ON JULY 5, 1930, a letter from Will Rogers was published in The New York Times.
"We sure had a great Fourth, especially after we picked up our morning papers and found that Congress had adjourned the night of the third," it began. "But our enthusiasm was immediately dampened, for the Senate are to meet again Monday, so that means that prosperity will pick up only 50 percent.
"This country has come to feel the same when Congress is in session as we do when the baby gets hold of a hammer," Rogers continued. "It's just a question of how much damage he can do with it before you can take it away from him. Well, in 18 months these babies have left a record of devastation."
Rogers was referring to the 71st Congress, which did indeed leave a record of devastation; its execrable Smoot-Hawley tariff helped bring on the Great Depression. The current Congress, the 110th, hasn't brought on a depression -- not yet, anyway. Unfortunately, the House and Senate are scheduled to reconvene after Labor Day. And as Rogers noted, when Congress is in session the question is not whether the economy will suffer, but how much.
In some quarters it is popular to berate Congress for doing too little. In a page one story last week, The Wall Street Journal noted that over the last 20 years, "no sitting Congress has passed fewer public laws at this point in the session -- 294 so far -- than this one." For example, Congress still hasn't passed a single appropriations bill for the fiscal year that is just five weeks away. By contrast, the House and Senate have taken up nearly 2,000 ceremonial resolutions, like the one designating July as National Watermelon Month or Representative John Olver's measure recognizing Pittsfield, Mass., as home to the earliest known reference to the word "baseball."
But the last thing sensible Americans should want is for senators and representatives to assemble and pass more laws. Only limited harm can result when members of Congress are off on junkets or the rubber-chicken circuit; it's when they gather en masse that they are most dangerous. "No man's life, liberty, or property are safe while the Legislature is in session," wrote Judge Gideon J. Tucker in 1866. What was true in the 19th century remains so in the 21st.
In fact, it's a quantifiable phenomenon. Scholars call it the "congressional effect" -- markets tend to get nervous when Congress is in session, and generally perform better when it isn't. As economists Michael Ferguson and H. Douglas Witte have shown, the impact this tendency can have is dramatic. Analyzing stock returns since the Dow Jones Industrial Average was created in 1897, they found that an astonishing 90 percent of its gains occurred when lawmakers were on vacation. A dollar invested in the index's stocks in 1897 and converted back to cash whenever Congress recessed would have grown to just $2 by 2000. On the opposite strategy -- investing in stocks only when the House and Senate were away and cashing out when they came back into session -- that dollar would have grown to $216.10.
"Our results," Ferguson and Witte concluded in a 2006 paper, "give empirical credence to the association of an active Congress with poor stock market returns."
Comes now Eric Singer, an experienced investment manager determined to turn this insight into earnings. He too has run the numbers. Between 1965 and 2007, on days when Congress was in session, the S&P 500 Index posted an annualized gain of 1.6 percent - versus a whopping gain of 17.6 percent when lawmakers were out of town. "What the market prefers," Singer says, "is a government that is quite literally on holiday."
So he has launched the Congressional Effect Fund, a no-load mutual fund that will invest in S&P 500 Index futures when Congress is out of session, reverting to cash equivalents such as Treasury bills whenever lawmakers reconvene. (Details at www.congressionaleffect.com) He's off to a fast start. Since opening for business on May 23, the fund is up 0.9 percent. The S&P 500, by contrast, is down 8.65 percent.
A fortuitous short-term anomaly? Singer doesn't think so, and history bears him out. Over the past 43 years, his system would have beaten the market by 1.7 percent -- despite being invested only about 30 percent of the time.
But Singer's goal isn't just to make money. It is also to make a point: The more Congress does, the less Americans prosper. Freedom, not legislation and regulation, is what powers the US economy. The old political wisdom is a sound investment guideline, too: That government is best that governs least.
Jeff Jacoby can be reached at [email protected].