How Republicans Can Torpedo the Economy

If Congress does nothing, the economy will weaken--and Obama will be increasingly vulnerable.

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If you're already anxious about the economy, here's one more unnerving thought: The nation's prosperity depends far more than usual on politicians in Washington.

Even worse: Some of them have a powerful incentive to weaken the economy further, before trying to bring it back to life.

[See 12 ways to thrive in a stagnant economy.]

It takes considerable cynicism to believe that Republicans are so venal that they'd deliberately harm the economy for political gain. (Or that Democrats would do the same, in similar circumstances.) So let's just say this is a hypothetical exercise. The struggling economy is obviously bad news for President Obama, with his re-election next year hinging on whether growth picks up and jobs start to return. And the state of the economy on Election Day 2012 depends to a large extent on measures that will either pass Congress and become law over the next 12 months, or go nowhere and leave the economy gasping for air. "To avoid another recession," says economist Mark Zandi of Moody's Analytics, "policymakers must get a few things right."

With control of the House and a sizeable minority in the Senate, Republicans control the fate of any legislation related to the economy. With growth still weak and at least 14 million Americans unemployed, many economists believe Washington needs to do a lot more to get help create jobs. There are honest differences about what the best medicine might be, but there's also general agreement that doing nothing would be like walking past an accident victim, without offering to help.

Needless to say, it would be bad form for the GOP to kill every idea that might help boost growth or bring back jobs, just to raise Republicans' odds of winning the White House next November. Among other things, voters would blame them for the nation's woes a lot more than they already do, which could backfire at the election booth. But what about more subtle efforts to keep the economy depressed, which might still leave Obama looking like the villain-in-chief?

[See 10 ways Romney and Perry differ on the economy.]

No genuine patriot would do such a thing, of course, and even the most mercenary political operative surely places country above politics. (Right?) But for argument's sake, here are four ways the GOP could choke the economy in the run-up to the 2012 elections:

Sink the supercommittee. The controversial summer deal on the national debt set up a 12-person congressional panel charged with finding a way out of America's borrowing binge. Their official job is to reduce the national debt by about $1.5 trillion over the next 10 years, with a plan due by the end of November that Congress must either approve or reject in full. Many budget hawks say the target is too low, and it will take at least $4 trillion in debt reduction to solve the nation's fiscal problems. Skeptics, meanwhile, predict that the "supercommittee" will end up at loggerheads over the usual issues: Republican refusals to raise taxes and Democratic refusals to cut entitlement spending. If that happens, the committee may only come up with $500 billion or so in true debt reduction.

Falling short of Congress's own target and putting off all the tough decisions would be an excellent way to retard economic progress. If the supercommittee fails to deliver, here's what is likely to happen next: Rating agencies such as Standard & Poor's and Moody's will probably cut the U.S. credit rating, in a decisive follow-up to S&P's first-ever downgrade over the summer. This time, a credit downgrade would probably ripple throughout the financial system, causing similar cuts in the ratings for federal agencies, big banks, and state and local governments, which all depend on the health of the federal government. Business and consumer confidence, already at recession levels, would fall further, which would depress spending and hiring even more. A full-blown recession would be likely.

[See why America's credit rating could fall again.]

Allow automatic spending cuts to kick in. The summer debt deal was structured so that if the supercommittee fails, automatic spending cuts of $1.2 trillion will go into effect, starting in 2013. While it might seem to make little difference whether spending cuts are carefully targeted by the supercommittee or spread across the whole government, it actually makes a huge difference. A prudent debt-reduction plan would lay out major cuts in the future—when the economy ought to be stronger--while allowing several years for those who will be most affected to prepare. It would also revise the tax code to make it more efficient, and raise some additional revenue through new or expanded taxes. It might also do something to boost the economy today, to help it grow faster and therefore produce more revenue for the government in the future.

If Congress can't pull that off, it will signal that policymakers are basically feckless, leaving the economy to drift along, rudderless. The automatic cuts wouldn't kick in until after the presidential election—but at that point they'd immediately cut into GDP growth, perhaps enough to trigger a recession. If businesses and consumers knew that were coming, they'd return to their bunkers, making the whole problem worse. "The biggest risk to the economy is that they [the supercommittee] do nothing," says Ronald Kruszewski, CEO of St. Louis investing firm Stifel Financial. "To take those cuts right out of discretionary spending in 2013 is a huge risk to the economy."

[See 11 things wrong with Congress.]

End the stimulus measures that expire soon. At the end of this year, two important federal measures will expire: One that reduces the payroll tax rate on most workers from 6.2 percent to 4.2 percent, and another that extends unemployment benefits for the jobless for up to 99 weeks. Both programs are expensive, adding about $160 billion to the national debt in 2011. While they put money directly into people's pockets, it's not clear how much that benefits the economy. Still, abruptly ending them, with little notice, would be a destabilizing shock at a very vulnerable time. Moody's Analytics estimates that ending those stimulus measures would shave 1.7 percentage points off of GDP growth in 2012—possibly enough to tip a wobbly economy back into recession. The best outcome would probably be a gradual and predictable phase-out of such federal subsidies. But Congress may not be capable of such a deft touch.

Hamstring the Federal Reserve. In September, Republican leaders John Boehner, Mitch McConnell, Eric Cantor, and Jon Kyl sent a letter to Fed Chairman Ben Bernanke, urging him to "resist further extraordinary intervention in the U.S. economy." The Fed has indeed been remarkably aggressive in its monetary policy, which could produce unintended consequences—including troublesome levels of inflation—that might hurt the economy some day. But if the GOP leaders were to get their way any time soon, it could definitely mean lights out for Obama.

[See why a growing economy is leaving many behind.]

There's a vigorous debate about whether the Fed's policies will help or harm the economy in the long run. But many business leaders regard the Fed's maneuvers as essential to helping kick-start the economy today—especially since Congress hasn't been doing much to help lately. The Fed's controversial quantitative easing program has helped boost stock prices, while pushing borrowing costs for companies and consumers to record lows. For all of the problems in the economy, big companies are quite healthy, thanks largely to the Fed. That will be an important pillar of strength once the economy recovers in earnest. If congressional action or political pressure were to proscribe further Fed action, business leaders would view it as a big setback.

Obama, for his part, has muffed the chance to make a bigger impact on the economy. He and his economic team misjudged the depth of the downturn, while prioritizing healthcare reform over jobs. Obama's debt-reduction plan came too late to make a difference, and he still hasn't embraced moves that could bring some relief, without requiring congressional approval, such as a regulatory holiday for businesses or a vigorous homeowner bailout plan.

But if Obama undermines the economy, he'll end up one of the most prominent victims. Republicans, by contrast, could be stealthy beneficiaries. Not that they'd want that, of course.

Twitter: @rickjnewman

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