Divided We Fall

We analyze the effects of partisan Congressional control on the US economy. We find that economic performance is weaker when no party has the majority in both chambers of Congress (divided Congress). This weaker economic performance is attributed to reduced and less effective regulation. We provide evidence that undivided Congresses, whether Democrat or Republican, tend to enhance economic performance. Republicans seem to create value for large firms, whereas Democrats enhance competition and create value for small firms. Overall, we conclude that congressional cycles and effective regulation are important drivers of economic activity.