Heading into today's midterm elections, the pundits anticipatethe balance of power in the Senate will shift to the Republicans.The GOP is also expected to strengthen its position in the House aswell as in key state races. Historical patterns are working againstthe Democrats; albeit with minimal turnover overall, thePresident's party generally loses House and Senate seats duringmidterms. The average loss in the Senate is about four seats. Withthat in mind, the likely extent of the Democrats' losses is notatypical, nor is it a truly epic indictment of the president'spolicies.


Having lost the Senate in 2006 and eager to improve theircollective prospects for the 2016 presidential bid, Republicanshave every reason to demonstrate they can govern effectively. Amid-October survey by Pew (here)shows a large majority of voters have a dim view of Republicans'ability to play well with others (Democrats do not fare muchbetter). The chances of winning over independents in two years'time improve if a reordering of the Senate proves to be aninflexion point in legislative effectiveness. It could go the otherway. If a Republican victory emboldens the GOP on priorities suchas federal spending, a brinksmanship dynamic between the parties onissues such as the debt ceiling or funding of government operationscould drag on the short-term growth outlook.


In principle, reduced gridlock is good for growth. Both partieshave a role to play in facilitating that outcome; the personalitieswe send back to Washington matter on this front. As for whether thespecific policies under debate carry high stakes for the economicoutlook, the views are mixed. Last week's NBC News/Wall StreetJournal poll (here)shows voters are currently focused on the economy to a far greaterextent than the headline-making threats from destabilization in theMiddle East or a significant spread of Ebola beyond West Africa.Even so, there are few electoral outcomes today that might reflectan altered order of priorities. For that, wait two more years andvote for your preferred candidate at the top of the ticket.


A few specific policy issues will command broad attention, evenif their path is unchanged by the outcome of the midterm election.Among them, little headway is expected on reforms to the tax code,adjustments to the Affordable Care Act, or an end to theconservatorship of Fannie Mae and Freddie Mac. Even if it passes atthe state level in Alaska, Arkansas, Nebraska, and South Dakotatoday, a federal minimum wage hike is almost certainly off thetable barring the unlikely scenario where Democrats improve theirpositions dramatically in the House and Senate. If Democrats areinstead weakened substantially, bank regulation may be one of thefew major areas where Republicans can extract visibleconcessions.


On balance, we do not expect a revision to our economic outlookon Wednesday morning. Our baseline forecast remains fairly reservedno matter who holds a slight advantage in the Senate. That forecastis characterized by relatively slow gains for the economy and thelabor market, and is generally in line with consensus estimates.Suffice it to say the economic data do not elicit the sameirrationalenthusiasm as prevailing commecial real estate trends. Our biggestconcern is still the absence of a clear focus in the Beltway onlong-term economic challenges and what manner of serious reformscould spur growth closer to the American economy's potential.

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Dr. Sam Chandan

An irreverent take on the macroeconomic environment. Dr Sam Chandan is President and Chief Economist of Chandan Economics and an adjunct professor in real estate and public policy at the Wharton School of the University of Pennsylvania.