What the GOP Gains Mean For Economy and Business

THE political tremor across the country may make only subtle changes in the United States economy.

At least that's the early opinion of economic analysts.

The Republican gains, however, may give a boost to the US dollar as well as the stock and bond markets. ``The foreign-exchange and domestic markets tend to like and trust Republicans more when it comes to policy stewardship,'' says Bob Brusca, chief economist at Nikko Securities Company, International, Ltd.

In fact, the Republican triumphs gave US stocks an immediate boost in Europe. This positive sentiment carried through to the US bond market, where long-term interest rates fell.

The timing of the drop was beneficial to the US Treasury, which was selling 10-year bonds. ``This is the best news the Treasury has received in a long time,'' says Brian Fabbri, an economist with Paribas Capital Markets.

The political shift may also mean less business regulation, as control of key congressional committees shifts to Republicans. ``That's a tax cut in a sense,'' says Paul Kasriel, an economist with the Northern Trust Company in Chicago, who notes that government regulations add to companies' costs of doing business.

Although some Republicans would like to see a large middle-class tax cut, economist Sandy Batten of Citibank doubts that Congress will enact such a change. ``The financial markets would not be thrilled with such a cut,'' he says, because of the implications for the federal budget deficit.

Instead, Mr. Batten is hopeful that Congress will concentrate on some ``A to Z'' spending cuts. Such cuts, he believes, would help the economy by giving investors more confidence.

Other economists also do not expect that Republicans will work toward a national tax cut right away. Instead, says Mr. Fabbri, ``We are more likely to see local tax cuts than national ones.''

This may be particularly true in New York, where Republican gubernatorial challenger George Pataki unseated Democratic Gov. Mario Cuomo. In his campaign, Mr. Pataki often pointed approvingly to tax cuts made by New Jersey Gov. Christine Todd Whitman.

``New Jersey is a powerful example for a lot of states,'' Fabbri says.

The political changes are not likely to have any immediate effect on the US economy, which continues to skip ahead. Instead, analysts still expect the Federal Reserve Board to lift short-term interest rates by half a percent next week. ``The Fed will be trying to slow a fairly robust economy down from about a 4 percent growth rate to a 2.5 percent growth rate,'' says Ian Borsook, an economist with Merrill Lynch & Co. Inc.

On a longer-term basis, economists believe the election results will doom some of President Clinton's proposals that were opposed by business. For example, substantial tax increases to pay for changes in the health-care system are now unlikely.

``These political changes mean there will be fewer liberal policies passing Congress,'' says Mr. Brusca, who pronounces Clinton's agenda ``dead in the water.''

It is not clear, however, that the Republicans will have enough votes to enact their own agenda. Some economists expect that Republicans will push some of their favorite policies, such as a balanced-budget amendment or a cut in the capital-gains tax. Either change would be welcomed on Wall Street.

``We could see slower growth in government spending, which could ultimately reduce interest rates,'' says Mr. Kasriel. And a capital-gains tax cut, he notes, might reduce companies' costs of building new factories. ``It will allow a greater supply of goods and services at a lower cost,'' he argues.

In fact, some economists believe that a reduction in the capital-gains rate would ultimately reduce interest rates, since the stock market might react enthusiastically. This could cause corporations to fund new operations by selling stock instead of borrowing money. Over the long term, this could help to bring down real interest rates.

Wall Street economists also believe that the shift to Republican control in Congress will help the passage of the pending General Agreement on Tariffs and Trade (GATT). Republicans will control the key committees that must initially approve the global trade treaty. Although ratification of GATT would not have an impact on the US economy in 1995, lower tariffs around the world might eventually help US exporters.

of 5 stories this month > Get unlimited stories
You've read 5 of 5 free stories

Only $1 for your first month.

Get unlimited Monitor journalism.