Post-Election Economic Forecast: Political Gridlock Will Be Good For Business

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by: Bill Conerly

The economy will do well with government control divided between Democrats and Republicans. I didn't always believe this, but a decade ago, I was persuaded by the late economist William A. Niskanen. "Our federal government may work better (well, less badly) when at least one house of Congress is controlled by the opposing party," he wrote. "Divided government is, curiously, less divisive. It's also cheaper. The basic reason for this is simple: When one party proposes drastic or foolish measures, the other party can obstruct them. The United States prospers most when excesses are curbed, and, if the numbers from the past 50 years are any indication, divided government is what curbs them."

Excesses have been evident since the election of Donald Trump, not only from the president's Twitter account but also from his opponents. We've seen huge deficits from the party that used to be tight-fisted. We've seen draconian immigration actions. Global trade relations are in turmoil. Maybe some gridlock will be good for us.

Niskanen, writing in 2006, found only two eras of fiscal restraint since World War II: the last six years of Eisenhower's administration, and the last six years of the Clinton administration. In both eras, the opposition party controlled Congress.

War also seems to be absent from periods of divided government. Niskanen also wrote: "In 200 years of U.S. history, every one of our conflicts involving more than a week of ground combat has been initiated by a unified government. Each of the four major American wars during the 20th century, for example - World War I, World War II, the Korean War, and the Vietnam War - was initiated by a Democratic president with the support of a Democratic Congress. The current war in Iraq, initiated by a Republican president and backed by a Republican Congress, is consistent with this pattern."

Major government changes are likely to be stable when they are developed by divided government, Niskanen also argued. He cited Reagan tax cuts, approved by a Democrat-controlled House of Representatives. A more modern example is Obamacare, passed during one-party control, which the other party vowed to repeal as soon as possible. Although that repeal didn't happen, the country continues to suffer from uncertainty about health care policy.

The economy is not managed by the government but by millions of individuals and companies trying to make the best choices for themselves. When the government does take action in the economic sphere, it's not entirely for the public interest. We learned this from Niskanen's most lasting contributions to economics, his theory of bureaucracy, part of public choice economics. He said that people in government are human, and their decisions will at least partially reflect their own ambitions. Bureaucrats want larger budgets and influence.

Looking forward to 2019 and 2020, expect less extravagant federal spending growth - at least a little bit. Don't expect major tax cuts again. Look for deregulation to continue in those areas where Congressional approval is not needed. This direction will be good for the economy.

A president can do a good bit of mischief all by himself. Barack Obama campaigned in 2008 against too much presidential power accorded to George W. Bush, but changed his tune after he held power. A Democrat-controlled House of Representatives will not grant additional discretionary authority to the president, though they will be unable to roll back power granted by existing laws.

Foreign trade is an area where past Congresses granted the president wide latitude - much to the regret of many existing members. Look for continued controversy here.

Immigration is an area ripe for compromise, and maybe the odds are a little better now. But just a little. Nobody thinks current law is ideal, and nobody thinks current law is being enforced. But this may be too thorny an issue for Congress to resolve. That means immigration will continue to be low, exacerbating the tight labor market that has been caused by economic growth and demographic change.

I recently wrote that the economy would probably not go into recession in 2019, but that we should all be prepared for the possibility. I stand by that statement even after the election results.