The Republicans are feeling exuberant. But before they become too carried away about their victories in the US midterm elections, they should look at a survey recently released by Harvard Business School that will bring them back to earth.
HBS alumni were asked to explain why America’s economic growth has been so dismal in recent years. The executives cited the usual structural suspects: a faltering education system, poor regulation, a distorted tax code and woeful infrastructure. But the most hated culprit was the political machine. Half of those surveyed declared the US political process worse than that of any other leading nation – and 80 per cent fear it is deteriorating. That is a vote of no-confidence in Republicans and Democrats alike from top executives.
Can the midterms change the mood? At first, it looks unlikely. The campaigns cost about $4bn but less than 40 per cent of voters participated, few tangible policy plans were tossed around and an embattled – and seemingly unbowed – President Barack Obama is now opposed by a Republican Congress.
Yet there is a glimmer of hope. One reason is tactical and practical: with the Republicans controlling Congress, they finally have an incentive to enact some legislative change to show voters in 2016 that they can actually get things done. And the sheer scale of Democratic defeat, coupled with Mr Obama’s desire for legacy, might make the White House willing to push through legislation, too.
But the other reason for a touch of optimism is that there are a few policy issues where the White House and Republicans may find common ground. Trade is one obvious arena: Mitch McConnell, the new Senate majority leader, has indicated his party is likely to back the trade deals Mr Obama’s administration is crafting with Asia and Europe. Indeed, the Republican side is more supportive than Democrats.
Infrastructure is another area to watch: irrespective of congressional battles over the national debt, there is bipartisan support for action here. And corporate tax reform might – possibly – produce pleasant surprises too. The parties are bitterly divided on issues such as social security reform and personal taxation, particularly of the rich. But on both sides there are groups that champion the idea of cutting corporate taxes rates in exchange for closing loopholes.
And while it will be extremely hard to turn this support into a tangible plan – given that vested interests will be trying to preserve every tax loophole, and exploit partisan splits – it is worth remembering that the last time Congress enacted corporate tax reform was during the Reagan era of the mid-1980s, when Washington was also divided. The precedent is distant – but it is there.
It is also painfully easy to imagine another scenario: Republicans spend two years pushing partisan issues (such as the repeal of the Affordable Health Care act); and Mr Obama infuriates Republicans by using executive powers to push favoured causes, such as immigration reform. If that happens, partisan battles, and business despair, will remain intense.
But perhaps the best reason for a twinge of optimism is to be found in that grumpy mood. Cynicism about Washington is so extreme that there is also room for “upside surprises”, as a trader might say. If the new Congress delivers even a few tangible pro-business reforms, this will be a pleasant surprise.
This matters. Many company executives have been sitting frozen in recent years, reluctant to invest, because of uncertainty about policy and economic turmoil.
An estimated $2tn of spare cash is sitting on US corporate balance sheets, for example. The banks have another $2.8tn of funds sitting idly at the Federal Reserves, too.
It will take more than politics to unlock the cash – but if just a tiny proportion can be deployed, the economic impact could be significant. And if a few tangible policy changes emerge from Congress, it is possible animal spirits will return. Even amid the business elite, from Harvard and elsewhere, who have been trained to be so cynical about politicians’ ability to do anything at all.
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