“The conventional wisdom likely to be repeated over the next few weeks,” writes Mohamed El-Erian today, “is that political gridlock is good for the economy”.
I’m not so sure. There are certainly some people taking that tack: Ken Fisher is saying that gridlock might be good for the stock market, but like all fund managers he’s talking his book, and his reasons are based more on investors emotions than on the fundamental benefits of gridlock. (People “freak out” when the government does something big, says Fisher, and that makes them less likely to invest in stocks.)
Meanwhile, as both El-Erian and Steve Rattner say, if you really want to help the economy, there’s a long list of things which really ought to get done and which aren’t going to happen under gridlock.
Here’s El-Erian’s:
Democrats and Republicans must meet in the middle to implement policies to deal with debt overhangs and structural rigidities. The economy needs political courage that transcends expediency in favor of long-term solutions on issues including housing reform, medium-term budget rules, pro-growth tax reforms, investments in physical and technological infrastructure, job retraining, greater support for education and scientific research, and better nets to protect the most vulnerable segments of society.
And here’s Rattner’s:
The list of unfinished business is long: action on climate change, reform of entitlement spending, and a revamp of the two zombie housing agencies, Fannie Mae and Freddie Mac.
I’d love to see more specificity from El-Erian on what he means by “pro-growth tax reforms”, especially in the context of those “medium-term budget rules”. But there’s a thread running through all of these columns, which it’s important to emphasize: there’s altogether far too much debt in the economy. That goes for individuals, stuck with enormous mortgages; it goes for Fannie and Freddie; it goes for state and municipal governments; it goes for the federal government; and it goes for some, but by no means all, corporations as well.
Top of my list of Things To Do, then, would be to deal with El-Erian’s debt overhangs by abolishing the ridiculous incentives that the tax code gives for taxpayers (both individuals and companies) to borrow as much money as possible. Those incentives eradicated one of the most glistering sliver linings of the crisis: the fact that the forced deleveraging was, at least, a deleveraging. As soon as the crisis was over, everybody releveraged again.
But that kind of reform was a step way too far even when the Democrats controlled both houses of Congress and the White House; it’s unthinkable today. Similarly, we’re not going to get bipartisan action on things like climate change, entitlement reform, or strengthened social safety nets when neither of the two parties would be willing to touch such hot-button issues on their own.
Gridlock, then, only serves to make impossible what was already highly improbable under the best of circumstances. For all their exhortations, El-Erian and Rattner know full well that they’re not going to get their wish lists — and they know that they wouldn’t have gotten their wishlists even if the Democrats had kept the house. It’s all well and good to ask that “mid-course policy corrections will be identified and undertaken on a timely basis” — but what administration has ever been able to do that? The US government simply isn’t that nimble, and it never has been.
So maybe the gridlock question is germane mainly to the perennial and rather boring debate about what happens to stocks under various permutations of parties in the White House, the Senate, and the House. Grandees like El-Erian and Rattner will continue to use their op-ed bully pulpits to push for grown-up action on a long list of issues facing the country. But the reality of U.S. politics today is that Congress is listening to an angry populace, not to multi-millionaire lefty pundits. And the angry populace has no interest whatsoever in “an encompassing economic vision that acts as a magnet of conversion nationally, counters growing international frictions and facilitates much-needed global economic coordination”.
Or, to put it another way, if you give those angry Americans what they think they want, it’s unlikely to help them and quite likely to harm them. But this is a democracy, so that’s what Americans are going to get.
(Cross-posted at Reuters)
Felix Salmon is a financial writer, editor, and podcaster. A former finance blogger for Reuters and Condé Nast Portfolio, his work can be found at publications including Slate and Wired, as well as his own Substack newsletter.