Empowered Republicans are wasting no time flexing their muscles, with a new deal on taxes that has forced President Obama to capitulate to a core GOP demand and agree to tax cuts for the wealthiest Americans. Conservatives are giddy. Liberals are angry. Obama himself has the aura of a man glumly resigned to betraying his principles.
The Republicans' big victory on taxes comes before the winners from the November midterms even sweep into Congress, where they will take control of the House of Representatives and strengthen their minority stance in the Senate. If the tax deal passes and becomes law, it will mark a startling shift in Obama's agenda. Since being elected in 2008, Obama has favored an extension of the Bush-era tax cuts for middle-class earners but not for the wealthy, yet he failed to get a Democrat-controlled Congress to pass his version of the tax extensions. The deal he finally got is like settling for a field goal after having a first down on the opponent's five-yard line.
Republicans, however, should beware a false sense of power as they begin their efforts to remake the federal government. Washington is a notorious echo chamber where ideological soulmates tend to convince each other that they're destined to lead the country in a new direction, only to have the country say no thanks. President George W. Bush learned that lesson after losing both houses of Congress to Democrats in 2006. Obama learned it in his first two years in office (or should have learned it, anyway).
The Republicans were able to get the tax breaks they wanted not because voters are lining up behind their conservative agenda, but because some Americans generally support the idea and few strongly oppose it. A series of Gallup polls, for instance, suggests that Americans aren't crazy about extended tax cuts for the wealthy, but aren't staunchly opposed, either. And in one survey, 66 percent of respondents favored the two-year extension of the tax cuts for everyone—the version that emerged in the White House compromise with Republicans.
Plus, Democrats got a lot out of the tax deal too, even though news coverage tends to highlight Democratic concessions, not Republican ones. The biggest Democratic priority in the deal is a 13-month extension of unemployment benefits for millions of down-on-their-luck Americans—a costly measure that many Republicans oppose. That extension is far longer than any of the other seven extensions of unemployment insurance that Congress has passed since 2008, which guarantees Democrats won't have to fight that battle again until 2012, if at all.
Republicans, in other words, now have the power to nudge policy toward the right when Americans are inclined to agree with them. But there's no evidence that the nation is likely to make a sharp right turn just because Republicans won big in the midterm elections. Here are four areas where Republicans may be poised to overplay their hand:
Gridlock. Senate Minority Leader Mitch McConnell and other Republicans have argued that their primary job is still to obstruct Obama's policies, rather than to pursue job-creation or economic-growth measures that would benefit Americans of both parties. And some business leaders believe that gridlock—the inability of Republicans and Democrats to agree on much of anything—would be in their interest, since it would mean no new regulations or other burdens on business.
But Americans, in general, haven't signed on to the gridlock agenda. In polls by the Pew Research Center, a majority of Americans say each party should work with the other to solve problems, even if it means giving up some of their own priorities. And economists warn that gridlock could harm the economy rather than helping it, since the recovery remains fragile and a lot of problems still need to be solved. If the tax deal passes, that will alleviate uncertainly about two big issues—tax rates for 2011 and the fate of unemployment benefits—but the ballooning national debt in particular remains the monster that will eat America if a do-nothing Congress sits on its hands and hums happy songs. Polls suggest that Americans would rather see bipartisan action to reduce the debt than intractable battles that accomplish nothing.
Healthcare reform. Republicans seem to believe that Americans have risen in unison and issued a full-throated plea to repeal President Obama's 2009 healthcare reform law. That's why Republicans plan to propose bills to repeal or defund healthcare reform as their first order of business when the new Congress convenes in January. But Americans have issued no such mandate, and support for healthcare reform actually runs a bit stronger than opposition to it. In a Pew poll, for instance, 40 percent of respondents favored repealing the health care law, but 52 percent said it should be expanded or left alone. Some economists even worry that a protracted battle over last year's legislation will distract legislators from more pressing matters and hold the economy back. "The effort to reverse or not fund healthcare reform would create uncertainty at a time when most business leaders talk about the need to reduce uncertainty," says Alan Levenson, chief economist at investing firm T. Rowe Price.
Financial reform. Republicans also want to scrutinize Obama's 2009 financial reform law, and possibly poke some holes in it as specific regulations are drawn up over the next year. But the logic on that is fuzzy. Americans do seem to want smaller government in general, but there's no evidence that they want weaker oversight of banks and financial firms, which earned a well-deserved black eye for taking massive and foolish risks that helped cause the 2008 financial panic.
Of the five biggest pieces of legislation passed during Obama's first two years, financial reform was the most popular, with 61 percent of respondents in a USA Today/Gallup poll saying they approved of tougher rules for banks. And casting your lot with Wall Street is a dubious political strategy: In a Pew survey from earlier this year, banks drew the lowest positive and the highest negative ratings among 13 institutions, coming in lower than labor unions, the news media, and even Congress. So it's hard to see how easing the rules on banks would please voters—although there's no doubt that it would draw millions in campaign donations from the financial industry.
Stimulus. Republicans effectively exploited the flaws in the Democrats' 2009 stimulus plan, which turned out to be deeply unpopular and helped Republicans surge to historic gains in the November midterms. But the real problem with the Obama stimulus plan may merely have been that the White House and their Democratic allies oversold it, with an infamous prediction early in 2009 that the unemployment rate would stay around 8 percent under the stimulus plan. In fact, it peaked above 10 percent, which made the huge program of spending measures and tax cuts seem like a failure—even though it boosted economic growth and helped end the recession sooner than it would have ended on its own.
Whether they realize it or not, Republicans have just helped craft a second stimulus plan, which could end up being bigger than the first one. The tax-deal compromise with the White House would inject $800 to $900 billion into the economy over the next two years, and so far, it's very popular, with about two-thirds of Americans saying they support it. The package is weighted more heavily toward tax cuts than the first stimulus program, relying on consumers to spend the money rather than the government. But it would still call for another huge helping of government debt to finance it. So if Republicans run against stimulus spending in the next election, as they did in the last one, they'll be running against their own program. Maybe they'll need something new to run against.