As it seems pretty likely now that we will have a Republican House with a Democratic Senate and President starting late January and I’ve begun to think about the economic impact. Obviously, even if the party predictions are spot on, there are some big unknowns, so I’ll start by outlining a couple of the most significant, and what influences they will have.
I’ll preface this by stating that this is only a prediction based on the evidence I have seen to date.
First, will Obama be willing to stand up to the Republican House the way that Clinton did? Up to now, he has at least given numerous indications that he was willing to entertain the notion of working with Republicans. Then again, from where I sit it looks as if the Republicans have been unwilling to negotiate in good faith, and I expect winning the House to embolden them to be even less willing to negotiate. So we could be looking at a Government Shutdown II. Or Obama could let the House stomp all over him. It’s too soon to tell.
Second, what will the Tea Party members of the House do when they discover that they can’t actually get their bills through the process? I see three possible immediate options:
- They could withdraw and refuse to be part of the process, which would relegate them to irrelevance in terms of Congressional influence.
- They could throw tantrums in public, hoping to get the public rallied behind them in a Republican coup attempt, which would have an unknown outcome.
- Or they could become part of the Borg collective, which is the path most members of Congress take, even while publicly denying that they are doing so.
Based on history, I’d bet on the last option, though the second option would be the most entertaining from a purely anthropological perspective.
It’s pretty much going to be various forms of sound and fury and no appreciable legislation. I have yet to hear anyone credibly suggest otherwise.
So what will happen to the economy? It’s pretty clear that money from the US Treasury won’t be sent to the states to fill their budget gaps. Given the size of the states’ revenue declines, it’s all but guaranteed that there will be state government layoffs and service reductions, which will increase unemployment and allow infrastructure not covered by existing ARRA funds to fall further into decline. I suppose some states could raise taxes to compensate, but I find that hard to believe.
We’re certainly not out of the woods until we see unemployment drop below 7%, and that’s not happening anytime soon. At the same time, I doubt unemployment insurance would be extended, so we’re probably looking at more bankruptcies and foreclosures than we would have had without the divided government. If more people end up on or over the edge, tax revenues will decline further, which will further reinforce the government layoffs and service reductions. As with most economic forces, each individual case has a cascading effect, which diminishes relative to the distance one looks from the source. In other words, someone who has less income will spend less, which will have a smaller effect on those businesses that would have otherwise received the business from that person, which will reduce their revenues by some (smaller) amount, which may trickle out another layer or two in a measurable way.
As long as those initiating economic forces are relatively few in number and/or infrequent, the economy absorbs them without too much damage. If they are large in number and/or frequent, they can create positive feedback loops (a strange term to use for something negative, but you see the point). The impact of the real estate meltdown had a significant direct impact on a huge number of people, and the resulting layoffs were significant enough to cause cascading effects that have only recently stabilized. Part of the support for that stability is money being pushed through the economy via safety net programs.
If we lose the safety nets that are stabilizing the economy, it is hard to see how that won’t create a new set of similar cascading effects. We can certainly reach a new equilibrium without those safety nets, but that would probably include significant homeless camps. After all, where do unemployed people go when they’ve had foreclosures? Some go to family or friends (who may or may not be in the same boat), but that only works if they have that social safety net available. If they don’t, they live in tents and the like. This is what happened on a grand scale in the 1930s.
I’m not at all trying to imply that a Republican House necessarily translates to another Great Depression. It is more likely, however, to translate into a drop to a new equilibrium, more due to inaction than due to action. The question is one of degree, not one of direction.
This all sounds like doom and gloom. Frankly, I’m gloomy about the economy. Banks aren’t lending, even though they have the cash. Businesses aren’t investing, even though they have the cash. The economy depends on money moving (a topic for a later date), and these large cash eddies are hurting our ability to have a speedy economic recovery. I see no indication that a divided Congress will be able to produce anything that will address this.
Am I missing something big here? Is it possible that the next Congress will produce legislation of beneficial consequence to the economy? Please, somebody, give me a reason to have hope.