WASHINGTON — Voters made clear Tuesday that they’re worried about the economy, despite steady job gains, a robust stock market and faster economic growth this year.
So what can – and should – the now-dominant Republicans in Congress and President Obama do together to benefit more Americans?
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Economists caution that the options are limited. But most say several actions could further help invigorate the economy – in areas such as immigration, trade, corporate taxes and energy.
At least one analyst thinks Congress and the White House could help by doing nothing at all. Why? It would avoid escalating tensions over ideological differences and possibly causing a calamitous shutdown of the government or a default on the federal debt.
Exit polls showed that voters put the state of the economy at the top of their list of worries. And they want bipartisan action that serves Americans who aren’t wealthy.
“They all need to get it together, compromise and start working for the people and not themselves,” Penny Korakis, 50, said in South Bend, Indiana. “Nobody’s going to win when there’s not a middle class America.”
Wages are at a standstill for many Americans. Where incomes have grown, the gains have gone mainly to the top 10 percent of earners, according to the Federal Reserve. Banks that were bailed out during the financial crisis now have healthy balance sheets. Stock investors have enjoyed outsized gains. Corporations are posting strong profits, and CEOs are earning record paydays.
The disconnect “reflects the sense that a lot of major American institutions, including the government, aren’t living in the same universe as we are,” said Michael Strain, an economist at the conservative American Enterprise Institute.
Here are five suggestions from analysts for what the Republican Congress and the Democratic White House could do over the next two years:
GO BIG ON IMMIGRATION
Immigration reform has languished on Capitol Hill. And according to Douglas Holtz-Eakin of the American Action Forum, a conservative think tank, that has held back growth.
“We’ve never used it as a tool of economic policy,” Holtz-Eakin said. “We can and should.”
If visas were increased for highly skilled foreigners and legal status was granted to more immigrants working in the United States, the economy would benefit, said Holtz-Eakin, a former head of the Congressional Budget Office.
Research shows that increasing the number of workers in the legal economy helps fuel growth. So does attracting more professionals from abroad – doctors, engineers, scientists – who command high pay and have more money to spend.
Polling by Holtz-Eakin’s organization found public support for immigration reform that would give legal status to foreign workers who pay fines and back taxes for illegal entry. A bill that would have done so cleared the Senate in 2013 only to languish in a Republican-led House that preferred a piecemeal approach.
Obama expressed openness Wednesday for a Republican overhaul on immigration.
CUT CORPORATE TAXES
Republicans such as Sen. Rob Portman of Ohio have been itching to cut corporate tax rates. They note that the top rate of 35 percent exceeds the corresponding tax in all other major industrial countries. That encourages companies to move through mergers known as “inversions” to countries with lower tax rates – a maneuver that keeps corporate profits abroad that might otherwise be circulating through the U.S. economy.
The effective U.S. tax rate paid by companies can be much lower than 35 percent, thanks to deductions, credits, loopholes and, in some cases, creative accounting. Retailers pay an average of 31 percent and utility companies 14 percent, based on Treasury Department estimates.
Treasury Secretary Jacob Lew has said that inversions could be stopped through legislation that “lowers the corporate tax rate, broadens the tax base, closes loopholes and simplifies the tax system.”
The overlapping interests give economists hope that some tweaks to the corporate tax rate are possible. The administration floated a framework in 2012 for cutting the top rate to 28 percent, just above the 25 percent pushed by many Republicans. The administration’s plan would reduce rates through the elimination of loopholes. It would also fund investments in roads, bridges and other infrastructure – another issue on which Republicans and Obama could find common ground.
CAPITALIZE ON ENERGY BOOM
Oil and natural gas would help grease economic growth, though not as much as many voters have been led to believe, economists say.
A Republican Senate could make two moves involving energy that would slightly boost the economy: They could push Obama to end the ban on exporting domestic oil. And they could broker a deal to build the Keystone XL pipeline.
“Those are no-brainers at this point,” said Robert Stein, deputy chief economist at First Trust Advisors and a former Treasury official under President George W. Bush.
The pipeline would transport oil from Canada to refineries along the Gulf of Mexico. Obama has yet to approve the pipeline’s construction out of environmental concerns, and many Republican leaders argue that the delay is robbing the economy of jobs.
But probably not many. The job gain would amount to 2,500 to 4,650 construction jobs, and they would last less than two years, according to researchers at Cornell University. This would represent an increase of less than one-tenth of 1 percent in total construction jobs.
All told, oil and natural gas extraction accounts for 213,500 jobs – 0.15 percent of the 139 million jobs in the U.S. economy, according to the Labor Department.
Stein acknowledges that the contribution to growth from the pipeline and exports would be modest.
“We’d be lucky to see more than two-tenths of a percentage point added to real GDP growth over the next couple of years,” he said, though he adds, “Every little bit helps.”
OPEN UP FOREIGN MARKETS
Most economists say Republicans could expand Obama’s authority to negotiate trade deals, such as the Trans-Pacific Partnership, which could expand the markets for American-made goods from Malaysia to Peru.
Obama could gain broader authority to negotiate trade deals under a Republican Senate “because the Democrats have been the biggest opponents” of the measure, Holtz-Eakin noted.
Even so, the gain would be slight. U.S. economic growth would receive a boost of 0.38 percent – or $77.5 billion – in 2025 with the Trans-Pacific Partnership in place, according to estimates from the Peterson Institute for International Economics.
JUST DO NOTHING
Republicans would actually help by leaving the economy on auto-pilot, said Paul Dales, chief U.S. economist at Capital Economics.
“Let the economy heal itself,” he said.
Congress would hurt by engineering policies that Dales said could weaken the recovery. During the past three years, for example, the budgetary brawling in Washington has slowed growth, Dales said.
To increase the government’s borrowing authority in 2011 and prevent a default, Obama and Republicans backed automatic spending cuts to military and social programs through 2021. Those cuts shrank the deficit. But they also caused government spending to fall relative to the size of the economy and curtailed growth, Dales said.
At the start of 2013, lawmakers and Obama cut a deal that raised tax rates on top earners. This pulled money out of the economy and held back growth.
Consider: GDP, after accounting for inflation, has risen roughly 2 percent during the past three years. But the federal government subtracted 1.4 percent from growth in 2011, 0.8 percent in 2012 and 1.9 percent in 2013.
Had the government’s impact been neutral, more Americans would be enjoying an economy roaring ahead instead of plodding back.
As the impact of these budgetary deals has lessened this year, hiring has improved. Employers have added an average of 227,000 jobs a month so far in 2014. It’s the best performance in a now five-year recovery that still has most of the country worried.
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