2011’s Top Risks: The trouble with gridlock

By Ian Bremmer and David Gordon

Many investors wrongly assume that congressional gridlock will present few risks in 2011 and may even provide the predictability that investors look for. But a divided government can throw up unnecessary roadblocks to necessary policy changes. It can also push the White House to rely more heavily on executive powers, which are harder to predict and influence, to get things done. At a time of sluggish economic recovery and still high unemployment numbers, congressional gridlock is especially damaging.

U.S. gridlock poses three major risks this year:

First is the risk that there will be no movement on policies that investors and business leaders want to see. The most important of these is housing finance reform. Democrats and Republicans are not far apart on potential solutions, but the tough issues of winding down Fannie Mae and Freddie Mac and deciding what to do on affordable housing limits prospects for success. Failure to resolve the issue would prolong a key driver of the weak recovery, as would failure to take substantive action on the recommendations of President Obama’s bipartisan deficit commission.

Second, in 2011, headline risk will be driven by both parties promoting priorities for which there is no path forward. The Republicans want to substantially revise the Dodd-Frank financial regulation bill, but they don’t have the power to do it, even if they threaten to hold up funding for the Securities and Exchange Commission and the Commodity Futures Trading Commission. President Obama will resuscitate immigration reform despite the fact that the legislation will not pass the Republican-controlled House.

Third is the risk that a road-blocked White House takes heavier-handed administrative actions that are hard to predict or influence. As President Obama finds little room to legislate next year, he is likely to turn to the things he can accomplish on his own. Understanding how the president can use his powers will be critical to getting 2011 forecasts right.

On Monday, we’ll take a closer look at Top Risk no. 8: Pakistan, which faces a near perfect storm of political, economic, and social crises.

Ian Bremmer is president of Eurasia Group. David Gordon is the firm’s head of research.