Postelection Fights Will Rattle Markets
No matter who wins the presidential race in November, year-end uncertainty will shake the economy and unsettle investors as Congress tries to wrap up 12 months of work in a few weeks after the election.
On the agenda: Raising the debt ceiling. Extending tax cuts put into place when George W. Bush was president and already extended once during President Obama's time in the White House. Trying to delay automatic spending cuts set to kick in Jan. 1. Extending the eligibility period for unemployment benefits. And deciding whether to keep a two-percentage-point cut in the employee share of the Social Security payroll tax.
Given the slew of issues, the short time frame and partisan rancor, the session is sure to be contentious and, without a doubt, the busiest lame-duck session ever.
Waiting for the new Congress to tackle the to-do list isn't an option. Some deadlines pass this year. Finding votes will require cutting deals on other measures that the next Congress won't be bound to follow.
And there is absolutely zero chance that a preelection deal can be reached. Even in the best of times, little of note gets through Congress in the months before an election. And because of poisonous partisanship, these are not the best of times.
How bad can it get? Think higher interest rates and bigger tax bills, followed by another recession. That's the worst case, but it's well within reach if a bitterly divided Congress finds no common ground in the lame-duck session.
How bad will it get? As the clock winds down on 2012, expect a deal that buys some time. But it won’t happen right away. First, the storm before the calm will send shock waves through the market, with businesses and consumers concerned that a meltdown won't be averted. Reluctant investors may require a higher risk premium to keep buying U.S. debt, and some business owners may put off expansion plans and maintain tighter inventories until the storm passes.
The centerpiece of the eventual deal will be an agreement to raise the federal government's debt ceiling. The cost of not taking this step is too high, so enough members of both parties will unite to approve the increase, allowing the country to keep meeting its obligations until sometime next year. Still, many in the tea party wing of the Republican Party will dig in and oppose raising the debt limit. Plus other lawmakers, whose votes will be needed to avoid the meltdown scenario, will push for their pet positions in the other bills in return for supporting the debt deal.
The House and Senate will punt on most of the other issues. Expect a yearlong extension of all the Bush tax cuts, including the ones for millionaire earners that Obama wants to allow to expire. Also a delay of six months or so for the automatic spending cuts.
Those actions, in their entirety, should calm markets and put off decisions by Standard & Poor's and other rating agencies to downgrade the U.S. credit rating.
But only for a time. The painful decisions can't be put off indefinitely, so it's a good bet that new battles over tax breaks for millionaires and the size of defense cuts, among other issues, will break out again next year.