Tuesday, 02 Nov 2010 11:21 AM
Political gridlock is supposed to be good for business. If
bickering lawmakers can't agree on anything, the thinking goes,
they can't pass laws and regulations that make the economy
worse.
So will the midterm elections, which are expected to leave
Congress at least partially controlled by Republicans and
squaring off against a Democratic White House, be a help to the
economy?
Don't count on it.
A standoff between the Obama administration and emboldened
Republicans will probably block any new help for an economy
squeezed by slow growth and high unemployment. Congress might
also create paralyzing uncertainty for investors and businesses
by fighting over taxes, deficits, healthcare and financial
regulation.
"We expect massive gridlock and little cooperation," writes
Brian Gardner, Washington analyst for the financial firm Keefe,
Bruyette & Woods.
If times were good, gridlock wouldn't matter so much. A
Republican Congress and Democratic White House butted heads in
the mid- and late '90s, after all, and their sparring did
nothing to derail a strong economy.
But now, nearly a year and a half after the official end of the
Great Recession, the economy still isn't growing fast enough to
bring down unemployment, which is stuck at 9.6 percent.
"Very few believe the government should sit on its hands," Yale
University political scientist Jacob Hacker says. "But right now
we're facing a period of drift."
In its Pledge to America, the GOP has vowed to oppose additional
spending to stimulate the economy. President Barack Obama's plan
to spend $50 billion on roads, railways and airports, for
instance, is probably dead. And the new Congress may resist
continuing to extend benefits to the 6.1 million long-term
unemployed, at least without cutting the budget elsewhere.
Federal Reserve Chairman Ben Bernanke has said lawmakers need to
do more to jump-start the economy. Otherwise, more pressure will
fall on the Fed to find a way to help, Gardner writes. But the
Fed has already pushed short-term interest rates to zero. And
its remaining option — buying Treasury bonds to pump cash into
the economy — is risky and unproven.
Texas Rep. Kevin Brady, top Republican on Congress' Joint
Economic Committee, says a GOP Congress would replace "the
firestorm of new regulations thrust through Congress" by the
Democrats with "a more reasoned regulatory environment."
Republicans have promised to repeal Obama's massive healthcare
law and are likely to try to scale back the overhaul of
financial regulation that the outgoing Democratic Congress
passed last summer.
Healthcare companies, insurers and banks would welcome relief
from regulation. But Republicans probably won't have enough
votes to overcome a presidential veto. And tinkering with
existing law risks creating even more uncertainty for employers
already reluctant to hire workers or buy new equipment because
of doubts about where the economy is going.
"It seems impossible to me there won't be more uncertainty after
the election," says Yale's Hacker, co-author of "Winner-Take-All
Politics."
Wall Street research also disputes the notion that gridlock is
good for the stock market, showing that stocks do just as well,
or better, when one party runs both the White House and
Congress.
Reviewing stock market and election results dating to 1950,
Fidelity Investments concluded that stocks soar the year after
midterm elections, with or without divided government.
Stocks of small companies surge an average of about 46 percent
in the year after a midterm election that gives one party
control of both Congress and the White House, Fidelity's
research found. That compares with a gain of about 24 percent
after the government is left divided. Large-company stocks
perform about the same either way.
William Galston, senior fellow at the Brookings Institution and
a domestic policy adviser in the Clinton administration, says
compromises in the next Congress are possible. Lawmakers in both
parties might support a grand tax bargain that would trade lower
corporate rates for fewer loopholes. Each could claim to have
made the tax code more efficient.
And Obama might get more support from Republicans than Democrats
for a free trade agreement he's working on with South Korea.
The two parties appear to be moving toward a deal to extend tax
breaks passed during President George W. Bush's first term that
are scheduled to expire Dec. 31. Obama wants to renew the cuts
only for families earning less than $250,000 a year.
He says the government, having run a $1.3 trillion deficit for
the just-ended budget year, can't afford to continue tax breaks
for the wealthy, too. Republicans want the breaks renewed for
everybody, arguing it would be folly to let taxes rise on
anybody when the economy is so fragile.
Joseph Quinlan, chief market strategist at U.S. Trust, expects
the government to "kick the can down the road" with a deal to
extend all the tax breaks for one year. Even so, renewing the
tax cuts doesn't do anything new for the economy. They have been
in place since before the Great Recession and throughout its
dismal aftermath.
The prospect for a big breakthrough in economic policy seems low
if the two parties battle each other to a standstill through the
2012 presidential election.
"Short-term gridlock is very bad for the outlook," Bank of
America analysts say in a report on the election. "In today's
challenging environment, inaction is dangerous."
© Copyright 2010 The Associated Press. All rights reserved.