Economic Policy as New Congress Takes Over
Dan Duray Nov. 11, 2010, 4:05 p.m.
A week has now passed since the Republican Party wrested control of the House and nearly succeeding in doing the same in the Senate. The Democrats’ reversal of fortunes from two years ago has been framed in terms of voters’ dissatisfaction with growth in government and the lack thereof in the private economy. In a 60 Minutes interview recorded last Thursday and aired over the weekend, President Obama conceded that “… first and foremost, it was a referendum on the economy.” The president did not warm to the notion that it might also be a rejection of the basic policy agenda, reflected in efforts such as health care reform, that the administration has pursued with real success in moving through Congress.
In any case, his comments suggest a greater focus on the immediate issues of the economy and jobs.
Irrespective of whether Congress is gridlocked or effective between now and the next presidential election, incoming Republicans may benefit from voters’ lack of discernment between correlation and causation. If the economy improves over the next two years in a manner consistent with baseline expectations, measuring modest but sustained gains in jobs, the midterm elections will almost certainly be positioned ex post as the trigger that pushed the economy closer to its potential growth trajectory.
As a cyclical reality, the next two years will be better than the last two, barring an unexpected or poorly managed shock. As the administration retools to focus more visibly on jobs and deficit fighting in response to voters’ Election Day message, Democrats worry that Republicans will claim undue credit for the resulting progress.
On both sides, the incentives for cooperation are mixed, and moderates have been marginalized in this election.
What Happens Next in Washington
While the president travels through India, promoting American business interests while en route to the G20 meeting in Seoul later this week, commentary at home has focused on the implications of the election results for the domestic policy agenda.
Unsurprisingly, given the upset of Democratic control, the election results are reverberating through Washington as party strategists on both sides now refine or refashion their agendas to reflect the shift in voter sentiment.
For the commercial real estate investment sector, that may imply more favorable near-term outcomes on the industry’s key issues of concern, including tax structure and regulation, and better visibility into the changing business climate.
Fed Chairman Ben Bernanke has his share of detractors among the freshman members of Congress, including visible figures like Senator-elect Rand Paul. The announcement last week of a new round of quantitative easing has stoked debate over the medium- and long-term impact of Fed policy, including the potential for above-target inflation.
Nevertheless, we are unlikely to see any change in the current course of monetary policy as a result of an increase in politician pressure. Congressional committee members will have the opportunity to question the Fed chairman during his regular testimony before Congress and will undoubtedly debate the merits of Federal Open Market Committee votes when speaking with the press or joining the Sunday-morning talk show circuit.
But Mr. Bernanke’s appointment has only just been renewed, limiting any direct threat to the leadership of the FOMC and in spite of well-articulated dissenting views within the committee.
While it is unlikely that Congress will impinge on the general independence of the Federal Reserve, it can shape regulatory outcomes through oversight of agencies and its funding authority.
Given the extent to which the landmark Dodd-Frank legislation delegates authority for its refinement and implementation, we may see that financial-services regulation is ultimately more lax than if Democrats had retained control of both houses.
Similarly, many of the issues pertaining to commercial real estate will be decided in lower-profile arenas than the obvious flash point of income tax break extensions and the potential decoupling of middle- and high-income tax break time frames.
Among the issues to watch, the embedded negotiations over dividend and capital-gains taxes and carried-interest taxation stand a better chance of being decided in a manner favorable to investment.
Still, do not expect these issues to be resolved immediately, even if the Democrats prove more pliable in the aftermath of the election. Congress resumes in a so-called lame-duck session on Nov. 15, only to be interrupted by the holidays before concluding. Depending upon how much time lapses in the staking of new political battle lines, it is unclear if any real progress will be made until well into 2011.
Sam Chandan, Ph.D., is global chief economist and executive vice president of Real Capital Analytics and an adjunct professor of real estate at Wharton.