Divided, We Stand
If Republicans win, does the global economy, too?
Today’s midterm election in the United States holds forth the very real prospect that both houses of Congress will fall into Republican hands for the first time since 2005. With an unpopular Democrat still in the White House, governmental gridlock seems assured. But the rest of the global economy will be watching to see if the two parties can finally work together — and perhaps, in some ways, they can.
First, let’s consider where things stand now. The current Congress has been one of the least productive in recent history — if you assume that Congress’s job is to pass new laws. Its public approval ratings are in the cellar, but that hasn’t been a terrible problem for incumbents running in this election. After all, with the Senate controlled by Democrats and the House by Republicans, they could always blame the other party for clogging up the works.
With Republicans at the helm in both houses, that won’t be possible anymore. Simply boasting of stopping President Barack Obama’s agenda probably won’t impress voters too much in 2016, either. And no one wants to go down in history as the party bigwig who merely watched while nothing got done (right, Mitch McConnell?). So Republicans may want to advance some legislation that the president would sign.
This is where the global economy comes in. The United States has been the lead horse pulling the wagon for several years now, and that doesn’t look like changing in the next two. The European Union is still hamstrung by austerity, unemployment, and weak monetary policy. China is in the midst of a historic slowdown that’s part of a larger downward glide path. And Japan, though showing some hopeful signs, is operating far from capacity.
In other words, the ball is in Washington’s court. And there are three important areas where Republicans can set an agenda that might even bring Obama along, offering him a chance to strengthen his as-yet-shaky legacy, and give Congress something to crow about.
The first is taxes, and the corporate income tax is front and center. The United States has one of the highest rates in the world, which has resulted in vast pools of cash owned by American corporations sitting unused overseas. Cutting the rate would make federal tax revenue less volatile, but it would also give Americans who pay taxes as companies a chance to shelter vast amounts of income. To preserve the reduction in volatility while maintaining the tax base, legislation might also get rid of some of the dozens of loopholes — such as the carried interest tax break made famous by Mitt Romney in 2012 — used by those same taxpayers.
If American companies took advantage of a friendlier tax rate to bring their earnings back stateside and invested them in their businesses, global growth could get an enormous boost. U.S. companies may hold on the order of $5 trillion in cash abroad; investing even $1 trillion at return of 5 percent would raise annual output in the United States by $50 billion, or about 0.3 percent per year, with likely spillovers abroad. Of course, the rest of the world might also suffer a dent in its liquidity, but the net effect of putting those dollars to work would almost certainly be positive.
Another area ripe for reform is immigration. The United States has an immigration policy that’s largely motivated by politics and cultural considerations rather than economics. Attempts by Republicans and Democrats to broach the issue have failed utterly. As a result, many industries must rely on undocumented workers, fewer smart people can come to the United States to work, and many who come to study end up going home instead of staying. Moreover, millions of people from around the world who might have improved their lives by becoming Americans never get the chance.
Even against the backdrop of an immigration policy that lacks economic underpinnings, research suggests that migration to and from the United States responds to supply and demand. Taking the brakes off immigration would allow more businesses to operate efficiently, bringing in workers as they would raw materials or physical capital. And when immigrants work in the United States, they frequently earn much more than they would have at home — and they send a portion of their incomes back to spur growth there as well. It’s hard to believe that Obama would reject a pro-business immigration reform that also allowed Republicans — not to mention the president — to accentuate their toughness on border security.
The last area where Republicans and the president might find common ground is trade. Obama is more in favor of free trade than the Democratic caucus, which has put a damper on his administration’s efforts to sign historic pacts with the European Union and neighbors across the Pacific. With Republicans in charge, there’s a chance that both deals could be fast-tracked, though the complexities of negotiating such enormous treaties — both would affect trillions of dollars of goods and services every year — may endure beyond the end of Obama’s term. Even passing one of them, however, would likely generate hundreds of billions of dollars of new economic activity.
That’s the economics. But from a political perspective, do any of these three areas show actual potential for progress?
Establishment Republicans, as opposed to the insurgent Tea Partiers and their ilk, have always boasted of a pro-business agenda. And John Boehner, the speaker of the House of Representatives, and Mitch McConnell, the presumptive Senate majority leader-in-waiting, are about as establishment as they come. By a stroke of luck, it’s also fashionable for Democrats to be pro-business these days (even in New York City). For Obama, especially as a lame duck, there’d be little benefit to vetoing economically driven proposals on any of the issues above; instead, he could use pro-business credentials to become an asset on the campaign trail once again.
No, the big question is whether the pragmatism of establishment Republicans can win over the more ideological wings of their party. Immigration, trade, and even taxes are all emotional issues, especially for Americans fed up with job searches and stagnating incomes. But as long as payrolls in the United States keep growing, there may just be room under the covers for some rather unusual bedfellows. If they can finally get it together, the global economy may be in for a blissful couple of years.