One result is clear from the U.S. election on Tuesday: Washington will quickly be returning to its natural state of little legislative progress. And that means a torrent of fiscal stimulus and other sweeping changes are off the table.
Gridlock is now the default setting for the U.S. political machine. More often than not, presidents and Congress are fused in an awkward embrace designed to thwart bold action. In recent years, they have become increasingly happy to outsource the difficult job of economic management to the Federal Reserve.
This time around is no different.
Washington’s inertia has the potential to threaten a fragile U.S. economic recovery. But it is likely to persist because of a political system that divvies up elected power among three rival centres of influence – the president, the Senate and the House of Representatives.
Most of the time, power in Washington has been divided between Democrats and Republicans, with both sides able to scupper the other’s plans. The result is a legislative system with a growing habit of shying away from big, bold stimulus programs, except at times – like this spring – when the case for action is so overwhelming that it trumps partisan divides.
Such occasions are rare. For the most part, Congress prefers to keep its distance and rely as much as possible on the unelected technocrats of the Federal Reserve to manage the economy.
That was what happened in the wake of the 2008 financial crisis, when Tea Party Republicans and others pushed back against the Obama administration and limited stimulus spending. Ben Bernanke, Fed chair at the time, was left to devise increasingly ingenious plans to support the economy.
But handing responsibility off to the central bankers runs into problems at times like the present, when the Fed has already cut rates close to zero and taken unprecedented steps to protect the economy from the ravages of the coronavirus.
William Dudley, former president of the Federal Reserve Bank of New York, warned last month that the Fed was running out of firepower and urgently needed legislators to pass fiscal stimulus to help support a slowing recovery.
Fed Chair Jerome Powell pleaded the case in a speech in early October. He urged legislators to deliver more fiscal stimulus, saying too little support would bring “unnecessary hardship.” He also warned of “tragic” social consequences if more help was not forthcoming.
For a while, it looked as if Mr. Powell might get his wish. A blue wave that would leave the Democrats in control of the presidency, Senate and House seemed possible, even probable, right up until voting day. Most Wall Street analysts expected Democrats to use their combined authority to unleash a torrent of stimulus.
Hopes for that stimulus are now fading fast. According to betting markets, the likeliest scenario on Wednesday was one where Joe Biden would win the presidency but Republicans would retain control of the Senate and Democrats keep control of the House.
“Those looking at the election as a turning point on climate change, energy sector policy, financial services regulations, taxation and other issues … can count on seeing less dramatic changes, if indeed any changes are in the wind,” Avery Shenfeld, chief economist at CIBC Capital Markets, wrote on Wednesday.
The economics team at Bank of Montreal acknowledges a split Congress would probably result in a smaller stimulus package. However, they argue that even a “skinny bill” worth only US$500-billion would be enough to keep the recovery moving forward, given the amount of savings piling up in household accounts.
Others aren’t so sure. “Without substantial fiscal stimulus, bankruptcies and layoffs are likely to continue rising,” Karl Schamotta, chief market strategist at Cambridge Global Payments, warned in a note. Gridlock may sound boring. It could be anything but.
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