New Congress must face deficit
BY TERRY SAVAGE Sun-Times Columnist Nov 1, 2010
Tuesday's election could have a dramatic impact on the economy.
Updated: May 3, 2013 12:14PM
Does it matter how Tuesday's vote turns out? Of course, it matters
that you vote. Otherwise you haven't earned the right to complain about
anything that Congress does -- or doesn't do-- in the next two years.
But as the political analysts examine the possibilities, the real
question is whether it will make any difference in the policies that
will affect our economy in the next two years.
The political possibilities are vast. The election could result in a
Republican takeover of the House, and a possible Republican majority in
There's even the long-shot possibility that the Tea Party candidates
could split the Republican and independent vote, leaving the Democrats
with more power than anyone anticipates.
Then to complicate matters, no one really knows how the Obama
administration will respond to the ultimate outcome. The result could be
gridlock -- or compromise.
But once the numbers have been counted, the impact on the economy
could be dramatic. It's as if the financial system has been sitting on a
see-saw, depending on where you come from. Right now it is pretty
well-balanced between the possibilities of future inflation and looming
The stock market always hates uncertainty, so it has recently been
poised between those two alternatives. The recent higher bias of the
market (and gold) seems to point to an eventual inflationary resolution.
The possibility of even more deficit spending and stimulus makes stocks
attractive in spite of the economy. After all, all of that money has to
And the election's outcome will have an impact on the Federal
Reserve, as well. Now we all learned in Econ 101 that the Fed is not
impacted by politics. We did learn that, didn't we? But the Fed's
governors and its chairman, Ben Bernanke, are not oblivious to the
outcome of this election.
They're poised to print money -- or, as it's now called,
"quantitative easing." If the Fed suspects that gridlock will be the
political outcome of the election, they might be more inclined to buy
bonds and create liquidity. After all, someone has to keep the economy
from going down the deflationary drain.
Facing the deficit issue
The really big questions to be decided by this next Congress revolve
around taxes, spending programs, and trade. They may also revisit health
care, and even financial reform. But the focal point of the debate
should be our federal budget deficit.
In the past two years the deficit has jumped from $161 billion to $1.3 trillion.
General spending has increased from less than 20 percent of our economy, our GDP, to more than 25 percent.
It's not your imagination that the government is quickly taking over
our economy, much like crabgrass. And, like a weed, it blends in at
first because it's all green. Only ultimately do you realize that it's
destroyed the lawn.
The key question facing the new Congress will be how to control the
huge and growing national debt, while we still have some credibility in
the global economy.
Will they enact policies that encourage the economy to grow its way
out of debt? Those policies would reward investment, entrepreneurship
and hard work. Or will the next Congress try to squeeze the failing
economy harder, exacting more taxes?
It's certainly not clear that even a Republican majority will do the
"right thing." After all, the last time the Republicans ran Congress
they racked up huge deficits in the midst of a pretty good economy that
had generated growing tax revenues.
There's plenty of opportunity for change when the new Congress is
seated in early 2011 -- and plenty of opportunity for mischief when the
current, lame-duck Congress meets again briefly in December.
What do you think will happen? Is gridlock the best we can hope for?
We're already on track for more slow growth, and more deficits. Can we
afford to not do anything for the next two years? Will the world
let us get away with that kind of indecisive policy and continued
"quantitative easing" -- while they hold piles of dollars?
The real question: Is there any chance of productive compromise to set our country on a better course?
Your vote is important. But, don't just vote blindly out of party
affiliation, or to protest, or because of smarmy commercials being run
by all of the candidates. In many races, we haven't been given great
choices. So once the electoral fervor ends, all Americans will have to
stay involved and continue to speak up. Our future is at stake -- and
that's certainly The Savage Truth.
Terry Savage is a registered investment adviser.