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Is There Any Reason to Be Optimistic About Economic Policy in a GOP Congress?

This is the sixth and final installment in an occasional series examining how Republican control of Congress might affect policy debates in the next two years. (Part 1, Part 2, Part 3, Part 4, Part 5)

Many political scientists believe the economy is the single biggest factor in determining election outcomes. It will likely cause Democrats to lose big on Tuesday. And, if conditions don’t improve, it could cause Democrats to lose big again in two years. But if the Republicans take over one or both houses of Congress, what can President Obama and the Democrats actually get done, given their recent struggles to pass legislation even while possessing majorities in both houses of Congress?

A new stimulus: Even some conservative economists agree the case for a new stimulus is strong. Obama and his allies seem to agree. Most recently, Obama proposed an infrastructure bank that would accelerate the spending of money on public works. But Republicans, as we all know, hate the very idea of governments spending to improve the economy. In August, House Minority Leader John Boehner, the presumptive speaker under a Republican House, discussed the economy in a speech whose text puts scare quotes around each of the (many) negative references to stimulus. Here’s just one example: “All this ‘stimulus’ spending has gotten us nowhere.” And recently, the Associated Press reported that Boehner “said if Obama and his team are going to work with the new Congress, then they must accept the end of government stimulus efforts as a means for creating jobs.”

Not only are Republicans dead-set against passing a new stimulus. They want to eliminate what’s left of the old one. Both Boehner’s August speech and the "Pledge to America" call for canceling unspent stimulus funds, and it’s also a sentiment widely embraced in the Republican caucus—see Eric Cantor, John McCain or Mike Pence for other examples.

But it won’t be easy for the Republicans to actually accomplish this. Only a small fraction of the approximately $800 billion originally allocated is still available; most has already been spent on tax cuts, infrastructure projects, and aid to states. According to ProPublica’s stimulus tracker, there is only $48 billion earmarked for non-tax-cuts projects that has not already been spent. There is a larger pool of money “in process” that Republicans could cancel, but doing so would leave a lot of half-finished bridges and roads as well as breach-of-contract lawsuits for municipalities whose project funding had evaporated. 

Unemployment benefits: Historically, one kind of counter-cyclical spending that both parties have supported is aid to the unemployed. Jobless benefits tend to boost growth, since the unemployed tend to spend their benefit checks on immediate needs. The benefits also seem easy to justify: People contribute towards unemployment insurance while they work. And once they are out of work, they need the help.

Unemployment benefits usually last 26 weeks, and some recipients can qualify for an extra 13 weeks. Congress has, during this downturn, made benefits available for up to 99 weeks. But the extension is temporary, due to expire on November 30. And there’s no guarantee Congress will renew the extended benefits after the election. The last extension cleared the Senate only because Olympia Snowe and Susan Collins crossed party lines to vote with the Democrats. Will it be possible to pass another extended-benefits extension after the Republicans win more seats in the Senate, even if Democrats retain control? The odds aren’t good—some of the potential winners (most famously, Sharron Angle) actually believe in cutting unemployment benefits.

The best hope for the unemployed is some kind of long-term extension during the lame-duck session. Retiring Republican moderates, like New Hampshire’s Judd Gregg or Ohio’s George Voinovch, might feel free to vote as their conscience dictates, rather than how the party line demands. That, of course, assumes their consciences believe extending unemployment benefits is a priority. If it isn’t, or if the extension only lasts until the new Congress is sworn in, millions could lose their benefits.

Note that even if Congress saves the extended benefits, the extra-long-term unemployed are still in trouble. These “99ers” have been unemployed so long that they’ve run through the extended benefits, but aiding them has not been a significant priority for either party, in part because it’s hard to even get a good estimate of how many there are. But it’s improbable a Republican-controlled Congress will act to aid the 99ers.

Taxes: Republicans do like to cut taxes. And with the Bush tax cuts set to expire, Obama and the Democrats want to cut some taxes too. But President Obama favors extending the so-called middle-class tax cuts (which actually still deliver the greatest benefit to the wealthy) and letting the tax cuts for the wealthy expire. This approach would cost about $3 trillion over 10 years. Most Republicans favor extending them all, at a cost of around $3.7 trillion over 10 years.

