Stalemate in Congress might not be bad for economy
WASHINGTON – Fresh off sweeping gains in Tuesday's elections, Republicans vowed to shrink government and repeal President Barack Obama's health care law.
Yet despite their capture of the House and near-takeover of the Senate, there's little chance they can summon the votes to enact their own prescriptions for the ailing economy. Democrats, with their own economic ideas, will likely fight them to a draw.
It may not matter. On its own, the economy is showing slow but steady improvement. Consumers and businesses are spending a bit more. Some companies are hiring. And most economists expect those gains to continue.
For both Democrats and Republicans, the inability to do much for the next two years may not be such a bad policy for the economy.
If you ask economists, none of the ideas proposed in the campaign - by either party - would make a big dent in the nation's 9.6 percent unemployment rate or ramp up consumer spending.
"If there were a silver bullet to be shot at this economy, it would have been shot already," says Diane Swonk, chief economist at Mesirow Financial.
The Republicans' victories do stand to affect Americans' personal finances. The highest-earning Americans, for example, are more likely now to keep tax cuts enacted under President George W. Bush.
Businesses might get some relief from government regulation. The long-term unemployed are likely to lose their jobless benefits sometime next year. Financially ailing state and local governments can probably abandon hope for more help from Washington.
Yet a likely two-year standoff between the White House and fired-up congressional Republicans shouldn't get in the way of a gradually improving economy, analysts say. "If the economy sticks to the script, (gridlock) is not a major problem," says Mark Zandi, chief economist at Moody's Analytics.
The danger, Zandi says, is if the economy should take a turn for the worse.
"If the economy doesn't cooperate and starts to backtrack, then this will become a problem," he says. "Policymakers will not be able to respond, and they'll need to."
Here's what the Republicans' gains likely mean for:
Republicans have resisted spending more federal money to try to spur the economy. They say cutting taxes and easing regulations for businesses could generate jobs. Chi Lo, CEO of HFT Investment Management in Hong Kong, says the economy could use more federal spending, so he sees the Republican gains as "negative in the short term." Bank of America expects the fading effects of the Obama stimulus programs to add 1 percentage point to economic growth in 2011 and nothing in 2012. The GOP also is likely to resist extending emergency jobless benefits to the long-term unemployed - after the Democratic-led Congress extended those benefits seven times since July 2008. The next cutoff in unemployment benefits comes Nov. 30. Judy Conti of the National Employment Law Project plans to lobby the lame-duck lawmakers to extend the payments through 2011 to protect them from budget cutters in the next Congress.
Tax cuts enacted under President George W. Bush are scheduled to expire Dec. 31. Obama wants to extend the tax cuts only for households earning less than $250,000 a year. The Republicans want to extend them to everyone, regardless of income. Analysts think Obama, stung by his party's defeat at the polls, will back down and agree to a compromise. The tax cuts are likely to be extended for a year or two. A report Wednesday from RDQ Economics says a quick decision on the Bush tax cuts could "resolve uncertainty" and "encourage faster hiring in the first half of next year."
The Republicans have proposed letting small business owners deduct 20 percent of their business income from their taxes. They say that tax break would provide entrepreneurs with cash to invest and hire. But the proposal is likely to face opposition from Democrats worried about losing tax revenue and expanding the deficit. The two parties might reach a deal to lower corporate tax rates in exchange for fewer loopholes in the tax code. Martin Baily, senior fellow in economic studies at the Brookings Institution, says the next Congress also might pass Obama's plan to expand and make permanent the business tax credit for research and development.
The stalemate in Congress is likely to move the policy battlefield from Capitol Hill to government regulatory agencies. The Environmental Protection Agency, for instance, has begun to try to regulate greenhouse gases, which contribute to global warming, because Congress hasn't acted. But the Republicans' gains Tuesday mean they will control the House committees that oversee - and fund - federal agencies. And they are expected to pressure regulators to back off business. Susan Eckerly of the National Federal of Independent Business says regulatory relief will encourage businesses to hire and expand, helping boost the economy.
Obama may find some Republican allies as he negotiates free-trade treaties with South Korea, Colombia and Panama. But many Republicans joined Democrats in the outgoing House to pass legislation authorizing the White House to punish China. The Senate hasn't taken up the bill. But the issue could resurface in the next Congress. Lawmakers accuse Beijing of manipulating its currency and giving Chinese exporters an unfair price edge in world markets at the expense of U.S. manufacturers. That raises the risk of a costly U.S.-China trade war. "I'm worried because there might be policy missteps that could wreak havoc in the world market," says Lo in Hong Kong. "Protectionism could intensify." But in the end, he expects both countries to "restrain themselves."