Power Play

The Capitol building in Washington, DC

How will the new Congress influence economic life in America?

When the 112th United States Congress convened for the first time this month, its membership reflected a dramatic shift in public sentiment and political power. Fueled by continuing economic uncertainty and the rise of the Tea Party movement, the Republican Party picked up 63 House of Representatives seats, regaining control of the House for the first time since 2006.

How will the financial markets, taxes, jobs, local economies and other areas be influenced by these new leaders ? Four Sellinger School of Business and Management faculty members weigh in:

Lisa Fairchild, Ph.D., chair of the finance department, on the financial markets and regulation:

"There seem to be signs of improvement in the US economy.  When we see economic improvement, regardless of which party is in charge in Congress, there tend to be fewer and fewer calls for reform of financial markets. So, some of the pressure Congress has faced to enact financial market regulations may soften. That being said, I think we do have some potential problems in the mortgage market area, especially with regard to determining how risky the debt instruments are that are sold into pools of mortgage-backed securities. Several states and cities also face financial problems and we may see an increase in defaults of municipal bonds. Problems in these markets could also have an impact on our financial markets. The federal deficit and the debt ceiling are big issues that will impact the economy.  There are pros and cons to the arguments being made in Congress about how to reduce the deficit and whether the debt ceiling should be increased. However, the Republican Party's ability to heavily influence the voting outcome on these items and other key items will likely depend on obtaining support from Tea Party members—right now, there seems to be some disagreement on the issue between the two camps. " 

Stephen J.K. Walters, Ph.D., professor of economics, on taxes and debt:

"In Loyola's state of Maryland, the political landscape didn't change much, but Maryland's minority-party candidates promised not to raise taxes and were trounced at the polls, so the dominant party may feel like it has a mandate to raise taxes on gasoline, for example, to address deficit issues.  Marylanders seem to have a preference for tax increases over spending cuts.  Nationally, the opposite seems to be true, but the main action on taxes took place in the lame duck session, with extension of the Bush tax rates for two more years.  The combination of the original Obama big fiscal stimulus and the recent extension of tax cuts is accelerating the growth of U.S. government debt.  And long term, things will get worse as the baby boomers retire and start claiming Social Security and Medicare benefits.  With a rapidly accumulating government debt we should be concerned that at some point global investors are going to question the U.S. ability to pay back. If such fears were to arise the interest rates on U.S. bonds would rise significantly and this higher cost of borrowing would make the debt even tougher to finance.  This could snowball into a crisis, similar to what Greece and Ireland have recently experienced."

John Burger, Ph.D., professor of economics, on jobs:

"Job-wise, our focus should be on monetary policy at the Federal Reserve rather than Congress or the White House. After the recent deal on extending the tax cuts we should expect no further fiscal stimulus. Future fiscal policy will be devoted to reducing government debt, so there aren't any fiscal arrows left in the quiver. The question is whether "Quantitative Easing II"-- the $600 billion bond-buying program meant to encourage consumers to spend more and businesses to create jobs -- will help speed recovery or inflate the next asset bubble. Regarding job growth in 2011, I am optimistic. We are starting to see some promising signs. In December, companies reported adding 297,000 private sector jobs. Goldman Sachs has also significantly increased its forecast for U.S. GDP growth in 2011."  

Mark Hubbard, J.D., affiliate professor of management and assistant chief of the Baltimore County Fire Department, on local governments:

"Local governments are in a period of strategic retrenchment, including downsizing through attrition, furloughs, cost control, and more outsourcing or fee-for-services rather than new taxes. Locally, it’s always about funding. We’re seeing an erosion of funding and when the economy tanks local governments experience the trickledown effect. A big component of that effect is the availability of federal grants. One area of grant growth since 2001 is in homeland security for public safety that may decrease as Congress deals with reducing the deficit and the prevailing belief that local threat mitigation capabilities have actually decreased with grant investments, so it is time to wean local governments off the grant funds. This will shift costs back to operating budgets,  so at the local level, leaders must be careful in applying grants so they don’t create excessive sustainment costs. This may create a shift toward regionalism of services to take advantage of scale economies such as shared public safety responses and regional purchasing efforts."