Economic Policy After The Midterm Elecions

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Barkley Rosser
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 Will economic policy change much aa a result of the midterm elecrtions? After all, the GOP has taken the House of Representatives, if only narrowly, with inflation and the economy supposedly the top issue, especially for those supporting the GOP. Will this reappearance of "divided government" have an impact on economic policy? My bottom line is probably not too much, although there is the serious possibility of some major drama and damage happening during this coming year.

On the matter of having "divided government," I must note that we already have been having that, if not in the way this is usually posed. While Dems nominally controlled both the White House and Congress, although only partially so in the Senate given the need for 60 votes to win on any issue not tied to the budget and thus able to managed by reconciliation (and even on those not necessarily, given two Dem senators not always supporting Dem budget-related proposals), what has been left out of such discussions has been the Supreme Court. It has been dominated strongly the past two years by serious conservatives appointed by GOP presidents who have taken an aggressive stance on overturning policies accepted by past presidents and Congresses dominated by both parties. An egregious example of this regarding economic policy has been the restricting of the EPA's ability to regulate pollution, a serious matter.

Of course a major reason the change of control of the House will not have all that much effect on inflationary policy is that the Fed is the lead entity on that, and I do not see the Fed changing its policy that much in response to the election, whatever one thinks of the Fed's policy. As it is they have been fairly sharply raising interest rates recently, with the value of the US dollar being quite strong, with this in fact beginning to show some signs of inflation beginning to slow down, if still much higher than most people would like it to be. And we now have hints from Powell that while the Fed is still intent on further interest rate increases, those may also begin to slow down somewhat, maybe only 50 basis points up in December rather than 75. Again, these considerations look disconnected from the election outcome.

Obviously where the House may be able to change economic policy somewhat involves fiscal policy, given the House role in budgetary policy. And they may in fact make efforts to reduce or eliminate funding for certain Biden admin initiatives, particularly some in the Inflation Reduction Act (IRA). As it is much of Biden's fiscal policy will not be affected. The probably somewhat inflatoinary ARPA is largely over, although there is still some disbursement of funds from it still happening. Also, the infrastructure and CHIPS acts seem to have some GOP support, so will probably be largely left alone.

What seems to be the top target in the IRA is funding for increasing the number of auditors in the IRS, with the GOP having put out all kinds of phony scare stories about these agents to be hired showing up armed at the doors of all kinds of middle class people. As it is, many of those to be hired are supposed to help out with such things as answering telephones, which most of the time now does not happen, with this sort of thing having become a problem due to many funding cuts in recent years for the IRS pushed by the GOP in Congress. In terms of enforcement the new agents are supposed to focus on higher income scofflaws as well as corporate ones, not middle or lower class ones. In any case, if the GOP-run House does succeed in cutting this funding, this will be inflationary due to reducing tax revenues. 

Another fiscal policy matter they might well push, although this is more likely to get blocked by the Senate or Biden veto is again cutting tax rates for higher income and wealthier people. This would also be inflationary if it gets implemented.

Arguably anti-inflationary would be cuts to Social Security and Medicare, although these are less likely to get passed, with I suspect some GOPs in Congress not wanting to get on board such cuts. But in fact cuts to Medicare might lead to higher costs rather than lower ones for recipients, and any changes to Social Security, if they were to happen, would probably take the form of raising the retirement age, only affecting Social Security outlays sometime in the future, not anytime soon.

Probably the only possibly anti-inflationary policy they would push might be for various policies to increase fossil fuel production in the US. These are likely to be blocked by veto if not the Senate, and would only have a fairly small impact some time in the future, given that as of now oil companies are sitting on lots of unused permits for drilling on public land. And one of the items the GOP loves to talk about a lot, the XL pipeline from Canada, would have zero impact on oil production in the US, and probably near zero even on production in Canada, as most of that oil gets out by other means anyway.

What the GOP in the House seems mostly obsessed with is having lots of hearings, with almost none of these having anything to do with economics, much less inflation in particular. Their top priority seems to be to expose the salacious contents of Hunter Biden's laptop, which like the 8 in a row Benghazi hearings will find nothing because there is apparently actually nothing on there about Joe Biden involving anything that actually happened, although that will provide lots of opportunities for GOP Reps to get on Fox News and its crazier cousins to promise that the next day will bring that witness that will surely show how bad Biden was. Hearings on Afghanistan, Fauci, and much else will also be similarly irrelevant to economic policy, although if they have hearings on trying to reduce immigration, well, like cutting funding for the IRS, this will likely be inflationary, not the opposite.

The possibility for drama involves the old saw matter of the debt ceiling, which the newly crazy GOPs in the House may well be willing to resist raising while making unacceptable demands to the point of triggering a default, which could indeed bring crashing financial markets and a global recession, with at least some degree of recession having non-trivial probability of happening anyway this coming year due both to Fed tightening as well as economic slowing in the rest of the world coming from China and the effects of the war in Ukraine. This suggests that a high priority for the Dems in Congress in the remainder of the lame duck session should be to use reconciliation to either substantially raise the debt ceiling or, better yet, just eliminate the darned thing that has been a damaging anachronism since almost the time it was instituted over a century ago, the only such thing on the planet. 

But, unfortunately, it seems that neither Biden nor any leading Dem in Congress, not even Bernie Sanders, seems at all interested in doing anything about this. Why they are so complacent on this I really do not know, although it seems they are all scared of some boogeyman of being viewed as "fiscally irresponsible."  But, as far as I am concerned, it looks to be utterly fiscally irresponsible to allow these incoming lunatics in the House the ability to wreak havoc on this matter. Deals were cut in the past in similar situations, as in 2011, and some Dems may think that the GOP will get blamed for any bad outcome on this.  But blaming GOP for a temporary government partial shutdown is one thing. Blaming them for a major recession is quite another, with blame for that, if it gets really bad and spills into 2024, much more likely to end up on the doorstep of the White House. What are they thinking?

Barkley Rosser