The US voting public has spoken. Just as with many mid-term elections, the balance of power of the House of Representatives has flipped. And it’s come close to flipping (and many believe it will in 2012) in the Senate. In looking at the shift, it would be easy to focus on the partisan politics of the change, whether you like it or not, but from an economic, trade and global sourcing perspective, I think there are a number of lessons and takeaways from the election. In this rant, I’ll share what they are, and provide a bit of opinion as well.
To start, it would be hard not to bring up the elephant (or would that be Tiger) in the room: China. China is not only in our room — it owns the room (and all the cheap, lead painted furnishings that we sit on and break because of shoddy construction). It also owns the drywall that’s given the room a foul stench, but don’t get me all revved up too early in this rant.
To me, it’s not entirely clear how the new Congress will treat China. I was curious about the unlikely hard line alliance between liberal Democrats (representing their union constituents) and Republicans from manufacturing districts before the election. This group of strange political trade bedfellows jointly came up with the Currency Reform for Fair Trade Act which threatened China (and any other country that displayed a clear pattern of currency manipulation) with a set of import tariffs for its goods, based on the degree of currency manipulation. Some of the supporters of the bill noted that twenty years ago when the initial debate over China trade started, the trade deficit was $5 billion per year. Now it’s $5 billion a week, they claim.
Changes like that suggest to me that regardless of political persuasion, the China debate will very much be front and center for the new Congress. On the one side, we’ll have the Cato “free trade at all cost” type of Republicans who won’t want to rock the trade boat even if rival ships are trying to flood it. On the other, we’ll have a bipartisan group of those who take a more activist view. Still, it’s my call that the currency bill is dead in its current form given the shift of power, for now. What comes next is very much up in the air, but I suspect that the trade deficit and China, specifically, will form a large portion of economic debate starting in January.
Along similar lines, I think we’ll continue to see an unlikely alliance of manufacturing and labor when it comes to Federal support and funding for R&D tax credits, pro-export policy and the like. And this will cross party lines. With the exception of the reopened healthcare debate, the usual union/management fight will be put on hold until the economy comes back to life and exports finally gain sustained steam. In this regard, don’t be surprised if we see new policies that encourage both small and large business spending (e.g., tax credits, expensing, etc.)
Perhaps most interesting in terms of economics, I think we’ll see a more activist congress when it comes to influencing (or attempting to influence) Fed policy around quantitative easing, especially after the 75-yard field goal try they blindingly attempted to make yesterday (don’t hold your breath). I personally believe that the Rand Paul type of Republicans will want to hit the ground running on cutting the deficit while attempting to stop the printing presses (even if it means short-term pain). That, or they’ll make a killing investing in commodities while inflation spirals, given their congressional pensions will be all but worthless…