There was a dramatic transfer of power in America this week. President Obama lost his Democratic majority in Congress as the Republicans, helped by the Tea Party movement, gained over 60 seats in the House of Representatives. That marked the biggest swing since 1948. But the Democrats managed to maintain a narrow hold on the Senate.
What the commentators said
Conventional wisdom holds that markets and the economy are supposed to like “political gridlock”, said Annie Lowrey on Slate.com. “If small government is good, the theory goes, then hamstrung government is even better” as it can’t meddle with the economy. But people tend to cite the 1980s and 1990s in support of this notion. Back then the economy had plenty of momentum, said David Rosenberg of Gluskin Sheff. This time round there are “lingering and deep” economic problems facing America. Any gridlock will just thwart solutions.
One of the main problems is the burgeoning public debt pile. This has jumped from 40% to 62% in the past two years and could reach almost 90% by 2010, according to the Congressional Budget Office. Don’t expect much progress on this one. For all the small-government rhetoric from the Tea Party, the Republicans don’t even have “the pretence of a policy programme”, said Clive Crook on FT.com.
They deplore high borrowing but want to cut taxes. Yet they won’t cut spending on Medicare, social security and defence – an “arithmetically… impossible” stance. Nor do the Democrats seem keen to tackle long-term spending, such as Medicare.
Moderates on both sides who could help Congress come to a compromise are few and far between after this election, said Andrew Sullivan on TheAtlantic.com.
Before the new Congress even sits down the old one will have to decide whether, or to what extent, to renew the Bush income-tax cuts that expire at the end of the year, noted Capital Economics. Republicans want to keep the cuts for everyone; Democrats for everyone except high earners. “The danger” is that no compromise is agreed and taxes climb for everyone on 1 January – applying a brake to the recovery. In the meantime, there’s another worry for investors, added Capital Economics. One of the few things the new “hopelessly split” Congress might be able to agree on is trade protectionism.