Picture a public-policy environment in which the most important, economy-related bills can't get through the U.S. Congress. A budget is passed by the Senate, but it fails in the House. A package of tax incentives aimed at increasing investment passes the House and Senate, but is vetoed by President Obama. Meanwhile, other important issues like financial-services reform and energy policy receive little attention because the House remains obsessed with overturning health-care reform legislation approved earlier. The stock market becomes rattled by all the uncertainty. Could this scenario happen?%%DynaPub-Enhancement class="enhancement contentType-HTML Content fragmentId-1 payloadId-61603 alignment-right size-small"%% It could if the Republican Party regains control of the House in November 2010 and helps create the worst of all possible Washington conditions for the economy, and for investors. That would be "gridlock," or divided government, in which the executive branch and Congress are not held by one party, in this case the Democrats.
A Long Shot
How likely are the Republicans to regain majority-party status in the House in November? Well, at this juncture, it remains a long shot. But the way things are currently going for the Democrats, they'll be fortunate to retain a 15- or 20-seat House majority.
Now investors may legitimately ask, how does a U.S. presidential majority that garnered 365 electoral votes amid a convincing Northeast-Midwest-Pacific West victory in 2008, lose majoritarian support in a year? Easy: it's called a 10% U.S. unemployment rate.
Few issues can change the fortune of a party in power like a rising U.S. unemployment rate. Political science and public policy research shows a consistent trend. During periods of high U.S. unemployment in an election year, if the party in power in Washington -- in this case President Barack Obama and Congressional Democrats -- does not improve the unemployment problem, the American people will vote that party out of power in November.
Of course, international events or a major scandal can always intervene. But as of now, job growth and reducing unemployment after the worst recession since the Great Depression are the nation's No. 1 concerns.
The Clock Is Ticking
Further, last Friday's U.S. Labor Department announcement that the U.S. economy in December unexpectedly lost another 85,000 jobs (a Bloomberg News survey had expected a 10,000-job gain), is another dose of bad news for Congressional Democrats. The reason? They have even less time now to get "the great American job creation machine" going again.
Moreover, the calendar may indicate they have 10 months -- the Congressional election isn't until November -- but in reality, they have only six months or until about June to create jobs and get the high U.S. unemployment rate trending in the correct direction, which is down.
And the reason the Democrats have only about six months has to do with how American voters think about the U.S. economy, and politics. In a nutshell, most Americans collect information on the economy and other issues through about Memorial Day. During election years, by Memorial Day or mid-June, they've basically reached an evaluation regarding the economy and made up their mind who they're going to vote for.
They then take a "mental break" during the summer months -- June, July and August -- and how many of us can relate to that? Most Americans (but by no means all) are too busy with family vacations, travel and enjoying outdoor activities in the summer to be preoccupied with the economy or goings-on in Washington.
A Turn Needed
Then, after Labor Day, Americans re-engage and resume obtaining information on the economy. However, rarely do conditions differ enough in the final two months (September and October) before the November election to change their vote.
Hence, in other words, it's a six-month season for the Democrats: The Democrats have roughly six months, January to June, to find ways to create jobs and get the unemployment rate headed lower. If the economy is consistently creating 225,000, then 235,000, then 250,000 jobs per month etc., with unemployment dropping by June, voters -- and particularly Independent voters -- will say, "You know, the economy is starting to turn and the Democrats' programs are working. I'll vote for Democratic Congressman Smith in November."
Conversely, if sustained job growth is not occurring and the unemployment rate is the same or rising, that same Independent voter who's not loyal to either party will vote the Democrats out of office for not fixing the economy.
Is the system fair? Not really. Frequently, the party in power in Congress and the White House inherits many problems that it didn't solely cause and that often take a long time -- two or three years, etc. to solve -- but that doesn't matter, from a governance standpoint.
Responsible For Everything
According to how American voters think -- once you're in power, you're responsible. The American people say, "You're in charge, there's a problem. Now, fix it." Attaining majority party status in Congress or becoming president is sort of like buying a home: Once the house sale has closed and you've moved in, that house, including its old furnace and that upstairs bathroom that needs to be updated, is yours.
To be sure, Congressional Democrats and President Obama inherited a mess when they took office in 2009. That included a financial crisis, the worst recession since the Great Depression and two wars.
But previous American policy makers have faced -- and overcome -- worse circumstances: President Abraham Lincoln led the nation through its greatest internal crisis, the Civil War. And President Franklin D. Roosevelt built support in a then very isolationist America to defeat the modern world's greatest evil, Adolph Hitler and Nazi Germany.
Further, the Democrats should look at the bright side: They should be glad the Congressional election is not today. If it was, they'd get clobbered! They'd lose roughly 30 to 35 seats in the House, whittling their 257-to-178 majority down to a razor-thin margin; they might have even lost control of the House. (The Democrats also would probably lose 4 to 5 seats the Senate, turning a 60-to-40 majority into a non-filibuster-proof 55-to-45 edge.)
Divided Government Possible
Further, a Republican majority in the House would invariably lead to divided government or gridlock, effectively ending the Obama legislative era. Very quickly, the public-policy process would grind to a halt, with Republicans failing to pass most Obama administration legislation. Certainly, the administration's federal budget proposals would be in jeopardy. Meantime, Obama would veto any Republican-framed legislation that managed to get to his desk.
Under divided government, one can see how key issues like the budget, tax policy, deficit reduction, financial services reform, trade policy and climate change, among others, would get bogged down in partisan bickering that permeates Washington, to the stock market's and investment world's detriment.
Some counter that government is a good thing, asserting that "a Congress that can't do anything, can't do any harm." Nothing could be further from the truth. Problems national in scope require national solutions. Divided government would simply create additional delays on key issues, such as the budget deficit, and the financial markets would not be pleased with a failure by Washington policy makers to address the deficit, to say the least.
Hence, there's a lot riding on the issue of job growth. If the Democrats want to retain their majority party status and avoid gridlock, they need to implement programs that create jobs and lower the unemployment rate. Although the political system isn't fair from a problems-inherited standpoint, the American people are realistic.
They know the Democrats inherited big problems and they don't expect miracles, but they do expect the economy to show job growth and a steadily-declining unemployment rate. The Democrats have six months to show they can accomplish this, or the American people will show them the door.
Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.
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