Midterm elections carry high stakes for US economy

AP News
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Posted: Nov 03, 2014 4:18 PM
Midterm elections carry high stakes for US economy

WASHINGTON (AP) — The midterm slugfest for control of the U.S. Senate could have far-reaching effects on the economy.

Tuesday's elections come just as U.S. growth has been showing consistent improvement, thanks in part to a congressional truce on budget fights. Previous such fights shut down the government and raised the specter of a default on the federal debt. A repeat of either could damage the economic recovery.

If Democrats retain control of the Senate, the cease-fire could hold, analysts say. But it could dissolve with a takeover that gives Republicans control of both chambers and potentially emboldens them to intensify their conflicts with a lame-duck Democratic White House.

Republicans already control the House and are expected to maintain and even expand their majority in that chamber.

Addressing the prospect of a Republican takeover of the Senate, Jack Ablin, chief investment officer at BMO Private Bank, said, "My sense is it will only harden the tension that's in place."

Though some analysts say Democrats still have a chance to preserve their hold on the Senate, most expect Republicans to capture a narrow majority. This could increase the risk of another prolonged skirmish over taxes and spending. Previous showdowns derailed consumer confidence, the stock market and job growth.

Still, it remains unclear how Republicans would steer the Senate. Few campaigns have outlined detailed policy agendas. Senate Republicans could repeat past budgetary clashes with renewed vigor. Or they could accept gridlock and pursue smaller deals on tax reform or trade authority with President Barack Obama in hopes of improving their party's fortunes in the 2016 presidential election. These deals could potentially benefit the economy, analysts note.

The result, given the unknowns, is a troubling set of uncertainties for an economy still hobbled in some ways by the resolutions from previous showdowns.

Another budget battle could paralyze businesses and consumers. Yet an eventual congressional deal could prove even more damaging. Previous agreements slowed the economy by raising taxes and slashing funding for military and social programs that can often boost the economy.

The settlements brokered to end clashes in 2011 and 2013 did manage to cut the budget deficit. Yet they subtracted from growth for the past three years, according to Commerce Department figures.

Coupled with the end of stimulus spending from the Great Recession, the automatic spending cuts agreed to three years ago caused government spending to fall relative to the economy. That was followed in 2013 by higher tax rates, which also slowed growth.

As a result, growth has meandered at a sluggish annual pace of roughly 2 percent for three years. Government austerity subtracted 1.9 percent from growth last year, according to Commerce. If the impact of the government had been neutral, the economy would have expanded a robust 4.1 percent last year.

The economic drag from these deals is likely to fade in 2015 and beyond if the current truce holds.

"We're slowly moving away from contracting to stability," said Kevin Logan, chief U.S. economist at the bank HSBC.

Regardless of the election results, Corey Boles, a senior analyst with the Eurasia Group, a consulting firm, said voters shouldn't expect the midterms to push Congress into action.

"It will be same personalities in charge of the chambers and a president who is disconnected from domestic policy," he said. "We don't expect a lot to get done."