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Here's what the new Washington picture will mean for the economy and investors.
Bush mandate. With a big Republican win, President Bush's influence in Congress will be enhanced by more than the vote total. The election showed that he can influence voters, meaning members of Congress have to care about his views more than before. He can help friends — and hurt foes. Taxes. Republican control of the Senate means that Bush's 2001 tax cuts will be phased in at least as fast as the current schedule and will probably be made permanent. It also increases the chances of a constructive fix to the alternative minimum tax problem. It might bring an investor-class tax cut or sweeping tax reform, though that depends to some extent on the outcome of the budget-process issues. But there will now be even more interest in expanding tax incentives for savers given the popularity of IRAs, 401(k)s, Roth IRAs, 529 education savings plans, and the government's FERS plan (allowing government employees to self-direct their pensions). Budget process
and scoring. Congress is scheduled to update the budget process, and
it's unclear how far this will go. The current process is biased toward
more spending and more taxes because the economic effects are not taken
into consideration. If Congress or the administration began using a less
biased system for scoring tax-cut bills, the tax code could begin to evolve
in a less anti-market fashion. Next Fed chairman. Alan Greenspan's term as chairman expires in 2004. The next Fed chairman has to be confirmed by the Senate after passing through the Senate Banking Committee. Having a Republican Senate may alter the timing of the Fed changeover and the nominee. Judges. Most of the focus on the Senate confirmation process has been on judges. But we will now probably see resignations of conservative judges from the Supreme Court, while more federal judges will get through the Senate process. Democratic party changes. The poor election showing by the Democrats will probably move the party more toward the political mainstream. Liberals didn't do well in this election: that includes Tom Daschle, Terry MacAuliffe, and the Democratic parties in Massachusetts and Maryland. Economic team. Harvey Pitt's resignation adds to the importance of likely changes in the Bush administration's economic team. Social Security reform. Republicans didn't campaign for social security reform, so they don't have a mandate. The concept of "privatizing" social security is dead. However, the election outcome increases the chances of constructive changes — including "individualizing" social security accounts and clarifying their ownership. Other legislation. An energy bill is likely to pass. The Republican takeover reduces the threat of a broad expansion of financial regulation and retribution beyond the Sarbanes-Oxley law. It's not clear yet how the election will affect tort reform, one of the most important issues facing Congress. Republican majority control of the Senate is important. Republicans will control the Senate's agenda, giving them an advantage in picking the timing of legislation and confirmations. GOP control also means a shift to Republicans in committee chairmanships and many committee staff positions. For example, Senator Richard Shelby will become chairman of the Senate Banking Committee, taking over from Sen. Paul Sarbanes. Shelby and other Republican committee members will name most of the committee staff, causing dismissals on the Democratic side and extra hiring on the Republican side. And while it takes 60 votes in the Senate to stop a filibuster and force a vote, meaning single senators can tie up legislation and nominations, it will now take fewer cross-over votes to reach the 60 votes and budget legislation including tax changes within reconciliation bills have certain privileges that lower the threshold from 60 to 51 votes. Congress is likely to resume activity around November 12. The Homeland Security bill will probably pass quickly, as will appropriations legislation. Government spending will most likely go up sooner under this election outcome than it would have under the status quo. But the prospects for accelerated growth are much greater today than they would have been if the Democrats retained the Senate. This GOP mid-term win is a victory for the economy, Wall Street, and investors. — Mr. Malpass is the Chief International Economist for Bear Stearns. |
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Republican takeover of the Senate has far-reaching implications, many
of them positive for economic growth and the equity markets. The conventional
wisdom is that financial markets prefer a split government because that
means less legislation and therefore fewer chances for Washington mischief.
Yet this time, many of the legislative possibilities are market-friendly.
