Econometer: Will A Divided Congress Affect The Economy?

Democrats took control of the House last week, creating a divided U.S. Congress. The San Diego Tribune conducted a question-and-answer session with analysts and industry experts on what the future holds:

Question: Will divided control of Congress affect the economy?

Phil Blair, Manpower

YES: Unfortunately even logical, non controversial legislation will be tied up in negotiations with both parties wanting to make sure the other party does not get an advance or credit for the change. Growing the economy, fair pay and protecting American jobs are issues both parties must work on together. Otherwise the losers will not be political parties, but the American worker.

Kelly Cunningham, San Diego Institute for Economic Research

YES: As the philosopher opined, "Nothing is permanent except change." The midterm elections were not a slam dunk or "wave" for either party as Democrats barely managed to flip the House and Republicans slightly added to their already slight majority in the Senate. The likely gridlock resulting over the next two years is not necessarily a bad thing, while Trump probably reaches across the aisle to work with Democrats to pass another round of economic stimulus.

David Ely, San Diego State University

NO: Clashes between the House Democrats and the president may impact whether additional changes to tax policies are made and whether the trade deal with Mexico and Canada is approved. However, the change in control of the House will not impact many very important determinants of economic growth, including the willingness of consumers and businesses to spend, monetary policy decisions by the Federal Reserve, and the economic growth of trading partners in Europe and China.

Gina Champion-Cain, American National Investments

NO: Barring any unlikely bipartisan collaboration on massive infrastructure spending, the divided Congress will continue to operate within its established status quo. Interest rate increases and the decreasing impact from corporate tax cuts will be the economic drivers of greatest influence. Congress will be loathe to meddle with the economy heading into the 2020 cycle. Any substantial action affecting the economy will come from the White House not Congress, think 25 percent tariffs.

Alan Gin, University of San Diego

NO: It is unlikely that much legislation affecting the economy will be passed, except for possibly an infrastructure bill. That means no more tax cuts (or tax increases), fixes to the health care system, reforms to entitlements, etc. So there will be nothing that will move the economy off the path set by previously taken actions. Unfortunately, some of those actions are leading to negative consequences, e.g., an exploding deficit, so the lack of legislation to address those problems could hurt the economy in the future.

James Hamilton, UC San Diego

YES: A divided Congress is likely to do a better job of controlling the federal deficit, with no consensus for the Democrats' spending increases or the Republicans' tax cuts. It may also serve to moderate some of the economically disruptive policies favored by one party or the other and reduce business uncertainty. But without real legislation to pass, I expect to see endless congressional investigations that will eventually take a toll on public confidence.

Gary London, London Moeder Advisors

NO: The political aspect of the economy is dwarfed by the market and Federal Reserve-related events. That said, the Trump tariffs, and political nationalism, do have an impact, which might be neutered by the Democrats takeover of the house.

Norm Miller, University of San Diego

YES: With various lags, the economy reflects all major fiscal decisions from the last several presidential terms made via our three houses of government. Congress can impede or encourage several policies that impact our fiscal soundness and economy such as budget approvals, tax law changes, infrastructure and special projects like walls. I suspect that gridlock will return, perhaps a shutdown threat or two, and if this restrains a spending surge it is not all bad.

Jamie Moraga, IntelliSolutions

YES: A divided Congress could result in legislative gridlock. With this divide, we are unlikely to see much movement with policy or new legislation in the near term. That said, the results of the midterm election are what the market anticipated. Stocks were up following the midterm election and the market is staying the course for now.

Austin Neudecker, Rev

YES: The current political environment enables the largest corporations to buy influence and set policy. This is great for their short-term profitability and stock prices (but bad for long-term progress). With Democrats taking the House, I expect the legislative agenda to grind to a crawl (slowing the economy) while political turmoil increases. Yet again, many government agencies remain controlled by appointees connected to the industries they are supposed to regulate, enabling more profit (and increasing negative externalities).

Bob Rauch, R.A. Rauch & Associates

YES: Divided governments ensure policies that are not too extreme and should ensure balance. However, when Congress needs to make a decision to avoid an event, a divided Congress can slow the decision-making process. Increases in uncertainty can lead to deterioration in expected financial performance. Absent significant cooperation between President Trump, Republicans and Democrats, the economy could falter. Cooperation over divisiveness is a good thing.

Lynn Reaser, Point Loma Nazarene University

YES: Further tax changes, as advocated by the president, are now unlikely. The administration's economic policy will focus on trade and deregulation, using executive orders. Congress could have some influence through the ratification process of trade agreements and oversight of regulatory agencies. An infrastructure bill is possible, but faces conflicts between Republicans and Democrats over funding. The major impact of the election will be a return to gridlock, with greater risks of budget impasses and government shutdowns.

John Sarkisian, Motion Ventures

NO: In the short term, fiscal policy will have less effect on the economy than monetary policy. It will take significant time for fiscal policy changes to get passed through a divided legislative branch of the federal government. The Federal Reserve is making quarterly changes to the money supply and interest rates. These changes will drive the direction of the economy in the near future.

Chris Van Gorder, Scripps Health

YES: But possibly -- maybe hopefully -- in a good way. Gridlock may keep the parties from doing much harm, but bipartisan collaboration will do much more to sustain our strong economy and avoid a future recession. The stock market's initial response to the news was positive, so that's a good sign. I have always believed that the best legislation comes from compromise from both parties -- something that's been missing in Congress of late.

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