With split Congress, prospect for eco­nomic deals looks dim

The Morning Journal (Lorain, OH) - - NEWS - By Josh Boak

That said, most economists don’t think a stale­mate in Congress would nec­es­sar­ily de­press growth. The $20 tril­lion U.S. econ­omy — the world’s largest — re­lies far more on the health of the global econ­omy and the will­ing­ness of con­sumers and busi­nesses to spend rather than on any gov­ern­ment ac­tions.

WASH­ING­TON >> Pres­i­dent Don­ald Trump floated the idea Wed­nes­day of part­ner­ing with the newly Demo­cratic-led House on two ideas that could prove pop­u­lar with vot­ers: In­creas­ing spend­ing on Amer­ica’s in­fra­struc­ture and lim­it­ing drug prices.

Yet the poi­sonous at­mos­phere in Wash­ing­ton, man­dated fed­eral spend­ing lim­its and a po­ten­tial duel over the gov­ern­ment’s bor­row­ing au­thor­ity make it dif­fi­cult to achieve any deals that would boost eco­nomic growth.

Over the next two years, with Democrats con­trol­ling the House and Repub­li­cans the Se­nate, most eco­nomic and mar­ket an­a­lysts fore­see mainly en­trenched grid­lock. Many think the two sides will mostly ma­neu­ver for pub­lic fa­vor while look­ing to­ward the 2020 pres­i­den­tial elec­tion year.

At a news con­fer­ence, Trump re­it­er­ated his de­sire to reach some agree­ment on in­fra­struc­ture spend­ing — to re­build road­ways, rail sta­tions or air­ports, for ex­am­ple — among other pri­or­i­ties. But to achieve any real break­through, he would have to com­pro­mise with Democrats who won of­fice largely by op­pos­ing his plans to restrict im­mi­gra­tion, his ef­forts to re­peal the Af­ford­able Care Act, his deficit-funded tax cuts and his op­po­si­tion to gun con­trol in the af­ter­math of mass shoot­ings.

That said, most economists don’t think a stale­mate in Congress would nec­es­sar­ily de­press growth. The $20 tril­lion U.S. econ­omy — the world’s largest — re­lies far more on the health of the global econ­omy and the will­ing­ness of con­sumers and busi­nesses to spend rather than on any gov­ern­ment ac­tions.

Nor do mar­ket an­a­lysts think stock prices will suf­fer. In fact, ma­jor stock av­er­ages soared Wed­nes­day in the wake of the elec­tions. In part, that’s be­cause Tues­day’s vote caused no ma­jor sur­prises, in part be­cause the prospect of lit­tle or no ma­jor con­gres­sional ini­tia­tives means law­mak­ers won’t stand in the way of a ro­bust U.S. econ­omy.

“While you might see fur­ther grid­lock if the Democrats take the House, that doesn’t mean it would tip the boat and slow growth,” said Beth Ann Bovino, chief U.S. econ­o­mist at S&P Global.

Economists at Bank of Amer­ica con­cluded, “We ex­pect a di­vided gov­ern­ment to lead to a leg­isla­tive log­jam in Wash­ing­ton, DC in the next Congress, lim­it­ing pol­icy ac­tions to pass­ing the bud­get with mod­est spend­ing in­creases and rais­ing the debt ceil­ing.”

Trump would still have dis­cre­tion on some key eco­nomic is­sues. His trade war with China and his drive to re­duce reg­u­la­tions are two of them. The pres­i­dent has man­aged to pur­sue those pri­or­i­ties with­out Congress’ in­volve­ment, though his up­dated trade agree­ment with Canada and Mex­ico would need con­gres­sional ap­proval.

But the new Demo­crat­i­cled House could thwart Trump’s plans for more tax cuts, a wall along the bor­der with Mex­ico and a 5 per­cent bud­get cut to Cab­i­net de­part­ments. But the Democrats’ own agen­das would also likely meet with de­feat.

At his news con­fer­ence, the pres­i­dent sug­gested that he could work with Democrats on such pri­or­i­ties as boost­ing in­fra­struc­ture spend­ing and re­duc­ing the costs of pre­scrip­tion drugs. He also said he’d con­sider rais­ing other tax rates to pay for a mid­dle-class tax cut, though he didn’t of­fer any de­tails.

