James Pethokoukis

Politics and policy from inside Washington

Wall Street could suffer some voters’ remorse

Nov 3, 2010 21:12 UTC

U.S. midterm elections brought a degree of sweet payback for banks miffed about financial reform and President Barack Obama’s populist rhetoric. Their campaign dollars helped fund huge Republican gains. But the new Tea Party-infused GOP will present as many challenges as opportunities.

Wall Street certainly made its displeasure clear to Democrats. During the 2008 campaign, Goldman Sachs — through individuals and its political action committees — gave 25 percent of campaign cash to Republicans. This time around, it was 59 percent. JPMorgan went from 40 percent to 52 percent and it was the same story, more or less, for Citigroup and Bank of America Merrill Lynch.

So what kind of return on investment might they expect? The House Financial Services Committee will now be run by Republicans who all thought Dodd-Frank considerably overreached. Any new attempts to regulate away banking profits and limit the size of institutions will be non-starters. The GOP also will have a greater ability to influence technical tweaks to the legislation and strictly oversee the regulators writing the rules. Both should moderate the reform’s impact, if only at the margins.

Greater Republican numbers in both chambers should also keep the dying White House bank tax proposal at bay. In the Senate, one of the Democrats most responsible for tougher derivatives rules, Blanche Lincoln of Arkansas, lost her re-election bid. And the likely new Senate Banking chairman, South Dakota’s Tim Johnson, is thought to be better for the industry than was his predecessor, Chris Dodd.

But the GOP tidal wave swept in Tea Party-backed candidates who think banks should have been left to fail in 2008. They’ll probably pressure colleagues to take Fannie Mae and Freddie Mac off government life support, a notion which won’t cheer the many banks that think fully privatizing housing finance is a risky proposition. And lenders may be hard-pressed to find support from the Washington newcomers if the economy should go south again.

Banks have complained all year they have no friends left in Congress. Tuesday’s election may not have changed the situation as much as they had hoped.

Why 2011 will be the Year of the Tax Cut

Nov 3, 2010 17:20 UTC

American presidents usually win second terms, even if their parties suffer midterm blowouts. But President Barack Obama better not rely on history for a 2012 victory. To lift his political fortunes after Tuesday’s absolute shellacking — and those of the economy — he needs to work with incoming Republicans to do two big things: cut spending and cut taxes.  Here’s why:

1. Unless Obama actually desires to be a one-termer, he really has no other choice. Ronald Reagan and Bill Clinton both sailed to reelection despite suffering midterm setbacks, thanks to good growth and popular policies. When it’s one-and-done, as was the case with Jimmy Carter in 1980 and George Bush in 1992, it’s the economy that sends them packing. And that’s just the scary scenario emerging for Team Obama. The White House’s own forecasts don’t predict unemployment dipping below an average of 8 percent until 2013. Even worse, some of the hardest hit states — Florida, Michigan and Ohio – are big ones in the Electoral College that Obama needs to win again if he’s going to score another four years in the job. And all three just elected Republican governors.

2. Obama could stay the course. He could battle the GOP newcomers including their sizeable Tea Party contingent, pray for a boom and continue to push his agenda, such as capping carbon emissions, through regulatory agencies. But that’s a dead electoral end unless the economy perks up considerably (and immediately) and Republicans choose some incompetent, unelectable nominee. (As the midterms showed, candidate quality matters.) One of the clear midterm messages is that Americans have rejected the beyond-center-left, big government, redistributionist agenda. Exit polls said that some 60 percent of voters think government is doing too much. And voters in blue-state Washington rejected tax increases on the rich.

3. Voters say they want compromise. And there are deals Obama could potentially reach with Republicans that might generate jobs and reassure markets about America’s fiscal seriousness. Obama has already proposed letting businesses immediately deduct new capital investments. He could add cuts in corporate and payroll taxes and temporarily extend some or all of the expiring Bush tax cuts.  Both parties should also take a look at the Wyden-Gregg tax reform bill. In return, Obama could bargain for more infrastructure spending, especially if he agreed to suspend federal pay rules that raise the cost of government-funded construction projects.

