Editor’s note: Mark Zandi is chief economist of Moody’s Analytics. The opinions expressed in this comment are his own. See more opinion on CNN.
The midterm election results are still rolling in, but Republicans have won control of the US House of Representatives, ensuring that we will have a divided government. If history is any guide, that means the next two years of economic policy will be frustrating, marked by legislative problems and fiscal rounding off. And if the economy suffers a recession, as is widely expected, lawmakers will not act to cushion the downturn.
That would be a big change from the past two years when the Biden administration worked with a Democratic-controlled Congress. However, the Senate was evenly split between Democrats and Republicans, so both Vice President Kamala Harris’s tie-breaking vote and the use of arcane budget rules were often needed to get economic legislation across the finish line. It was not easy, but a lot was done.
The massive US bailout passed shortly after Biden took office, with only Democratic votes. The government support package helped the economy navigate the fallout from the pandemic.
The Infrastructure Investment and Jobs Act became law late last year, this time with some Republican support, providing investments in roads, broadband bridges and the electric grid. The CHIPS and Science Act also passed with bipartisan support, supporting semiconductor manufacturing here at home.
The recently passed Inflation Reduction Act, which had no Republican support, addresses the long-term problem of high prescription drug costs and, most importantly, climate change.
While the past two years have been a legislative whirlwind for economic policy, the next two are likely to be anything but. A Republican-controlled House looks set to follow the playbook of the Republican Congress under former President Barack Obama. That is, it appears ready to focus on the government’s large budget deficits — and use the threat of government shutdowns and a breach of the government’s debt limit in efforts to force the Biden administration to cut government spending.
Indeed, House GOP Leader Kevin McCarthy recently told CNN that, while Republicans were willing to raise the debt limit during the Trump administration, the situation is different now that Democrats have spent trillions of dollars. But McCarthy insisted Republicans would not use it as a bargaining chip.
It would be very bad if they did. The debt limit sets a legal maximum on the country’s outstanding debt. Once the limit is reached, the government can only spend what it receives in revenue. If the government runs a deficit, as it consistently has, then someone is not going to get paid, at least not on time. That someone could be a soldier, a Social Security recipient, a global investor who previously lent money to the government or a long list of others who expect checks from the US Treasury. Not paying its bills on time means that the government will default.
The debt limit was intended to force lawmakers into fiscal responsibility. If they reach the limit and face a default, they will have to raise taxes or limit government spending. That’s not how it worked. Instead, often to many storm and urge, lawmakers raise the cap in time to avoid a default, but without making tough policy choices. The drama intensifies with each debt limit battle, with some lawmakers considering how bad a breach of the limit would be for financial markets and the economy.
That would be bad. That the government pays what it owes on time is a foundation of our economy and global financial system. This is why the US dollar is the world economy’s reserve currency. The economic benefits of this over the generations are incalculable.
Divided government also means that if the economy soon suffers a recession — and the recession risks are high — no help is likely to come from lawmakers. This may not be a big deal in a modest downturn, but recessions can take on a life of their own. If one turns out to be more serious and longer-lasting than expected, lawmakers won’t be there to save the day. The government will not have the economy’s back.
The next two years in Washington, DC will be very different from the past two. We’ve had two years full of drama, but a lot has been done. The next two will be full of drama, but probably little to show for it.