Kudlow Confuses the Stock Market with Iowa Electronic Market

As we were voting yesterday, Lawrence Kudlow was writing:

A series of late-October, early November surprises has turned the midterm elections into a real horse race. The bullish stock markets of recent months have been saying all along that a Democratic tsunami will not materialize, but now even a decent Dem wave seems a long shot.

But as we argued here, the stock market is influenced by factors other than which party will win an election. Mark Kleiman was reporting on the Iowa Electronic Market yesterday:

As of this writing, Republican loss of control of the House is 82 bid, 84 offered. That’s been trending up over the past week: the average daily prices since Wednesday have been 73, 73, 79,79, 80.

But even as the Iowa Electronic Market was predicting that Nancy Pelosi would become Speaker of the House, the S&P 500 was doing quite well since the opening of business Monday morning. Of course, the press has this spin:

The broad advance came as investors bought optimistically ahead of an election that could strip power from Republicans in the House of Representatives for the first time since 1994. Stocks often rally on elections as Wall Street bets change will lead to an environment more favorable to business; the theory on the Street is that a split in power in Washington will create legislative gridlock, slowing down regulatory change.

Stock markets up – sign of a GOP upset? Oh wait, the Democrats regained control of the House, never mind. Then again, Kudlow comes back with:

Look at blue dog conservative Dem victories, and look at Northeast liberal GOP defeats. The changeover in the House may well be a conservative victory, not a liberal one. Blue dogs are rabid budget balancers. At tomorrow’s news conference, President Bush should reach out to them, and to Republican base, with a spending limitation pay-as-you go proposal that gets to a balanced budget in a couple of years. Any spending increases (defense) must be offset with spending cuts (domestic pork). A spending limit paygo was used effectively by the Gingrich Congresses between 1995 and 1998, the high tide of their limited government period. And, this approach will head off a revenue paygo advocated by Pelosi, Spratt and Rangel that would lead to tax hikes.

Good grief – I thought Kudlow was against paygo. I guess if one is allowed to flip-flop like this from one day to the next …

Update: Dan Drezner channels this tale as the Pelosi effect:

Global finance markets have wobbled on fears that a Democrat victory in the US Congressional elections could prompt less market-friendly policies in the world’s biggest economy.

Kevin Drum objects and Dan replies:

He might be right – but that conventional wisdom seems pretty widespread in the business press

Funny – the S&P 500 was up 0.21% today!