Gridlock Just Might Be Good for the Economy

Scholar: Stalemate on Capitol Hill means ill-considered ideas don't stand a chance.

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Budget resolutions, jobs legislation, student loans. Those are just three of the many economic issues that Congress has tackled and failed to agree upon this session. It's a common sentiment these days that government is broken. But be careful what you wish for. Inaction may be just what the economy needs.

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"People often don't realize that a political system is sometimes effective when it does not do certain things." says Pietro Nivola, senior fellow in governance studies at the Brookings Institution, a Washington-based think tank. "You can't just measure the things it does, the actions it takes; you also have to measure the actions it does not take."

In a new paper, Nivola cites several examples of recent legislation that would have hurt growth had lawmakers not shot them down. The Republican House twice last year approved measures that would have cut spending too quickly and too steeply, he says: first, a strict budget resolution last spring, and then a bill that would have raised the debt ceiling for only a short period, conditioning future raises on spending cuts. Instead, Congress passed the Budget Control Act, which ended the debacle and maintained fiscal year 2011 spending levels, as opposed to making potentially dangerous cuts to spending, Nivola writes.

Altogether, the idea of government stalemates as a boon for the economy only makes sense to a certain extent, says David Shulman, senior economist for UCLA's Anderson Forecast.

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"In the short run, it certainly has some merit," he says. "If you're a Keynesian, [gridlock] delayed any kind of contractionary policy that the government would likely impose."

But the benefits of stalemate fade as one looks to the future.

"I think in the long run it is very bad for the economy, because otherwise, you're going up against certain laws of arithmetic," says Shulman. Key among those laws, he says, is that it's unsustainable to have an ever-shrinking worker-to-retiree ratio.

"That will put more and more tax pressure on young people, and that's a gigantic burden. So something has to happen with entitlement programs," Shulman adds.

In short, though Congress may have succeeded in not-passing legislation that may have harmed the economy, it will eventually have to agree on bigger-picture issues of closing deficit and debt gaps.

That day may be coming sooner rather than later.

"What we're really focused on right now is what this means for the end of the year," says Gabriel Horwitz, director of economic programs at centrist think tank Third Way. "We're arguing that Congress really needs to come together to figure out a grand bargain."

He's talking about the so-called "Taxmageddon" coming when 2012 ends, when payroll tax cuts and Bush-era income tax cuts are set to expire, at the same time that automatic government spending cuts mandated by the Budget Control Act will kick in. The Congressional Budget Office this week estimated that without action, the economy could contract at an annualized rate of 1.3 percent in the first half of 2013.

Meanwhile, the United States is expected to hit its debt limit once again before the end of 2012, as Treasury Secretary Timothy Geithner has said, piling on yet more urgency for Congress to act on fiscal policy.

Though the U.S. economy managed to weather the bumpy ride of the last debt ceiling fight and went on to post relatively strong growth in 2011's fourth quarter, few would argue that the nation should relive all of that worry and uncertainty—not to mention a credit rating downgrade. Nivola acknowledges that it was almost too close for comfort.

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"That was a close call, and the system really did almost become dysfunctional," he says. "If we had let the debt ceiling deadline expire and if we had defaulted, we would have been up a creek."

In reaching large-scale deals, whether it's on Taxmageddon or debt ceilings, Horwitz says that Congressional moderates are key.