(Amity Shlaes, a Bloomberg View columnist and a senior fellow in economic history at the Council on Foreign Relations, oversees the Echoes blog. The opinions expressed are her own. Ilan Kolet, who created this graphic, is a data editor at Bloomberg News.)

-0- Aug/26/2011 15:36 GMT