Yet Trump made clear that if House Democrats pur­sue him with in­ves­ti­ga­tions in­volv­ing his 2016’s con­nec­tion to Rus­sia or fi­nan­cial ethics al­le­ga­tions, he would drop his will­ing­ness to seek co­op­er­a­tion on leg­is­la­tion in­volv­ing the econ­omy or other is­sues.

“They can play that game, but we can play it bet­ter,” the pres­i­dent said.

Still, Trump could be pres­sured to bar­gain with the Democrats on two ma­jor fis­cal is­sues with con­se­quences for the econ­omy, said Joe Brusue­las, chief econ­o­mist at the con­sul­tancy RSM.

The pres­i­dent would need to in­crease the gov­ern­ment’s bor­row­ing ca­pac­ity — or it would be un­able to con­tinue is­su­ing debt and pos­si­bly shut­ter. A 2011 show­down on the debt ceil­ing led the S&P 500 stock in­dex to plum­met and raised fears that the econ­omy could sink into a re­ces­sion.

“Given the new con­fig­u­ra­tion of power in Wash­ing­ton, the prob­a­bil­ity of a gov­ern­ment shut­down is greater than 50 per­cent,” Brusue­las said.

Sec­ond, Trump would need to sign a spend­ing bill for fis­cal 2020. Oth­er­wise, pre­vi­ously agreed-upon spend­ing caps would au­to­mat­i­cally re­duce fed­eral ex­pen­di­tures, which would likely slow the econ­omy dur­ing a pres­i­den­tial elec­tion year.

The econ­omy has en­joyed an ac­cel­er­a­tion in growth this year — to a gain es­ti­mated to be 3 per­cent. Un­em­ploy­ment is at a five-decade low of 3.7 per­cent, and em­ploy­ers are post­ing record-high job open­ings. The econ­omy’s ex­pan­sion is al­ready the sec­ond-longest on record.

But an­nual growth is widely ex­pected to dip back to its long-term av­er­age near 2 per­cent by 2020. It’s even pos­si­ble the econ­omy could slip into a re­ces­sion within a few years as growth stalls — for rea­sons un­re­lated to who con­trols the White House or Congress. A global slow­down could, for ex­am­ple, spill into the United States. Or higher in­ter­est rates, spurred by the Fed­eral Re­serve, might de­press eco­nomic ac­tiv­ity.

In an ap­pear­ance last month at Har­vard Univer­sity, Nancy Pelosi, the House Demo­cratic leader, out­lined her agenda should her party re­gain the cham­ber’s ma­jor­ity and she the speak­er­ship. Within the first 100 days, Pelosi said, she would seek to re­duce the in­flu­ence of large cam­paign donors and groups that aren’t legally re­quired to dis­close their fund­ing sources. She would also pur­sue in­fra­struc­ture fund­ing and seek pro­tec­tions for un­doc­u­mented im­mi­grants who came to the United States as chil­dren, among other pri­or­i­ties.

Yet the ran­cor be­tween the two par­ties makes the like­li­hood of any mean­ing­ful eco­nomic mea­sures ap­pear dim.

“The way par­ties are talk­ing about it right now, I don’t think any­body is dy­ing to co­op­er­ate,” said Michael Mad­owitz, chief econ­o­mist at the Cen­ter for Amer­i­can Progress, a lib­eral think tank.

It’s pos­si­ble Trump might feel pres­sure to pro­duce some tan­gi­ble leg­isla­tive re­sults be­fore his quest for re­elec­tion. If so, he could back­track and find ways to work with Democrats to boost the econ­omy.

“Trump is the wild card here,” said Ja­son Rosen­stock, a fi­nan­cial in­dus­try lob­by­ist with Thorn Run Part­ners. “He may want to be seen as a deal-cut­ter go­ing into the 2020 elec­tion.”

EVAN VUCCI — THE AS­SO­CI­ATED PRESS

Pres­i­dent Don­ald Trump speaks dur­ing a news con­fer­ence in the East Room of the White House, Wed­nes­day in Wash­ing­ton.

JACQUELYN MARTIN — THE AS­SO­CI­ATED PRESS

House Mi­nor­ity Leader Nancy Pelosi of Calif., speaks about Demo­cratic gains in the House of Rep­re­sen­ta­tives to a crowd of Demo­cratic sup­port­ers dur­ing an elec­tion night re­turns event at the Hy­att Re­gency Ho­tel, on Tues­day in Wash­ing­ton.

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