Republicans and Democrats might sit together every now and then, but that doesn't mean they'll get much done. In fact, 2011 could be a year of historic inaction in Washington.
Republicans would love to unravel healthcare reform, the Dodd-Frank financial reforms, and several other initiatives passed during President Obama's first two years. But Democrats who still control the Senate will bat down the Republicans' counter-reform efforts, and if they didn't, Obama would veto them anyway. There will also be lots of talk about slashing spending, to start paying down the crushing national debt. But few politicians will have the guts to vote for real spending cuts in the run-up to the big presidential election in 2012.
President Obama has his own agenda of infrastructure investments and other moves to boost economic growth, but those will probably languish as well. Republicans view government "investment" as nothing more than spending by another name, and since they control the House of Representatives, they have the power to scotch the president's requests. "Don't hold your breath waiting for Congress to appropriate money for any spending increases," advises analyst Chris Krueger of forecasting firm MF Global. With both parties eager and able to torpedo the other's priorities, Washington will settle into a kind of attrition politics: There will be lots of boom-boom, but the front lines will barely shift.
On a few select matters, however, Congress might actually accomplish something. Since it's often hard to tell what amounts to real action in Washington, and what is mere theater, here's a cheat sheet highlighting four issues worth paying attention to:
Corporate tax reform. One idea gaining popularity is the need for widespread tax reform, to close hundreds of loopholes for businesses and individuals, stimulate business activity, and ultimately, raise new revenue. If it happens, tax increases will certainly be a part of it. But dessert will come before the veggies. That's why there's a reasonable chance that Democrats and Republicans could agree to lower corporate tax rates this year, which both sides would label as a business-friendly move meant to boost the U.S. economy and help create jobs. Lower corporate tax rates would only be possible if there's a broader agreement on the need for tax increases and big spending cuts down the road. But politicians won't be foolish enough to spell those out now. The payback won't be outlined until 2013 at the earliest, when Obama is either a second-term president not worried about reelection, or a one-termer sent packing because voters preferred a Republican approach to revamping the government.
There could be other efforts to start shaping an overall debt-reduction plan, since that's an issue voters are starting to rate as important. There are now several detailed proposals by outside groups for how to cut spending, boost taxes, and return the U.S. government to solvency, and voters seem to realize that some tough decisions are coming. One proposal, for instance, is to reduce the deduction for mortgage interest, which many budget-watchers thought would generate the usual howls of protest when it was included in one prominent debt-cutting plan. But opposition was more tepid than expected, indicating possible acceptance of such an idea. Still, don't expect specific details or a serious legislative proposal. At most, there will be a "discussion" about future action.
Regulatory "moderation." Republicans can't roll back healthcare or financial reform, but they can hold dozens of hearings meant to publicize aspects of the new laws that might seem draconian, or simply violate common sense. And that could change the way regulators write and enforce the rules. Even though both laws passed in 2009, regulators are still drafting many of the detailed rules that will determine their ultimate impact on businesses and consumers. And the risk of having to defend onerous new strictures to Republican lawmakers generally hostile to regulation could lead to a looser interpretation of the rules, and gentler enforcement.
[See who will prosper in 2011.]
The beneficiaries, according to MF Global, are likely to be Wall Street banks facing new restrictions on the amount of "proprietary trading" they're allowed to undertake to boost their own profits, and other financial firms that might not have to transform their operations as much as once thought under Dodd-Frank. Small businesses could benefit, too. Obama has already said he'd be comfortable repealing one reporting requirement for small businesses contained in the healthcare reform law. And he's directed the government to streamline or revoke other obsolete regulations.
One of the biggest things to watch this year is the "individual mandate" contained in healthcare reform, which requires all Americans to carry health insurance by 2014, or pay a penalty. That provision is the focal point of lawsuits challenging healthcare reform, which seem destined for the Supreme Court. The requirement is a core plank of the law, because it would generate millions of new customers for health insurers and drug companies, which is prerequisite for many other provisions of the law. If the requirement were to be overturned, the whole plan could unravel. So the assumption has been that Obama would strongly oppose repeal of the individual mandate. But the president has clearly been drifting to the right since his party took a "shellacking" in the 2010 midterm elections, and finding a way to undo the individual mandate could neutralize opposition to healthcare reform, and even short-circuit the lawsuits. So a change in the individual mandate isn't out of the question.
Cuts in defense. Obama wants the Pentagon to cut $100 billion in spending over five years, and Defense Secretary Robert Gates seems sincere in his order to the military services to do just that. Cuts in the president's defense budget often get restored by Congress, since those cuts usually add up to jobs and perks in the districts of key members. But the pressure to cut spending may finally be strong enough that defense cuts stick. Besides, both parties know there will have to be far deeper cuts in defense spending—which accounts for about 19 percent of the government's budget—to get the national debt under control. So $20 billion a year seems like a modest first step. If Congress can't accomplish that, it will be hard to take budget-cutters seriously on much tougher issues like how to reform Medicare and Social Security.
New energy initiatives. One thing that members of both parties increasingly agree about is the need to develop new forms of energy. China's government is investing heavily in home-grown solar industries, electric cars, and many other things that could help wean China off oil and give it a huge advantage in the 21st-century economy. And policymakers in Washington are starting to get worried that America could fall behind. So there's growing support for more research into electric-vehicle technology—which has gotten a boost from General Motors's successful launch of the Chevy Volt—as well as more use of natural gas, nuclear power, wind, and other forms of energy. These have been Obama priorities since his days as a candidate, but Republicans could probably agree to support some of them in exchange for other limits on spending, since "green energy" plays well with voters. And with other accomplishments scarce, both parties will need a little something to take credit for.