The window for President Barack Obama to accomplish big things may have closed.
With his party’s losses in congressional elections last night, Obama confronts a new balance of power, one that constrains his ability to deliver such unfinished pieces of his agenda as climate change legislation. Similar midterm losses in 1994 led then-President Bill Clinton to pursue small-bore initiatives, a strategy Obama derided as a candidate.
“Things are going to get a lot harder, from the big sweeping things like cap and trade to the smaller things like ‘Don’t Ask, Don’t Tell’ and shutting down Guantanamo,” said Matt Bennett, a former Clinton White House aide and a vice president at Third Way, a policy research and advocacy organization in Washington. “But there will be deal-making and the question is: Where will the Republicans seek to cut some deals?”
The election also may force a shift of responsibility on economic policy. At a moment when voters consider jobs and the recovery their biggest worries, Republican gains will intensify political gridlock on fiscal issues, putting more of the burden for managing growth on the Federal Reserve.
This afternoon, about the same time Obama holds a news conference to answer questions about the election, the nation may see a new show of force from the central bank. A majority of economists surveyed by Bloomberg News say they expect the Fed will announce plans to inject at least another $500 billion into the economy through bond purchases under its unconventional program of quantitative easing.
After winning passage early in his presidency of an $814 billion fiscal stimulus to battle the recession, Obama now is confronted with a Republican House majority opposed to his economic policies. As a result, the Fed “is the only game in town” in managing economic growth, said Vincent Reinhart, the central bank’s former director of monetary affairs and now a fellow at the American Enterprise Institute.
“If you were to write down a list of the 15 things that could come out of Washington to help sustain the recovery, quantitative easing is 15th on the list,” Reinhart said. “The problem is that items 1 through 14 are off the list because they involve tax policy, changing the laws. Nobody realistically thinks that’s going to happen.”
Budget and Deficit
The biggest battle will be on the budget and deficit. While Obama’s bipartisan deficit commission is scheduled to deliver its report Dec. 1, Democrats haven’t signaled willingness to compromise on cutting entitlement programs such as Medicare and Republicans have been firm in opposition to tax increases.
A broad overhaul of energy policy to address climate change, which Obama cited as his highest single priority during the presidential campaign, will be up against Republicans, and even some Democrats, who campaigned against Obama’s cap-and- trade plan.
Leading up to yesterday’s election, Republican leaders suggested they won’t be moved. Senate Minority Leader Mitch McConnell, a Republican from Kentucky, told National Journal magazine “the single most important thing we want to do is for President Obama to be a one-term president.”
At the same time, White House aides said they don’t expect any major changes in the course Obama has set.
Obama advisers said some of the administration’s focus would naturally shift to implementation of health-care and financial industry regulatory overhauls, which the president regularly cites as major achievements. They expressed confidence in Democrats’ ability to counter any Republican effort to roll back the legislation.
While Reagan and Clinton rebounded from midterm election losses in 1982 and 1994 to win re-election two years later, Obama faces economic challenges of a different order than they did. The recovery was already well-established in 1994 and unemployment had been falling for more than two years. About the same time as Reagan’s midterm losses, the Fed began easing a tight monetary policy it had maintained to control inflation and the economy was growing at rate of more than 7 percent by the 1984 election.
When Obama faces re-election in 2012, the economy is projected to grow at a 3 percent rate and unemployment -- now 9.6 percent -- is projected to be 8.7 percent, according to the median forecast of economists surveyed by Bloomberg News in October.
While the longest and deepest recession since the Great Depression officially ended in June of last year and the economy has been growing for five quarters in a row, there were still almost 7.8 million fewer Americans working full-time in September than when the recession began in December 2007.
The economy is burdened by an overhang of consumer debt, a stagnant housing market and the after-effects of the financial crisis that began with the collapse of Lehman Brothers Holdings Inc. in September 2008.
At the end of June, 23 percent of residential mortgage borrowers were “underwater” with more debt secured by their home than it is worth, according to Santa Ana, California-based CoreLogic Inc.
“For these homeowners, all of their housing wealth has disappeared, and traditionally that’s been the bulk of consumers’ wealth in the United States,” said Sam Khater, senior economist for CoreLogic.
In other countries, financial shocks have depressed growth for a decade. A study of severe financial crises since World War II by Reinhart and his wife, Carmen Reinhart, an economics professor at the University of Maryland, found per-capita economic growth in the affected nations declined by a median of 1 percentage point for the following 10 years.
Still, some parts of the economy have bounced back strongly. By the second quarter, corporate profits had rebounded almost to the pre-recession peak reached in 2006. Among the 381 companies in the Standard & Poor’s 500 Index that had reported third-quarter earnings by Nov. 2, profits were up a share- weighted average of 35 percent since a year earlier, with nearly three-quarters of companies outpacing analysts’ expectations.
The S&P 500 is up more than 48 percent since Obama took office.
U.S. companies had amassed almost $1 trillion in cash on their books as of mid-year, according to a report by Moody’s Investors Service released Oct. 27.
Though some of that cash balance is foreign earnings retained overseas by multinational corporations seeking to avoid tax that comes due with repatriation, the Obama administration has for months been wrestling with how to move that money off the sidelines to spur investment, said two senior White House officials.
“He has got to put all the emphasis on private-sector growth. It’s got to be about how you grow the economy and get companies to move cash off their balance sheets and invest,” Bennett said. “There are some tonal changes the White House has got to make and will make regarding American business.”
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