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The Elections, the Fed, and Jobs Data: Next Week the Fog Lifts a Bit

12:00 AM, Oct 30, 2010 • By IRWIN M. STELZER
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If you abhor uncertainty, this coming week will be a good week for you. On Tuesday voters will let you know the direction in which we want our politicians to take our country. On Wednesday Federal Reserve Board chairman Ben Bernanke and his colleagues -- or some of them, since unanimity at the Fed is no longer assured -- will let you know their plans for the U.S. economy. And on Friday the government will release the monthly jobs report, which will give us a clue as to whether the unemployment rate might, just might, be headed down, or is stuck at 9.6 percent, and might be headed up.

The Elections, the Fed, and Jobs Data: Next Week the Fog Lifts a Bit

Start with Tuesday’s congressional elections. If the pollsters are right, or even close to right, the Republicans will take control of the House of Representatives. They might even take over the Senate, but that seems less likely. More important for its implication for the 2012 presidential race, the Republicans are slated to make big gains in state-wide races, winning several governorships and statehouses, giving them control of the process of re-drawing congressional districts to reflect new Census data.

If all of this comes to pass, the implications for the economy are significant. Republicans will be in control of the key committee chairmanships. Hordes of bureaucrats are now drafting thousands of regulations to implement the president’s health care and financial reform legislation. Democratic chairmen would be pressing them to move in the direction of tighter and more expensive regulation; Republican chairmen will skewer them if they do that. Republicans will move to repeal the president’s health care “reform,” considering a majority of voters in key congressional districts want them to do just that – but, at least for now, Obama would surely veto such a bill. But they can, and will, “de-fund” major portions and, by refusing funds for implementation and enforcement, negate some of the more costly parts of the legislation.

Most important, the Tea Party will have made its point -- Americans don’t want more and more intrusive government, bigger and bigger deficits, and higher and higher taxes. The atmosphere will be acrimonious. For one thing, many of the Democrats headed for involuntary retirement from Congress are moderates, who represent seats they had won by very small margins in 2008 when Obama brought Democrats trooping to the polls in unusually large numbers. Those who will retain their seats represent heavily Democratic constituencies, and are left-of-center, long-serving politicians of the Pelosi variety. They will be unlikely to surrender their principles -- activist government as a force for good -- to Tea-Party-sponsored congressmen who were elected to control Obama’s hyperactive expansion of government’s role in the lives of Americans. Result: gridlock -- usually a good thing, but with mounting deficits, a weak recovery, and the extension of the Bush tax cuts to be decided -- no action lets them lapse -- perhaps not this time around.

Equally important, Obama is not a man given to compromise: it took him 18 months to invite the Republican leader of the Senate to the White House for a one-on-one chat, and he has been touring the country accusing his opponents of receiving funding from unnamed foreign sources. As Shelby Steele put it in a brilliant article in Thursday’s Wall Street Journal, Obama sees his opponents as “really only the latest incarnation of that old [American] characterological evil that you always knew was there.” On the other side, the Republicans have made it clear that their number one goal is to set the stage for the defeat of the president when he stands for re-election in 2012. None of this conducive to Ronald Reagan - Tip O’Neill style drinks and bonhomie.

There is some talk that when campaign-induced passions have cooled, the new Congress will come up with a deal: raise some taxes to please the Democrats, cut some spending to please the Republicans, with the result of a reduction in the budget deficit. Right now that is just talk. 

On to Wednesday. The Fed will act to shore up what it sees as a faltering recovery, and prevent a dangerous round of deflation. Bernanke has already indicated that he will launch another round of dollar-printing, or quantitative easing or, in the vernacular, QE2. This will drive down long-term interest and mortgage rates. Indeed, the mere expectation of QE2 already has caused the yield on 10-year Treasuries to fall from 4 percent in April to 2.6 percent, and mortgage rates to hit an almost 50-year low. However, many economists and, more important, presidents of three Federal Reserve regional banks, say there is so much excess manufacturing and labor capacity in the economy that trying to spur investment by printing money is a feckless enterprise that will only produce unacceptable inflation in the long run. But running the presses will put added pressure on the dollar just before the president heads for the November 11-12 meeting of the G20 in Seoul to argue against competitive currency devaluations.  

Bernanke has not revealed whether QE2 will be a massive $2 trillion vessel (some want the super-luxury $4 trillion craft), or a fleet of smaller, $250 billion ships, launched quarterly as conditions seem to warrant. The latter course, which rumor has it is the most likely, is the more cautious, but it does leave the markets in a continuing state of uncertainty, as it waits for Bernanke to consult his muse every quarter.

Finally, on Friday we will know whether the jobs market is improving. Signs are mixed. The economy grew at a 2 percent annual rate in the third quarter, not fast enough to create jobs, but better than a decline into a double-dip recession. Consumers seem to be less nervous, profits are reasonably good, corporations have $2 trillion in cash to spend. But the housing market remains a mess, with sales well below last year’s already-depressed levels, and prices sliding at a rate that some analysts say will take them to below last-year’s levels in a few months. Worse still, the White House and the Congress have not figured out what to do with Freddie Mac and Fannie Mae, the bust government agencies that are providing almost all the new mortgages written. Throw in the confusion created by the banks’ sloppy paper-work that has stalled repossessions and the subsequent sale of these homes, and it might be a long time before the residential construction industry begins creating jobs.

None of this means that you will be able to pick up this column next week and get a definitive read on America’s near- and medium-term economic future. This economist possesses neither the skills nor the courage to offer one. But the crystal ball will be a bit less hazy. That, I trust, gives you something to look forward to as you watch the elections, the Fed, and the jobs data.

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