Expect Gridlock Ahead
The big question for the United States is not what will happen in the November elections. That's more or less a foregone conclusion.
The big question is: What happens in January when the new Congress meets? Will the U.S. government work --or will the trains smash?
Two smashes in particular head the schedule.
Smash 1 is over taxes.
The Bush tax cuts expire in January. When they do, income tax rates jump for almost every American who pays income tax. The top rate of income tax jumps to 39.6% from the present 36%. The per-child tax credit tumbles from $1000 to $500. The tax rate on long-term capital gains rises to 20% from 15%, and the tax rate on corporate dividends soars from zero to a maximum of 39.6%.
Most in Congress want to avoid this result, but Democrats and Republicans intensely disagree over how. Republicans want to extend all the Bush tax cuts indefinitely; Democrats want to renew tax cuts for individuals earning less than $200,000, but not for those earning more.
You'd think that would be a narrow enough difference to bridge. You'd be wrong.
Democrats look at polls that suggest tax relief for upper-income earners is desperately unpopular right now. They think the issue is good terrain to fight over.
Republicans by contrast think the tax cuts that most help the economy are precisely those aimed at the upper-income earners. Besides--lower taxes for everyone is just fundamental party principle.
Combine these respective party positions with the likely vote result, and it's easy to imagine the following scenario:
The Republican-majority House of Representatives votes to renew the tax cuts. A Democratic-majority Senate votes to renew the tax cuts for the under-$200,000s, but not for the over-$200,000s. President Obama announces he'll sign the Senate bill if the House agrees. Both sides decide they have themselves winner issues for 2012, and so nobody yields.
Suddenly the tax issue stops being political, becomes economic. How will financial markets react? How will the real economy react to this tax hike in the midst of a weak recovery?
The markets and the economy may be extra jumpy, because these fights will occur at the same time as another, even bigger fight over health care -- the second smash.
Republicans cannot repeal the Democratic health reform of 2010, even if they win both House and Senate. Repeal will require a law, and as such must be signed by the president. Anyway, as few as 41 Democratic senators can filibuster repeal and prevent it from ever coming to a vote.
What Republicans in the House can do, however, is refuse to appropriate the funds necessary for the reform to go into effect. They can refuse all funds, or they can target especially unpopular sections of the reform.
It's the same scenario again: Both sides imagine they're on the winning side of the issue.
Republicans see polls showing that voters don't like the reform as a whole. But voters do seem to like portions of the bill, and those portions are the portions that cost the most money. (Surprise!)
Will the Republicans refuse to vote the funds to increase the subsidies to senior citizens' prescription drugs? To provide tax credits to subsidize small businesses that provide health coverage to employees? Look for Democrats to force the issue, to squeeze the Republicans either to alienate their base or to provoke voters.
And if Republicans do vote to zero out portions of the health bill, look for Democrats to try to frame that vote as a "government shut-down," just like the literal shut-down of 1995, which so badly tarnished Newt Gingrich (and did so much to bring Bill Clinton and Monica Lewinsky together--the president-hunting intern remained in the White House halls at a time when the people in charge of keeping her away from the president were furloughed).
The paralysis of the 1990s at least occurred at a time of gathering prosperity. A crisis in 2011 will hit during a very weak economic recovery. Three out of seven seats on the Federal Reserve's board of governors are currently vacant. You may say, "four out of seven is not so bad," but the quorum to approve an emergency lending operation is five. If a crisis were to hit tomorrow, the Federal Reserve could not legally act.
The coming election offers the U.S. an opportunity to get big things right, to correct the over-reach of the Obama years, to put the country on the path to reasonable taxation and a balanced budget. What threatens instead is gridlock, recrimination and policy failure leading to economic failure. It does not have to be this way. But it will take something more like leadership than we've seen so far to avert it.
Originally published in the National Post.