A stunning upset victory by Republican Scott Brown in liberal Massachusetts' Senate race Tuesday would unquestionably be a significant setback to President Obama's agenda. It wouldn't simply threaten Democrats' health care plans; it would signal that a slippery slope of expanding government and inevitably much higher taxes might become somewhat less slippery.
CNBC host and one-time Obama supporter Jim Cramer is talking up the chances of "a gigantic rally."
HMOs, medical device makers, banks, and Big Oil could all rally in expectation that "a more pro-business, less pro-labor government could be in front of us," says Cramer.
The accuracy of Cramer's prediction may depend on whether investors are more concerned about the looming impact of higher taxes and stiffer regulation than they are about how the economy would fare in the near term with less government support.
While some industries may celebrate a weakened presidency, a political earthquake on Tuesday could raise uncertainty about the macro-economy.
Already, some Senate Democrats are raising doubt that the administration will get the extra stimulus Obama is advocating.
A Brown win would be perceived as lowering the odds for substantial new stimulus and increasing the chances that stimulus will begin to wane in the second half of 2010 and turn into a drag on the economy next year.
Of course, perception might not be reality. GOP senators might find it hard to vote to let jobless benefits run out. They also might support payroll tax cuts, which the Congressional Budget Office says would be more effective than infrastructure spending.
Much will be at stake as the two parties decide whether they can work together.
The economy is now enjoying a big boost as firms ramp up production to keep depleted inventories from falling too low. But as the inventory effect subsides, many economists see a risk that government stimulus efforts will shift into reverse before a sustainable recovery is assured.
A look at the latest gloomy National Federation of Independent Business survey may be instructive.
It shows that 20% of surveyed firms cite taxes as their biggest problem, while government red tape is the biggest complaint of 13%. But poor sales are the top concern of 34% of surveyed firms.
Uncertainty about the strength of the recovery also was reflected on a Friday conference call by JPMorgan Chase (JPM) CEO Jamie Dimon. He noted that the bank was waiting for the recovery to play out before raising its dividend "just in case you have another dip down here."
It is possible that Obama would pivot after a Brown loss and reach a consensus with Republicans on how to keep the recovery on track. One idea for doing so was floated last week: temporarily extend the Bush income and investment tax cuts for higher earners that are due to expire at year-end.
But Obama's first priority is likely to be getting a health care bill to his desk in any way possible. The high-stakes political battle that it will take is likely to be perceived as limiting the chances for cooperation on the economy.
Finally, the truth is that there's no partisan path to limiting the size of government. Without consensus, entitlements will continue to grow on automatic pilot for the foreseeable future and the Bush tax cuts for upper earners will expire on schedule. One extra Republican senator "” or even 10 "” would only do so much to change the built-in biases toward bigger government.
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