The Economic Effects of the 2010 Midterm Elections

I think most people know what a Republican House coupled with a Democrat Senate and President means in terms of politics: absolute gridlock, lots of subpoenas, and a ton of meaningless rhetoric.

But what does this mean economically? How will the recovery trajectory of our country change as a result of this event?

First of all, the loss of single-party control over the government will reduce economic uncertainty. When the fear of new regulations that will increase costs prevents businesses from hiring, investing, or doing anything else with the slightest bit of risk, the best thing you could hope for is gridlock in the government. Businesses always have to plan for the worst-case scenario if they want to survive, so costly new taxes and regulations are priced into the market even before they pass into law. Then, if the efforts to pass them suddenly derails, the market gets a boost as that overzealous caution is lifted and market confidence returns. So, taken alone, this effect would result in a faster recovery trajectory.

On the other hand, the executive branch has no gridlock at all. The 111th Congress delegated a lot of “rule-making” powers to the executive branch over the last few years [insert Bush administration comparison here]. This means that, thanks to poorly-written laws like Obamacare, people like Health Secretary Kathleen Sebelius have the autocratic power to make laws on a whim, with nothing other than the President holding them back. This is extraordinarily dangerous, because the extreme reach of her control means Sebelius could single-handedly turn the economy on a dime with a bad rule, sending us back into a recession. Therein lies the danger of turning away from liberty-based representative democracy in favor of technocratic authority. Even without any further action by Congress, we’ve got boatloads of uncertainty hanging on the economy like a lead weight. We could get some (more) seriously messed up rules coming out of the White House, and businesses and investors will have to plan for that, but they also can’t plan for everything.

What all this means is that we may get a return to the “normal” sluggish growth that has characterized the last decade, but we’re certainly not going to get any sort of massive acceleration towards a full recovery unless the Democrats start accepting some of the calls to repeal costly regulations and give up executive power over transactions (not likely). Hence continues the country’s second Great Depression.

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