4. But there might be even more opportunity on the spending side. In a bit of fiscal jujitsu, Obama could challenge the Tea Party folks to cut billions in corporate tax breaks and vote for any social insurance cuts recommended by his own deficit panel. And Obama must surely know that when advanced economies have reordered their fiscal houses by cutting spending, it’s often been under center-left governments able to pull a “Nixon to China” moment with interest groups.

It may not feel like it right now to the shell-shocked White House, but the Democratic election throttling might just help the president pivot to a second term.

COMMENT

I don’t understand, forgive me… Spending cuts reduce public treasure and public goods. Tax cuts also reduce public treasure and public goods. With all the negative momentum of global environmental crises on top of our own nation’s burst private-sector bubble, why is it that the republic now calls for reducing public treasure and public goods?

Posted by psuckow | Report as abusive

Obamanomics to blame for historic Democratic midterm collapse

Nov 3, 2010 11:37 UTC

It wasn’t just the economy, stupid. The historic losses suffered Tuesday by Democrats in the U.S. midterm elections owe as much to the unpopular and off-point agenda of President Barack Obama as it does to high unemployment. A policy pivot might have limited the damage, but the White House failed to recognize the trouble until too late.

Of course, Democrats will understandably be tempted to blame the debacle almost entirely on the undeniably poisoned chalice George W. Bush handed them. The Great Recession was of a sort Americans hadn’t experienced since the one Franklin Roosevelt encountered. The two previous downturns were brief and job losses minor. Even now, Americans are as gloomy as they were at the downturn’s depths.

But if the American public was blindsided, so was the White House. It recklessly predicted unemployment would never reach 8 percent if Congress passed its $816 billion stimulus plan. The economic team was also dismissive, even through this spring, of the notion that the U.S economy would suffer the slow-growth aftermath that typically follows deep financial crises.

Still, the magnitude of Democratic losses – the worst drubbing in the House since the 1930s — certainly hints more at play than just economic frustration. In the 1982 midterms, for instance, Republicans lost just 26 House and zero Senate seats despite unemployment cresting at 10.8 percent. The damage was much worse in 1994 — Democrats lost 54 House seats and 8 in the Senate — when unhappiness over President Bill Clinton’s healthcare plan offset a growing economy.

Likewise, voters saw the passage of Obama’s healthcare reform, which helped spawn the Tea Party movement, as at best a distraction from job creation. To this day, as many as two thirds of Americans polled think the stimulus was mostly a waste of money. That might be an overly harsh assessment. But even the White House admits the plan’s “shovel-ready” spending took too long to implement. And instead of cuts in marginal tax rates or payroll taxes, Team Obama chose poorly structured tax credits.

Despite plunging polls, business complaints about regulatory uncertainty and populist rhetoric, and the stunning loss Ted Kennedy’s Senate seat last January, there was no major course correction. To the White House, it was all just a bunch of whining. It was only in September that the administration finally proposed a “second stimulus” of business tax cuts that were too little, too late to change the political or economic dynamic. The economy made a Republican win almost inevitable, but Obamanomics made it a wipeout.

COMMENT

shawngrggs – “The American public handed him arguably one of the worst economic situations in American history, and told him “fix it, NOW!””

The American public didn’t hand him anything. The economic situation that we’re in right now was created by the Govt not the public. The fact is, this is a country of booms and bust……it always has been and it always will be. That’s how free market enterprise works. You can’t be in a perpetual boom forever. At some point it has to go the other way. The problem with the Govt is they’re always trying to “fix” the problem by passing some enormous expensive piece of legislation that really does nothing but make doing business harder which results in less jobs being created and longer bust periods. If we would just let the busts happen and stop trying to fix everything with some ridiculous law we’d all be much better off.

Posted by FiosFiend | Report as abusive
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