Well, that was quite the year we had last week. Sheesh. Anyway, as of this writing, the future composition of the U.S. executive and legislative branches is still a little unclear, but it’s increasingly looking like 2021 will feature a President Biden, a Speaker Pelosi, a Majority Leader McConnell, and little in the way of a governing mandate for any of them. (Count me among those who do not expect a Blue Wave in Georgia’s two upcoming Senate runoffs once Trump’s name is off the ticket.) This prospect has elicited the usual laments about divided government, federal policy‐making, and the nation’s economic prospects. This pessimism, I think, is mostly wrong. In fact, there is substantial evidence that political gridlock can actually be pretty good for the economy and especially good for fans of limited government and fiscal restraint.
So today we’ll look at the (mostly) good and (potential) bad of a divided federal government, starting with the latter. Grab your leftover nachos and let’s dig in.
It’d be wrong, I think, to say that all political gridlock is all good (hence, the title of this week’s column). For starters, we can all probably think of situations in the past where unified government produced some pretty good federal policy (immigration in 1965 and taxes in 2017 immediately come to my mind).
Furthermore, I see at least two ways in which a divided federal government can create legitimate policy or economic concerns. First, as both the Obama and Trump eras proved, U.S. presidents have increasingly chosen a “pen and phone” approach to policy-making—far beyond merely modifying previous administration’s regulations or executive orders—when the legislative branch won’t do what they want, and the courts have so far provided only a limited (and often delayed) check on such unilateralism.
There’s every reason to think a President Biden, under pressure to show “results” without a willing Congress to help him, would follow a similar (albeit maybe more limited) approach in the areas—like trade and national security—where the president’s powers are least checked. I didn’t like this stuff under Obama or Trump and won’t be cheering it under Biden, either.
Second, some research shows that political discord increases economic uncertainty, which in turn can hurt the economy. For example, a recent study of business innovation activity in 43 different countries found that “political uncertainty” (as opposed to one certain party in charge) hurts innovation because domestic businesses hold off on investments and inventions—particularly risky ones—when their future financial return is unclear. This effect is particularly strong in election years, when the government’s future makeup is unclear. Similarly, Philadelphia Fed research finds that partisan conflict can “slow economic activity by delaying business investment and consumer spending,” and that this conflict has increased significantly in recent years: