Wall Street expects gridlock in Congress, more compromises

Analysis

November 09, 2006|By Kevin G. Hall | Kevin G. Hall,McClatchy-Tribune

WASHINGTON -- Wall Street and business leaders welcome the Democrats' capture of power in Congress as a formula for gridlock that should lead to lower government spending and no significant change in tax law.

That's not to say that the Democrats' victory won't have any economic impact. It jeopardizes several trade deals that President Bush has negotiated but Congress hasn't passed. It may well mean an increase in the federal minimum wage. And it's sure to mean tougher scrutiny of Big Oil, and perhaps the first regulation of hedge funds, the investment pools favored by the very wealthy.

But experts think that the biggest impact may be on the federal budget process, with renewed efforts to reduce government spending to improve the long-term outlook for the federal deficit and national debt. That in itself shows how much politics has changed in recent years; before the Bush administration, Republicans embraced small government and low spending, and Democrats generally favored the opposite.

"In an environment where you've got a Democratic majority, even a narrow Democratic majority, you are going to have more interest in budget reform," said Stephen Slivinski, director of budget studies for the Cato Institute, a libertarian research center in Washington.

"There's now a re-energized moderate Democrat presence on the budget front," he said.

Slivinski wrote the recent book Buck Wild, which documents how Republicans strayed from their conservative roots to embrace big government and big spending. In it he shows how divided government has yielded lower federal spending since 1965.

Since 2000, President Bush and the Republican-led Congress increased discretionary spending on domestic programs - excluding defense and homeland security - by 7 percent annually. That's nearly twice the 4.2 percent annual growth under President Bill Clinton and a Congress run by pre-Bush Republicans.

In fact, Slivinski said, Republican presidents with Republican-controlled Congresses posted average annual spending gains of 3.6 percent per person, while Democratic presidents with their own party controlling Congress boosted spending 3.3 percent. Divided governments, however, increased spending by just 1.5 percent.

"The [stock] market historically likes gridlock. The big bull market of the 1990s really didn't get going until late 1994, when the GOP took over the Congress," said Al Goldman, chief market strategist for A.G. Edwards, a national brokerage firm.

Divided government makes sweeping changes improbable.

"I don't think any big economic question will get on the agenda," said Mark Zandi, chief economist for Moody's Economy.com.

The threat of gridlock could ease some compromises, however, said Jay Timmons, senior vice president of the National Association of Manufacturers.

"In divided government, you have almost a better opportunity to get things done than when one party controls it," he said. Timmons hopes the parties will expand offshore drilling for oil and gas. "It forces both sides to reach agreement and not get 100 percent of what they want."

Another compromise could be immigration revisions and a guest-worker program. Two-thirds of the Democrats in both chambers of Congress either have supported guest-worker programs or opposed construction of a wall along the U.S.-Mexican border, said Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce.

"What you are left concluding ... is that the opportunities to proceed forth in moving a comprehensive immigration bill have been enhanced," he said.

One test of bipartisan cooperation will come in the House Budget Committee, where the incoming chairman will be Rep. John M. Spratt Jr. of South Carolina. The Democrat is expected to push for a 1990s-style compromise to impose caps on federal spending.

"The main goal would be to put the budget on a path to balance, as we did in 1997 with the balanced-budget agreement," said Charles Fant, a spokesman for Spratt. "There was some genuine give and take on both sides; he'd like to see that again."

Trade also will test bipartisanship. New York Rep. Charles B. Rangel, the incoming chairman of the tax-writing Ways and Means Committee, promised yesterday an America-first approach to trade. "We have to protect American jobs. We have to protect American workers," Rangel said.

He pointed to a trade deal with Peru, negotiated but not approved by Congress, and said it wouldn't pass unless it was amended to require the Andean nation to adopt international labor standards.

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