In the effort to rebalance toward private economic activity, fiscal restraint and the unwinding of the federal government’s recession interventions will figure prominently in the agenda of the new U.S. Congress.
More than two months have passed since the Republican Party wrested control of the House of Representatives from the Democrats, nearly succeeding in doing the same in the Senate. In the framing of the Democrats’ reversal from two years ago, there has been broad recognition of voter impatience with the pace of the economic and job market recovery, as well as deep divisions about the administration’s initial legislative and policy priorities. As with any shift in power, the election results are reverberating through Washington as party strategists on both sides now refine or refashion their agendas to reflect evolving voter sentiment.
For the commercial real estate investment sector, this retooling may result in more favorable near-term outcomes on the industry’s key issues of concern, including tax structure and a host of regulatory initiatives, as well as greater clarity regarding the changing business climate. Further into the new congressional term, the potential for a serious effort to rein in government spending, while putting the U.S. economy on a more solid long-term trajectory, also implies disruptions to the already uneven recovery in capital markets and job-driven demand for commercial space.
With the immediate crisis of deep job losses and domestic financial market instability abating, legislators are necessarily shifting away from public stimulus and stability measures and refocusing on measures that will spur durable private sector job creation. A response to unacceptably high unemployment is clearly needed, even though consensus about what to do has proven elusive. For many businesses, the U.S. economy’s serious structural problems and the uncertainty caused by new policy initiatives are now the greatest disincentives to long-term investment and hiring, precluding the effectiveness of any short-lived subsidy for job creation. Restoring confidence in the stability of market structures is critical to addressing this challenge and fomenting private investment. In the effort to rebalance toward private economic activity, fiscal restraint and the unwinding of the federal government’s recession interventions will figure prominently in the agenda of the new Congress.
What form will the deliberations over fiscal restraint—directed toward a goal of fiscal stability—take as the issue assumes new urgency? Apart from the immediate and often vitriolic tax policy debate, the next two years will be characterized by more tempered implementation of reforms of health care and financial services because both are perceived as inhibiting business and have been vigorously opposed by Republicans. Given the extent to which the landmark Dodd-Frank legislation delegates authority for refinement and implementation of key provisions to committees, commissions, and agencies, financial services regulation can be expected to be more lax than if Democrats had retained control of both chambers of Congress and the full array of committee chairmanships.
Similarly, many of the legislative initiatives that have been identified as priorities for commercial real estate investors and operators will be decided in lower-profile arenas than the obvious flash point of income tax break extensions and the potential decoupling of middle- and high-income tax break time frames. Among those priority issues, the embedded negotiations over dividend and capital gains taxes and carried-interest taxation are viewed with a more favorable investment bias than during the previous congressional session. Setting aside issues of equity and fairness, a more predictable business environment will encourage investment and job creation, positioning the economy to more easily absorb inevitable but unpredictable shocks.
Efforts to balance new spending and tax priorities will not, on their own, result in material progress in addressing the underlying budgetary shortfalls that are now weighing on confidence and undermining the U.S. economy’s long-term potential growth. So the new Congress is also expected to take up the issue of deficit reduction in a more concrete way than previously seen.
Much of the groundwork for the debate has been laid by the National Commission on Fiscal Responsibility and Reform—known less formally as the Deficit Commission—that released its report December 1. An alternative set of proposals has been offered by the Washington, D.C.–based Bipartisan Policy Center and its Deficit Reduction Task Force. The scope of the proposals offered by these two groups is necessarily broad, targeting programs that are sacrosanct for powerful constituencies. But the public and political will to make difficult choices seems to be at the back of the congressional leadership and the administration, even if the tax debate elicited myopic responses from both parties. Commercial real estate market participants will have to follow developments in the vigorous debate closely. Whether the United States adopts a national goods and services tax or dramatically scales back federal hiring are only two among an array of scenarios that have specific implications for property performance.
The aversion to government largesse that will dominate the new Congress and the debate over deficit reduction also provides a foundation for recent criticism of the Federal Reserve. By design, monetary policy in the United States is independent of the vagaries of day-to-day politics, so an increase in political pressure is unlikely to cause any immediate policy change. The institutional separation is designed to ensure some measure of accountability on the part of the Fed, but, ultimately, to curtail external influence. Congressional committee members will have the opportunity to question the Fed chairman during his regular testimony before Congress and will undoubtedly debate the merits of Federal Open Market Committee votes as part of their public discourse. Even within the Fed, there are dissenting views on the appropriateness of new quantitative easing of monetary policy.
The Fed’s isolation from the political process is not impenetrable. Fed Chairman Ben Bernanke has his share of detractors among the members of Congress, including the new leadership of the House Financial Services’ Domestic Monetary Policy Subcommittee, but he is no different from previous Fed leaders in this regard. The greater concern for him, and for the independence of monetary policy in the United States, is the increasing pressure to revisit the Fed’s basic autonomy. If that should come into question, the consequences from a loss of credibility among global investors become unpredictable. In this regard, the Fed’s decision making may be constrained by the expectation of the response that unpopular choices will elicit.
To the extent that changed membership in the new Congress foretells a shift in favor of a reduced role for government, the near-term implications include a more limited scope for current reforms in areas ranging from health care to financial services. Over a longer period, deeper adjustments in the funding of entitlement programs and the mechanisms of tax revenue generation may be even more far reaching in their impact on the economy and, by extension, real estate. A move toward greater fiscal responsibility and stability is necessary for the long-term growth potential and competitiveness of the U.S. economy. But with a nod to the practicalities of that move, it also implies difficult-to-predict changes to the status quo that will require adjustments by commercial real estate investors, operators, and lenders.