So what happens? Theoretically, Democrats hold the trump card here. If Congress doesn’t act, taxes for everyone go up next year. That’s leverage that should be able to force Republicans to give in. But the Democrats themselves are divided; Ben Nelson, Joe Lieberman and other centrists support at least a temporary extension of all tax cuts. And among the few new Democrats who are likely to enter Congress, there is substantial support for a full extension.

Republicans, meanwhile, look like they’re ready to dig their heels in. Boehner backpedaled after the caucus he nominally leads hammered him in early September for having the temerity to suggest he might accept the cuts for high-earners being scrapped. Now he’s back on-message, echoing others in Republican leadership by saying, “This is not a time for compromise.”Democrats worry that they’ll take the blame if taxes rise next year, even if it’s Republicans who block an agreement. And when Democrats worry, they tend to retreat. Don’t be surprised if that’s what happens on taxes—perhaps with both sides agreeing on a one- or two-year extension of all the tax breaks.

Deficit reduction: Republicans have hammered President Obama for the growth of the national debt during his presidency. The Pledge to America, for example, describes spending as “out-of-control,” “runaway” and growing at a “breathtaking rate.” And in his August speech, Boehner declared Obama “should submit to Congress for its immediate consideration an aggressive spending reduction package” to pare back “deficits that threaten our economy.” The messaging has worked—in a recent Gallup poll, 87 percent of respondents who said their greatest concern “the size and power of the federal government” intended to vote Republican.

But the Republicans so far seem unserious about actually living up to their slogans. Both the Concord Coalition and the Center for American Progress, for example, note that the Pledge to America would likely make the budget picture worse, not better. As a recent New York Times article noted: 

Republicans’ ranks will almost certainly be strengthened by a wave of conservatives, including Tea Party loyalists, who are opposed to raising any taxes and to compromising with Democrats generally — a stand Congressional Republican leaders have adopted. And incumbents otherwise inclined to make deals are now wary, Republicans say privately, mindful of colleagues who lost primary challenges from Tea Party candidates.

Common ground: That’s not to say Democrats and Republicans can’t find common ground at all. Noam Scheiber outlined a few possibilities last week. Another one would be corporate tax reform. Both Democrats and Republicans agree the current system is broken. Democrats lament that many companies don’t pay federal income tax; Republicans object to a system that has one of the highest statutory rates in the developed world. Obama has signaled an interest in lowering the tax rate in return for a simplified system with fewer deductions. Republicans will likely be willing to negotiate.

Then there is trade. Most Republicans are still strong advocates of treaties liberalizing trade. Obama has given mixed signals, and he must navigate his relationship with labor unions carefully, but according to the Wall Street Journal, “the White House appears willing to back accords with South Korea and Colombia.” And Senate Minority Leader Mitch McConnell also said trade is a subject where there’s room for bipartisan cooperation.

Oh, and then there’s the “other” tax cuts—not the Bush tax cuts, but the Obama ones. The Making Work Pay tax cut was part of the stimulus, and for the past two years meant an extra $30 or so a month in low- and middle-earners’ wallets. Obama included a one-year extension in his budget, but Congress has made no move on the issue yet. However, it seems like a natural area for cooperation—to paint with a broad brush, Democrats like helping the poor, and Republicans like tax cuts, so there’s something for everyone.

Or so you’d think. It is an expensive tax cut ($600 billion over 10 years), but Democrats seem interested in extending it, even if they haven’t acted. Senate Finance Committee “Chairman Baucus is open to extending the Making Work Pay tax credit and is working with Leader Reid and his colleagues to determine how best to address all of the expiring tax provisions, including the Making Work Pay credit, when Congress reconvenes next month,” wrote a Democratic committee aide in an e-mail. Republicans, on the other hand, seem more suspicious. Of the three Republican leadership aides I asked about the subject, two didn’t return my e-mails, and the third promised to ask his boss, but never answered definitively. And no Republican has publicly called for the specific extension of the Making Work Pay tax cuts.