Lets set aside everybody's favorite trigger issues on the social side. What happens to the economy?
If Rs take the Senate as well as the White House, it will be a very different story. But an R Senate win seems less likely at this point than a Romney win of the White House, given that several states that look like they may go for Romney (FL, VA, WI, OH, MO) are, at the moment, leaning D. Rs may lose MA and seem likely to lose ME. Rs appear likely to pick up ND and Nebraska. Rs remain in striking distance in a number of states: VA, CN, WI, and possibly FL, while Ds remain in striking distance in IN. MT remains a tossup, which would be an R pickup if the Rs win it. So while I don't write off the possibility of a total R sweep, it seems less likely than a Romney win and Ds maintain a slim majority in the Senate.
Mind you, I am not conceding the race to Romney either. Nate Silver, whose model has proved pretty good in the past and who factors in a number of things other than polls, still gives Obama a mild advantage. But it is no longer difficult to see a Romney path to victory in the electoral college or even in the popular vote.
My purpose here is not to argue about the likelihood, but to try to start to think about likely outcomes and their economic impact. This is like fantasy football for policy wonks. Let me run through a couple of scenarios first just for my own amusement. Also, it will save some explanation after the election.
Lame Duck, Farm Bill and the Fiscal Cliff
The first hurdle is the "fiscal cliff" that triggers at the end of the year. On January 1, 2013, two things happen. First, massive cuts in military spending and social programs kick in through a process called "sequestration." For those who cannot remember that far back, this is the "doomsday device" scenario that Ds and Rs rigged to head off the stalemate over the debt ceiling. If the parties could not agree on how to reduce the deficit through the "Super Committee," 5% spending cuts in military programs (beloved of Rs) and social programs (beloved of Ds) kick in. Because this kicks in immediately, it will result in immediate massive layoffs among federal contractors and federal employees (although they may be furloughed rather than RIFFed if it looks like a fix will happen). It will also dramatically reduce payouts to states that have budgeted for those funds. Individuals who are recipients of programs that are being cut will lose those revenues, and therefore reduce spending.
The other thing that happens is tax code changes. All the Bush-era tax cuts, as well as the Payroll tax cut we've had for the last 2 years, expire. That means an immediate, sharp increase in withholding from paychecks, which impacts consumer spending.
Finally, Congress failed to renew the Farm Bill. If Congress remains deadlocked on the Farm Bill, various federal programs funded via the Farm Bill (such as food stamps, school lunches, and subsidies for crop insurance) will need another short-term extension, or they will expire. Like the Transportation Bill, the Farm Bill is one of the major ways that the Federal government injects money into the economy.
This combination of circumstances (as well as some other lingering business) is called the "Fiscal Cliff" (usually this just means sequestration and the tax stuff -- everyone forgets about the Farm Bill). Predictions for what happens if we blow past the fiscal cliff range from apocalyptic to short-term "shallow" recession and after that rise in growth due to deficit reduction. But either way, no one is particularly happy about going through with things as they are now scheduled to go. But to alter course requires compromise between Rs and Ds on a package to replace the current legislation with something else.
This compromise will get worked out in the "Lame Duck" session. If Obama wins the election, Ds hold the Senate, and Rs hold the House (i.e., no change), then we would expect a deal similar to past deals -- some spending cuts, some increases in revenue through fees, extension of most tax cuts for another year or two.
But if Romney wins the election, what then? Ds will have much more incentive to press what little advantage they have left. Rs, however, know they will still need to deal with Senate Ds after the election anyway. But if Rs win both the Senate and White House, how does that work out? Rs arguably have a stronger incentive in that event to wait until they maximize their negotiating strength -- even if it causes some damage to the economy before January 21.
Assume We Survive the Fiscal Cliff, Then What?
Lets assume we survive the fiscal cliff due to a lame duck compromise (which I think is the most likely outcome). What happens going forward. Here is where divergence gets very interesting indeed.
Assume Ds keep the Senate but lose the White House. This means Ds can block all confirmations (which traps the Federal government in paralysis mode) and can pretty much block any legislation they don't like -- in theory. In practice, however, Dems are rather crappy at this kind of hardball. OTOH, it is highly likely that Rs will regard a win of the White House as a mandate, encouraging the Tea Party House Republicans (and the engineers of the White House nominations) to double-down on ideological purity. So while Ds may not have a lot of fortitude for a fight, the opening R position is likely to be too much for Ds to stomach.
So what happens with a government in gridlock? It produces a lot of drag and uncertainty. While it is hard to imagine 2 years of utter paralysis weighing on the economy, such an outcome is entirely possible.
But what if Rs take the Senate? Then things get interesting indeed. While Ds can still hold up most appointments, Rs can pass financial legislation via reconciliation -- which eliminates the filibuster. Such a move requires straight up and down votes, however, which would give control of the draft of such legislation to the House, which is much more ideological. In such a scenario, it is entirely possible that the House could pass an omnibus bill prepared by leadership during the break and force it through the Senate. Republican leaders would view this as the chance to enact a conservative version of the Stimulus Bill from 2009 -- but with no Larry Summers and Rahm Emmanuel urging a tack to the center. To the contrary, leaders such as Jim DeMint will recognize that this is their single, best chance to enact full repeal of things like Obamacare and Dodd-Frank, arguing that they will be in a stronger position to "mend" these measures when starting on a clean slate.
Now THAT would be an economic catastrophe. Republicans talk about repealing Obamacare without much consideration of what would happen if it all just suddenly disappeared (David Frum was drummed out of the party for saying that by the time Rs got control of the White House and Congress in 2013, it would be too late to repeal). But the impact on seniors, nursing homes, hospitals (particularly rural hospitals) would be huge. And that's just the initial impact. I can't even begin to imagine the ripple effect.
Fun times . . . .