Newly split Congress can unite on one big issue: infrastructure

With Democrats winning a majority in the House of Representatives and with Republicans holding on to their majority in the Senate in Tuesday’s midterm election, two years of gridlock could well be in store for the U.S. Congress when it comes to economic policymaking.

The one hope, and it’s a big one, is that the two parties could come together and move forward on an issue that both have favored in the past, and that President Trump has also advocated — an infrastructure plan that would upgrade and modernize a key element of a productive and prosperous economy.

{mosads}There was a time when business was said to favor gridlock on Capitol Hill. It was viewed as sidelining the government and its tendency to interfere in business activity, allowing U.S. companies to do what they do best: pursue profitable opportunities here and abroad, invest, create jobs and generate higher profits, wages and tax revenue.

Markets were said to love this configuration as it has the potential of delivering rising stock markets without the risk of destabilizing moves in yields on government bonds. With that, the enhancement of current wages and profits would be accompanied by healthier pension and other retirement plans.

More recently, however, there has been a growing appreciation of the need for government to be more active in smartly removing anti-growth distortions and, more generally, better positioning segments of the economy to exploit important technological innovations and navigate notable changes in the global economic order.

Such recent efforts, which have included deregulation and tax cuts, have helped the U.S. outpace other advanced economies and retain its leadership role as one of the world’s most powerful job-creating machines. With that, the U.S. stock market has significantly outperformed the vast majority of others around the world. 

Remember, most economic policy changes involve winners and losers, even when the net income is unquestionably positive. In many of these cases, the upside-downside configuration can pit the return to capital versus that to labor, i.e., companies versus workers.

As such, it should come as no surprise that the loss of a single-party majority in both houses of Congress tends to paralyze fiscal policy, the most important and powerful of all the government’s policy tools.

Unlike the aftermath of the 2010 midterm election, we should not expect the Federal Reserve to step into the policy void. Having carried an enormous policymaking burden since the global financial crisis, the central bank is in the process of stepping back.

Already, it has signaled — and reiterated several times — its intention to continue to reduce monetary stimulus after what has been an exceptionally protracted period of an unusually expansionary policy stance that relied on unconventional and experimental measures.

Meanwhile, with elements of foreign trade policy following under the auspices of the executive branch, the midterm election is unlikely to have much of an impact on what comes next.

Fortunately, there is one potential policy exception, and it is an important one. 

Infrastructure is an area that in the past has attracted broad-based support. By potentially enhancing supply and demand at the same time, it is one of the few policy areas that simultaneously benefits both companies and workers. And it is a promising area if the U.S. is to maintain its strong economic and financial performance.

Like other advanced economies, our country faces the challenge of supplementing its short-term cyclical growth impulse with longer-term secular contributors.

Absent the required structural reforms, the economy will eventually experience what both Europe and Japan are feeling now: a slowdown in economic momentum, the threat of falling back into stagnation and a higher risk of recession and destabilizing financial volatility. 

An infrastructure modernizing plan would be one of the ways to improve the probability of a more powerful cyclical-secular handoff. It would upgrade aging facilities that increase business cost and lower business efficiency. It would place the economy in a better position to benefit from technological innovations and compete internationally. And it would help crowd-in other sources of demand, investment and production. 

The fiscal implications of such a plan need not be an area of concern. By using a range of currently under-exploited public-private partnerships, the government can reduce the direct budgetary cost; and by focusing on areas that translate into sustainably higher growth, the incremental debt-servicing burden could be more than covered by the additional income that the economy generates.

In today’s rapidly changing global economy, the split Congress that emerged from Tuesday’s midterm election and the sidelining of many legislative efforts that is likely to come with that will not translate into a flourishing business environment.

But it need not mean a return to the “new normal” of low and insufficiently inclusive growth. By pursuing a policy area that, rationally and intelligently, has attracted bipartisan support in the past, Congress can enhance America’s growth prospects, maintain its record of impressive job creation, unleash more of its productive engines and help to meet its citizens legitimate aspirations for their wellbeing and that of future generations. 

Mohamed A. El-Erian, Ph.D., is the chief economic advisor to Allianz, the corporate parent of PIMCO where he served as chief executive offices and co-chief investment officer (2007-2014). He is a Bloomberg Opinion columnist, a Financial Times’ contributing editor, serves as trustee on several non-profit boards and has joined the board of Under Armour.