[News] Opinion: A divided government will be disastrous for the US economy

Editor’s Note: Mark Zandi is chief economist of Moody’s Analytics. The opinions expressed in this commentary are his own. View more opinion on CNN.

The midterm election results are still rolling in, but Republicans have won control of the US House of Representatives, ensuring that we will have a divided government. If history is a guide, this means the next two years of economic policy will be frustrating, punctuated by legislative logjams and fiscal brinkmanship. And if the economy suffers a recession, as is widely anticipated, lawmakers won’t step up to cushion the downturn.

Moody’s

This will be a big change from the past two years when the Biden administration worked with a Democrat-controlled Congress. The Senate was evenly split between Democrats and Republicans, though, so both Vice President Kamala Harris’ tie-breaking vote and the use of arcane budget rules were often necessary to get economic legislation across the finish line. It wasn’t easy, but a lot got done.

The massive American Rescue Plan passed shortly after Biden took office, with only Democratic votes. The government-support package helped the economy navigate the fallout from the pandemic.

The Infrastructure Investment and Jobs Act became law late last year, this time with some Republican support, providing investments in roads, bridges broadband and the electric grid. The CHIPS and Science Act also passed with bipartisan support, shoring up semiconductor manufacturing here at home.

The recently passed Inflation Reduction Act, which had no Republican support, addresses the long-term problem of high prescription drug costs and, most significantly, climate change.

While the past two years have been a legislative whirlwind for economic policy, the next two will likely be anything but. A Republican-controlled House looks set to follow the playbook of the Republican Congress under former President Barack Obama. That is, it appears ready to focus on the government’s large budget deficits – and use the threat of government shutdowns and a breach of the government’s debt limit in efforts to force the Biden administration to cut government spending.

Indeed, House GOP leader Kevin McCarthy recently told CNN that, even though Republicans were willing to raise the debt limit during the Trump administration, the situation is different now given that Democrats have spent trillions of dollars. But McCarthy insisted Republicans wouldn’t use it as a bargaining chip.

It would be really bad if they did. The debt limit sets a legal maximum on the nation’s outstanding debt. Once the limit is reached, the government can only spend what it receives in revenues. If the government has a deficit, as it consistently does, then someone isn’t going to get paid, at least not on time. That someone could be a soldier, a Social Security recipient, a global investor who has previously lent money to the government or a long list of others who expect checks from the US Treasury. Not being able to pay its bills on time means the government would default.

The debt limit was intended to force lawmakers into fiscal responsibility. If they reached the limit and faced a default, they would have to raise taxes or restrain government spending. That’s not how it has worked. Instead, often after much sturm und drang, lawmakers raise the limit in the nick of time to avoid a default but without making difficult policy choices. The drama intensifies at each debt limit battle, with some lawmakers contemplating just how bad a breach of the limit would be for financial markets and the economy.

It would be bad. That the government pays what it owes in a timely way is a bedrock of our economy and global financial system. It is why the US dollar is the global economy’s reserve currency. The economic benefits of this over the generations are incalculable.

Divided government also means that if the economy suffers a recession anytime soon – and recession risks are high – there will likely be no help coming from lawmakers. This may not be a big deal in a modest downturn, but recessions can take on a life of their own. If one turns out to be more severe and long-lasting than expected, lawmakers won’t be there to save the day. The government will not have the economy’s back.

The next two years in Washington, DC will be very different than the past two. We’ve had two years full of drama, but a lot got done. The next two will be full of drama, but likely little to show for it.

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