What do 2010 elections mean for the economy?
Will political paralysis be good for the financial markets? The stock market seemed pretty sanguine this Election Day, with the Dow Jones average rising 64 points and analysts talking about greater political clout for the business interests that have opposed the Democrats and contributed so generously this fall to the GOP.
But I'm dubious. What gridlock means for economics is that we can forget about fiscal policy for the next two years. That's a scary prospect at a time when we have an
economy that's in danger of stalling out just as it tries to get airborne again.
Despite endless repetition by Republican candidates that the problem is too much government spending, many economists argue the case for an additional boost of stimulus -- especially if it's targeted at infrastructure investment, as President Obama has proposed. At a time when interest rates are effectively zero, it makes sense to borrow money to invest in projects that have a long life (such as roads, bridges and telecommunications). That makes sense for government as well as business.
If predictions of GOP victory are correct, the new Congress will be focused on the deficit, rather than increasing economic growth. (Yes, I know, the Republicans say they favor growth. Too, they have a two-word formula, "tax cuts," that isn't very promising.) And however the numbers turn out, this isn't likely to be a Congress that will do much creative economic thinking, in any direction. (Zero interest rates make the deficit a lot less scary than is usually advertised, by the way, but that's another story.)
So our post-election economic fortunes rest with the Federal Reserve and its "quantitative easing" of long-term interest rates. Good luck to Fed Chairman Ben Bernanke with that. But if it doesn't work, the Fed will have run out of bullets in its monetary gun -- at the same time our political wars have crippled fiscal policy. Not an encouraging picture.
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