The economic consequences of gridlock

By Felix Salmon
November 3, 2010
Mohamed El-Erian today, "is that political gridlock is good for the economy".

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“The conventional wisdom likely to be repeated over the next few weeks,” writes Mohamed El-Erian today, “is that political gridlock is good for the economy”.

I’m not so sure. There are certainly some people taking that tack: Ken Fisher is saying that gridlock might be good for the stock market, but like all fund managers he’s talking his book, and his reasons are based more on investors emotions than on the fundamental benefits of gridlock. (People “freak out” when the government does something big, says Fisher, and that makes them less likely to invest in stocks.)

Meanwhile, as both El-Erian and Steve Rattner say, if you really want to help the economy, there’s a long list of things which really ought to get done and which aren’t going to happen under gridlock.

Here’s El-Erian’s:

Democrats and Republicans must meet in the middle to implement policies to deal with debt overhangs and structural rigidities. The economy needs political courage that transcends expediency in favor of long-term solutions on issues including housing reform, medium-term budget rules, pro-growth tax reforms, investments in physical and technological infrastructure, job retraining, greater support for education and scientific research, and better nets to protect the most vulnerable segments of society.

And here’s Rattner’s:

The list of unfinished business is long: action on climate change, reform of entitlement spending, and a revamp of the two zombie housing agencies, Fannie Mae and Freddie Mac.

I’d love to see more specificity from El-Erian on what he means by “pro-growth tax reforms”, especially in the context of those “medium-term budget rules”. But there’s a thread running through all of these columns, which it’s important to emphasize: there’s altogether far too much debt in the economy. That goes for individuals, stuck with enormous mortgages; it goes for Fannie and Freddie; it goes for state and municipal governments; it goes for the federal government; and it goes for some, but by no means all, corporations as well.

Top of my list of Things To Do, then, would be to deal with El-Erian’s debt overhangs by abolishing the ridiculous incentives that the tax code gives for taxpayers (both individuals and companies) to borrow as much money as possible. Those incentives eradicated one of the most glistering sliver linings of the crisis: the fact that the forced deleveraging was, at least, a deleveraging. As soon as the crisis was over, everybody releveraged again.

But that kind of reform was a step way too far even when the Democrats controlled both houses of Congress and the White House; it’s unthinkable today. Similarly, we’re not going to get bipartisan action on things like climate change, entitlement reform, or strengthened social safety nets when neither of the two parties would be willing to touch such hot-button issues on their own.

Gridlock, then, only serves to make impossible what was already highly improbable under the best of circumstances. For all their exhortations, El-Erian and Rattner know full well that they’re not going to get their wish lists — and they know that they wouldn’t have gotten their wishlists even if the Democrats had kept the house. It’s all well and good to ask that “mid-course policy corrections will be identified and undertaken on a timely basis” — but what administration has ever been able to do that? The US government simply isn’t that nimble, and it never has been.

So maybe the gridlock question is germane mainly to the perennial and rather boring debate about what happens to stocks under various permutations of parties in the White House, the Senate, and the House. Grandees like El-Erian and Rattner will continue to use their op-ed bully pulpits to push for grown-up action on a long list of issues facing the country. But the reality of U.S. politics today is that Congress is listening to an angry populace, not to multi-millionaire lefty pundits. And the angry populace has no interest whatsoever in “an encompassing economic vision that acts as a magnet of conversion nationally, counters growing international frictions and facilitates much-needed global economic coordination”.

Or, to put it another way, if you give those angry Americans what they think they want, it’s unlikely to help them and quite likely to harm them. But this is a democracy, so that’s what Americans are going to get.

(Cross-posted at CJR)


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Gridlock reduces regime uncertainty. It makes it easier for businesses to plan and commit over the medium-term because sudden changes to laws and regulations are much less likely.

Posted by RobSterling | Report as abusive

I understand now why Obama aimed so low. Yes if you think everything in the US is fine now or that any change will be for the worse then gridlock is good. But anyone who thinks that is either benefiting from the status quo or is very very scared of change.

Posted by BigBadBank | Report as abusive

I think this election cycle worked out perfect for the parties. I believe the democrats wanted to loose just enough seats in the house to loose their majority. Its bad politics when either party has house, senate, and presidency. I think they try very hard to avoid it. People have even switched parties to keep things this way. If one party controls all three they have little or no “Spin” that works on why they won’t do what the people want. Much better to have gridlock to blame. It’s worked for, well, the three decades that I can remember. When will people realize that the parties work together very well. Just not the way we want them too, and not publicly.

Posted by tmc | Report as abusive

“if you really want to help the economy…”

It is clear that helping the economy is not a priority for Republicans, or even most Democrats. Obama proposed the most incredible business-friendly tax bill, where businesses would receive 100$ credit (not deduction) for capital investment through 2011. This would mean profitable businesses would get capital equipment for free, as the cost would be credited against their tax bill. What could stimulate the economy more than having businesses invest in new equipment? Yet the Republicans just ignored it, as did the Democrats. I’m not surprised his own party didn’t jump at this, because it’s against their ideology, but what possible reason could the patron saints of the chamber of commerce have for not jumping all over this offer?

Congressmen do not care all that much about helping the economy, they just want voters to believe their opponents are hurting the economy.

Posted by OnTheTimes | Report as abusive

“if you give those angry Americans what they think they want, it’s unlikely to help them and quite likely to harm them”

Doesn’t that sound elitist?

In fact voters apparently defeated some of the more hard-line candidates (Angle, Buck in CO, O’Donnell, Miller in AK apparently).

But if there was any message at all, it is fiscal restraint. This moves our leadership more in the direction of France, Germany and the UK, doesn’t it?

As far as scaling back the international tension, the 800 pound gorilla is our relationship with China and the thing they hate most is our fiscal profligacy, right?

Is this better than in France where the people riot for greater fiscal profligacy?

Posted by DanHess | Report as abusive

But isn’t that what works? It seems like as a politician, you’re much more likely to run a successful campaign if your platform is “My opponent will fail” than if you run on “I will succeed”. I really don’t blame the politicians, I blame us as a people for allowing this to be the case. We literally ask for it.

Posted by spectre855 | Report as abusive

@spectre855, yes, that works if your goal is to get elected. It doesn’t work if your goal is to help the economy. It’s clear they would rather get elected (or re-elected) than help the economy, or solve any other problem.

Posted by OnTheTimes | Report as abusive

Well, I think if your options are to contribute to the greater good and get fired from your job for it, or maintain the status quo and stay employed, better than 90% of people would choose to remain employed.

Posted by spectre855 | Report as abusive

“He’s talking his book”??? Are you kidding me? What kind of schlock analysis is that? Fisher is a billionaire and manages a big firm. How much money do you make off a best selling business book? A monster business best seller in this environment might sell 50k copies in the first year, 100k to 150k in its life. Authors might net a dollar a book, and that’s before they spend to market it. That doesn’t make or break a guy like Fisher. Come on. And just why is investor sentiment not “fundamental”? What is demand if not fundamental? This blog is garbage.

Posted by MaggieKimball | Report as abusive

I agree with Maggie. Really? Because book writing is so dang lucrative? Well, where are all the billionaire book writers? Other than the Harry Potter lady, there are none. I doubt Fisher is just hawking a book. He’s talked about years in a presidential term and gridlock and how that affects stocks for years now. You’d think Reuters would require its writers to do some background digging before posting stuff.

Posted by CAKnapp | Report as abusive

Talking your book is an expression. The book refers to his stock portfolio, not a book that is selling on Amazon. h_on_washington_talking_yo.html

Posted by Stevensaysyes | Report as abusive