Good news! Gridlock. Bad news! Gridlock

By Paul R. La Monica, editor at large

NEW YORK ( -- You want gridlock? You got gridlock.

As expected, the Republicans won control of the House of Representatives but did not gain a majority in the Senate. Combine that with a Democrat in the White House and it's hard to imagine that much will get done in the next two years.

What effect will the 2010 midterm election have on the economy?
  • Improve it
  • Make it worse
  • No impact

Is that going to be good news or bad news for the economy?

The answer largely depends on whether you're more interested in how the economy fares next year or for the longer-term.

Several financial experts said it's highly likely that federal spending geared toward getting the job market and housing market (the two biggest laggards in the economy) back on track will be a lot lower than the past two years.

That may mean the economy remains stagnant throughout next year because of a lack of stimulus and a focus on deficit cutting.

"Now is the time to face the music. There may be little growth without government intervention," said John Lekas, principal with Leader Capital Corp., an investment firm in Portland, Ore.

That doesn't sound very delightful. But one could argue that the midterm results are a sign that more Americans are willing to suffer through another tough year or two if it means that government gets smaller and the federal debt load and budget deficit come down.

"Any spending that you take away will impact the economy in the near-term," said Jason Pride, director of investment strategy at Glenmede, a money manager in Philadelphia "But the longer-term benefit of getting the nation's fiscal house in order is greater than taking more steps to get back on the right path right now."

Pride added that he thinks the midterm results are more a reflection of fears about where the economy is headed as opposed to dissatisfaction about the economy's current state.

"People are worried about taxes," Pride said. "Businesses are in a funk. Consumers are in a funk and the job market is not great because of concerns about the future."

Lekas took it a step further. He thinks the best medicine for the economy is for the government to completely butt out and let the private sector sort out the mess.

"Free markets are absolutely necessary and healthy," he said. "It's not good for the economy in the short-term but we need to get through the foreclosures and find a bottom in the housing market before the economy and job market can truly improve."

Not everyone agrees. After all, you can make a strong case that free markets, left to their own devices, were the reason why banks encouraged consumers to engage in the kind of reckless financial behavior that led to the credit crisis in the first place.

Sure, there is no doubt that the United States has to show more fiscal restraint. But some think the notion that the government can't create jobs or should have no role in managing the economy is a mistake.

"Gridlock may mean the potential for smaller deficits but the economy is still not fully capable of standing on its own two feet. Some fiscal support would probably be warranted," said Tom Higgins, global macro strategist with Standish, an asset management firm in Boston.

Higgins conceded that the federal government can't fix the economy. But he said it could help prevent another major downturn. He argued that tax incentives to spur hiring could be a way for the government to actually help the economy.

"When the economy is growing as slowly as it is right now, it's more susceptible to shocks," he said. "Growth is going to be sluggish whether there is fiscal stimulus or no fiscal stimulus. But the government could lessen the downside risks."

That may be true. But the good news is that the economy doesn't appear to be on the verge of a repeat of 2008 just yet.

It's also worth remembering that inaction in Congress doesn't mean the Federal Reserve is going to sit by idly. In fact, the Fed is widely expected to announce its next bold plan to try and help the economy later Wednesday.

With all that in mind, Ed Keon, portfolio manager with Quantitative Management Associates, a money management firm in Newark, N.J., said it's unfair to give blame (or credit for that matter) to politicians.

The economy is simply going to repair itself over time -- and it's unrealistic to think that anyone in Congress or the White House can speed up the healing process.

"The current situation, as discouraging as it is, is really what you'd expect after a financial crisis. The reality is we've recovered from the steep downdraft but it's a slow recovery," he said.

"We tend to exaggerate the impact of political events on the economy. As weak as things are now, the economy will probably look better in a year or two," Keon added.

- The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of, and Abbott Laboratories, La Monica does not own positions in any individual stocks.  To top of page

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