With the sweeping victory in the November 4th election, the Republicans now control both sides of Congress. Will this help or hinder the economic recovery? That is the subject of this article. We’ll begin by discussing some of the elements that support or obstruct economic growth. Then, we’ll examine why this recovery has been so weak. Finally, we’ll consider some of the changes we may see in Washington over the next two years.  The Underpinnings of Economic Growth  Economic growth is predicated on two primary stimulants: fiscal policy and monetary policy. Fiscal policy is under the domain of the federal government and consists of government regulations, tax policy, and government spending. Monetary policy falls under the purview of the Federal Reserve and consists of adjusting short-term interest rates, the money supply, and bank reserve requirements. Obviously, supply and demand play a significant role as well.  Typically, when the economy begins to slow, fiscal and monetary policy will theoretically ride to the rescue. This time, however, it seems the fiscal riders have parked their white steeds and stopped for a cold one along the way. Since the recession ended in mid 2009, the U.S. economy, as measured by GDP, has been weak. Historically, GDP reaches 3% to 5% or more during a post-recession recovery. However, this particular recovery has been the weakest since WWII, with GDP struggling to surpass 2.0% until very recently. Why? That’s an excellent question!  Earlier this year, I spoke with the president of one of the Federal Reserve districts and posed this very question. His answer was quite revealing. He stated that fiscal policy has been a drag on economic growth. He further explained that if fiscal policy were removed from GDP, the economy would have been expanding at a rate greater than 3.0% since the end of the recession. Let me say that one more time. One of the primary hindrances to this recovery has been fiscal policy. Let’s examine this now.  Fiscal drag refers to the negative effect fiscal policy has on economic growth. Perhaps the most destructive fiscal issue in recent years is the Affordable Health Care Act, a.k.a. Obamacare. When government places a financial strain on corporate America, companies seek ways to minimize the damage. Obamacare mandates that all companies with more than 50 full-time employees must provide health insurance for these employees or pay a monthly non-compliance penalty. As a result, many employers have chosen to hire more part time workers or reduce the hours of existing workers to avoid this mandate. In short, Obamacare has led to more part-time, low-paying jobs which has weakened the labor market. Wage growth has also been weak which has hurt consumer demand. There have been fewer people seeking employment which is reflected in the lowest Labor Force Participation Rate in over 30 years. In other words, despite the fact that unemployment has dropped to 5.8%, things aren’t as good as they may appear.  High corporate tax rates are another example of fiscal drag. As a result, several large corporations have decided to move to a more tax-friendly country. If you’re curious, just Google “tax inversions.” The bottom line is that regulatory policy, tax policy, and government spending (i.e. fiscal policy) have hampered this recovery. Now that the Republicans are in control of the House and the Senate, will things be any different? Let’s look at this now.  During the past few years, Senate President Harry Reid has blocked more than 350 pieces of legislation which originated in the House. In short, Senator Reid would not allow Senate members to discuss or vote on these bills. Why? That’s anyone’s guess. What we know for sure is that he has prevented these bills from reaching the Senate floor. Ironically, the Democrats were blaming Republicans for the inaction of Congress at the same time. Is this honest? Is it ethical? Not really. It’s just politics. What can we expect from this new majority? To find out, I reached out to Louisiana Senator David Vitter (R). Senator Vitter serves on several committees, including the Committee on Banking, Housing and Urban Affairs and the Committee on Small Business and Entrepreneurship. This was his response:
The November 4th election created a new majority in Congress. With the Republicans now in control, what will change? Senator David Vitter (R) of Louisiana says we will see more pro-growth legislation for the president to sign. After six years, will the economic recovery finally begin to accelerate?