If the markets are looking for swift and decisive action on either deficit reduction or fiscal stimulus, they will likely be disappointed in the election results.

The best policy would be continued stimulus in 2011, better targeted than the last version, bolstered by a plan to rein-in the long-term structural deficit.

The problem is that neither party made a forceful or credible case for this approach during the campaign. As a result, no matter who wins, fiscal policy is likely to drift and voter frustration is likely to rise. None of this can be seen as good for the markets.

If Republicans win, they will quickly find that reducing their "Pledge to America" to a budget would produce deficits as large, or even larger, than the President has proposed. The spending cuts they have identified are nowhere near enough to offset their tax cut proposals.

If the Democrats win, it seems no more likely that they will be able to agree among themselves on a budget than they were this year. The split between deficit hawks and stimulus advocates remains strong.

If there is a split decision, each side will be tempted to write its own fantasy budget with no prospect of compromise.

Both sides seem to be missing the real mandate of the voters, which is not just to do something about the deficit but to work with each other on a compromise plan. This approach might not please "the base" heading into the 2012 presidential contest but it would be the best possible signal to the markets and the best possible interpretation of the voters' mandate.

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I had been looking to the mid-terms with horror, but the premise of this question cheers me up.

Gridlock will provide a natural experiment: can America survive if the Congressional Budget Office continues to predict fiscal Armageddon – and it doesn’t happen?

As I have written many times, with no contradiction so far from any economist, the CBO baseline budget forecasts are plainly implausible and internally inconsistent. While perhaps acceptable for the purpose of scoring legislative proposals, they should never have become the foundation of any actual budget forecast.

The CBO forecast-world, with (among other things) short-term interest rates rising to five percent and federal net interest payments rising to more than 20 percent of GDP while inflation stays at two percent, is an impossibility.

Financial investors obviously know this. That is one reason why long-term interest rates remain near historic lows. It is one thing for the agents of the Peterson foundation to spread their worry-talk about “national bankruptcy;” it would be quite another for Mr. Peterson’s actual Wall Street colleagues to turn their backs on United States Treasury Bonds.

Thus the challenge of coming up with a “credible plan to bring down budget deficits over the next five to ten years” faces an insuperable obstacle: such a plan would have to be based on the fantasy world of the baseline forecasts. It should be obvious that credible plans cannot be based on fantasy forecasts.

In the real world, the deficits exist because of unemployment and stagnant growth. They will decline if growth and employment are restored, and not otherwise. Gridlock will not help us enact a coherent and effective approach to this problem. But we weren’t making progress anyway, and gridlock might prevent actions – such as cuts in Social Security and Medicare – that would make the condition of the economy worse.

Under gridlock, Team Obama could be forced to tackle the zombie banking system, which is the real source of economic failure, including deficits. The Bush tax cuts may expire, cutting some ground from under the deficit hysterics. And the remaining Democrats could find their voice and souls defending the remnants of a civilized, orderly, decent society. Social Security and Medicare would then be completely protected, and not merely for those of us over 55.

There is a saying that God looks after children, small dogs and the United States of America. This could be one of those times.

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When the Republican took control of Congress in 1995 they reduced Clinton's spending plans and refused to raise taxes.

That brought the spending down and eliminated the deficit.

Raising taxes is what politicians do when they don't want to reduce spending or reform government.

The markets will react positively to a GOP House as the sign that all of Obama's plans are dead on arrival.

There may be a delay in the reaction of the stock market as folks wisely worry that there could be real damage done during a lame duck.