NEW YORK – America, once again, will have a divided government, with the Democrats holding the White House, and the Republicans controlling both houses of Congress. But that does not necessarily mean that the final two years of Barack Obama’s presidency need to be defined by stalemate and mutual recrimination.
The electorate’s desire for change and fear of continuing slow growth, which pushed the Republicans to their victory in this week’s mid-term congressional election, will invariably prompt discussion about new policy options designed to raise growth, employment, and incomes. Of course, America’s experience with divided government can leave one pessimistic about the two parties’ ability to compromise; but, as Mexico recently demonstrated when its three big parties agreed on a market-oriented “Pact for Mexico,” even bitterly opposed political parties can overcome their suspicions to embrace needed reforms.
The list of potential policy actions that could benefit the United States – trade liberalization, comprehensive regulatory reform, and immigration and education reform, among others – is long. But only two policies are particularly promising for such a “Pact for America”: federal infrastructure spending and corporate-tax reform. Enactment of these reforms would generate a win for each side – and for both.
But such a bipartisan consensus requires removing both the left and the right’s ideological blinders, at least temporarily. On the left, a preoccupation with Keynesian stimulus reflects a misunderstanding of both the availability of measures (shovel-ready projects) and their desirability (whether they will meaningfully change the expectations of households and businesses). Indeed, to counteract the mindset forged in the recent financial crisis, spending measures will need to be longer-lasting if they are to raise expectations of future growth and thus stimulate current investment and hiring.