The markets may need to curb their enthusiasm. 

Will the New Congress Bring Economic Renewal?

Mohamed A. El-Erian is a Bloomberg View columnist. He is the chief economic adviser at Allianz SE and chairman of the President’s Global Development Council, and he was chief executive and co-chief investment officer of Pimco. His books include “The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse.”
Read More.
a | A

In their shellacking of the Democrats, Republicans did more than gain control of the Senate in yesterday's midterm elections. They also increased their majority in the House of Representatives to a level not seen for many decades, raising speculation that President Barack Obama may have no choice but to accommodate many Republican priorities in his remaining two years in office.

Sensing this possibility, and linking it to the unleashing of greater economic dynamism, the stock market is reacting positively. Yet the relationships are far from straightforward.

Undoubtedly, Americans are looking for more from Capitol Hill. Their historically low rating of a "do little" Congress is compounded by the feeling that political polarization has undermined the country's effort to properly regain its economic composure after the 2008 global financial crisis.

With Republicans in control of both houses, the markets hope the stage is set for a constructive cohabitation of a Republican Congress and a Democratic president, similar to what evolved under President Bill Clinton. The late 1990s are remembered for a number of important pro-growth legislative initiatives.

There is certainly some low-hanging fruit that is ripe for bipartisan agreement, and that could be acted on quickly (such as free-trade agreements, immigration reform and the overhaul of corporate taxation). But two big things are required for this to translate into a phenomenon that would decisively improve the prospects for growth, jobs and prosperity.

First, the two parties would need to be a lot less beholden to their political bases. This is particularly tricky for the Republicans, given that part (though far from all) of their success yesterday came from the re-emergence of the party's more extreme activist wing. Obama would also need to move to the right, and do so without threatening his achievements that are of great value to Democrats (particularly health-care reform, the focus on the middle class and efforts to increase the minimum wage).

The complication for both parties is that virtually all of the needed comprehensive economic policies involve some cost to someone in the short term.

Second, the two parties have to be convinced (and trust, initially and over time) that their interests would remain aligned, even while pursuing objectives that are anathema to the other. In compromising with the president, Republicans would seek to convince voters that they can govern responsibly and get things done, as a means of increasing their chances of capturing the White House in 2016. For his part, President Obama would be compromising to better secure his legacy, a strategy to increase the probability of another Democrat following him in the White House.

It is possible that these two challenges will be overcome, but it is far from probable. More likely is a sequence that initially involves constructive comments from both sides and some bipartisan legislative progress, only to give way again to gridlock as the 2016 election gets closer, together with threats of politically inspired investigations and hearings.

If this occurs, the impetus to the economy -- while positive -- would fall short of the Sputnik moment needed to unlock this country's considerable potential for economic liftoff.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Mohamed Aly El-Erian at melerian@bloomberg.net

To contact the editor on this story:
Katy Roberts at kroberts29@bloomberg.net