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Likely gridlock in Congress could threaten economy

Associated Press | 11/2/2010, 11:19 p.m.

WASHINGTON — Political gridlock is supposed to be good for business. If bickering lawmakers can’t agree on anything, the thinking goes, they can’t pass laws and regulations that make the economy worse.

So will the midterm elections, which are expected to leave Congress at least partially controlled by Republicans and squaring off against a Democratic White House, be a help to the economy?

Don’t count on it.

A standoff between the Obama administration and emboldened Republicans will probably block any new help for an economy squeezed by slow growth and high unemployment. Congress might also create paralyzing uncertainty for investors and businesses by fighting over taxes, deficits, health care and financial regulation.

“We expect massive gridlock and little cooperation,” writes Brian Gardner, Washington analyst for the financial firm Keefe, Bruyette and Woods.

If times were good, gridlock wouldn’t matter so much. A Republican Congress and Democratic White House butted heads in the mid- and late 1990s, after all, and their sparring did nothing to derail a strong economy.

But now, nearly a year and a half after the official end of the Great Recession, the economy still isn’t growing fast enough to bring down unemployment, which is stuck at 9.6 percent.

“Very few believe the government should sit on its hands,” Yale University political scientist Jacob Hacker says. “But right now we’re facing a period of drift.”

In its Pledge to America, the Republican Party has vowed to oppose additional spending to stimulate the economy.

President Barack Obama’s plan to spend $50 billion on roads, railways and airports, for instance, is probably dead. And the new Congress may resist continuing to extend benefits to the 6.1 million long-term unemployed, at least without cutting the budget elsewhere.

Federal Reserve Chairman Ben Bernanke has said lawmakers need to do more to jump-start the economy. Otherwise, more pressure will fall on the Fed to find a way to help, Gardner writes. But the Fed has already pushed short-term interest rates to zero. And its remaining option — buying Treasury bonds to pump cash into the economy — is risky and unproven.

Texas Rep. Kevin Brady, top Republican on Congress’ Joint Economic Committee, says a Republican Congress would replace “the firestorm of new regulations thrust through Congress” by the Democrats with “a more reasoned regulatory environment.”

Republicans have promised to repeal Obama’s massive health care law and are likely to try to scale back the overhaul of financial regulation that the outgoing Democratic Congress passed last summer.

Health care companies, insurers and banks would welcome relief from regulation. But Republicans probably won’t have enough votes to overcome a presidential veto. And tinkering with existing law risks creating even more uncertainty for employers already reluctant to hire workers or buy new equipment because of doubts about where the economy is going.

“It seems impossible to me there won’t be more uncertainty after the election,” says Yale’s Hacker, co-author of “Winner-Take-All Politics.”

Wall Street research also disputes the notion that gridlock is good for the stock market, showing that stocks do just as well, or better, when one party runs both the White House and Congress.