A Boom in 2013?

While searching through market commentary, I came across these remarks, via Bloomberg:

“We are focusing on major U.S. equities now, looking past the European stock markets because there’s too much volatility there,” Tim Hartzell, who oversees about $350 million as chief investment officer for Houston-based Sequent Asset Management, said in a telephone interview. “The Fed is still accommodative and we’re entering into an election year, when politicians are usually pulling various levers to make the economy grow.”

Put aside the issue of the Fed’s level of accommodation for the moment.  Instead, will politicians be in a position to stoke growth during the upcoming election year?  As it stands, policy will turn increasingly contractionary in the months ahead.  Moreover, conventional wisdom is that a weak economy favors Republicans, who can run on the “are you better off than four years ago?” platform.  And looking at the latest news of declining median incomes in the post-recession period, combined with an economy that has dramatically underperformed relative to the Administration’s expectations when the stimulus was proposed in 2009, that argument has some legs.

Sure, we can argue that Republican intransigence is the core policy problem.  But at the same time, the Administration had no back-up plan for an L-shaped recovery, joined the fiscal austerity parade, and continued to place faith in reaching a “Grand Bargain” on the debt rather than focusing on the issue at hand – the unemployment crisis. When all is said and done, I suspect that from the view of the average voter, this Administration owns the economy lock, stock, and barrel.

Politically, it makes sense for the Republicans to thwart Democratic attempts to reduce unemployment, and instead keep the focus on the “failure” of such policies to date.  And they would like the Federal Reserve kept in line as well.  Stan Collender on the recent attempt by Republican leadership to prevent additional easing:

In other words, now that the GOP has made it all but impossible for fiscal policy to be used to improve they economy, they want to make sure that the only other tool the government has at its disposal — monetary policy — isn’t used either.

Why take on the Fed?  The Republicans have some direct control over fiscal policy because they can either refuse to consider a proposal in the House where they are in the majority or can filibuster legislation in the Senate where they are in the minority.  Because the Fed is an independent agency, the GOP can only do what they did today in the letter by threatening to bring down the wrath of god if it dares take any action to get the economy moving.

Maybe we will see an extension of payroll tax break and business-tax credits, but that only limits the contractionary turn in fiscal policy. Better than nothing, but far short of what is necessary.

So assume fiscal policy is locked up in Washington through 2012, and the Republicans win the White House.  What will policy look like in 2013?  I would like to hear the views of the gang at Capital Gains and Games.  I see two possible outcomes.  One is to embrace fiscal austerity with both arms.  The other is to abandon fiscal austerity, as it was only a useful weapon to win back the White House.  Instead, do exactly the opposite and embrace the mantra that “Reagan proved deficits don’t matter.”  That seems like a strategy designed to win in 2016.  But it pushes meaningful policy action out until 2013 rather than 2012 – bad news for the unemployed and financial markets.

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