Split Decision

The U.S. public chose centrism on Nov. 5 when it voted for a divided government

At first blush, it looks as if nothing much happened in America on Nov. 5. Bill Clinton, maintaining the sizable lead he held from Day One of the Presidential campaign, won an easy reelection over his Republican opponent, Bob Dole. Clinton beat his rival 49% to 41%--independent Ross Perot garnered just 8%--and piled up 379 electoral votes to Dole's 159. But the victory was muted, because Republicans, struggling to stay afloat amid heavy voter resistance to the conservative revolution of GOP firebrands, hung on to retain control of Congress. Big deal, right?

Well, actually, yes. No Democrat has ever won the White House while the GOP held Congress. And no Democrat has managed to win a second term since 1936. That means Franklin Delano Roosevelt, architect of the modern welfare state, has been joined on a pedestal by William Jefferson Clinton, who proclaimed: "The era of big government is over" and ended the poor's 60-year entitlement to welfare benefits.

But Clinton isn't the only politician who made history on Election Day. So did Newton Leroy Gingrich, the Other Man of Campaign '96. Although the House Speaker's scorched-earth tactics nearly cost his party control of Capitol Hill, Republicans fought back. They lost ground in the House, but retained a slim majority, and boosted their Senate margin. The upshot: Not since 1928 has the GOP managed to hold Congress for two successive elections.

Predictably, both Clinton and Hill conservatives have been quick to hail the outcome as an endorsement of their policies. Addressing a noisy Little Rock rally in the wee hours after Election Day, Clinton said: "The American people have spoken. They have affirmed our course." Countered a defiant Gingrich in a 3:15 a.m. post-election appearance in Georgia: "The election was not about liberalism, because nobody was left to defend it." Added Gingrich aide Tony Blankley: "On a personal level, [the election] is also a vindication for the leadership of the party".

In fact, neither side won a mandate from a deeply suspicious electorate. Voters opted for divided government, preferring the prospect of continued partisan clashes to a blank-check policy for either major party. Business leaders, who considered Clinton relatively nonthreatening but had sentimentally gravitated to Dole, are resigned to the division of power in Washington.

"Of course, I would have liked a Republican to win the Presidency," says Albert G. Bersticker, chairman of Ferro Corp., a Cleveland-based manufacturing concern. "I'm glad Republicans kept the House and Senate. It forces Clinton to be less liberal and the Republicans to be less conservative."

Business leaders seem particularly pleased that the election will reinforce, rather than weaken, the President's steady march toward free-trade policies. "Clinton is the most Republican Democrat in a long time," says Raul D. Pedraza, CEO of Eagle Cos., a Miami-based transportation-services company. "I'm looking forward to his working with Congress to bring freer trade."

As for the possibility of renewed partisan stalemate, execs are hoping that it can be held to a minimum. "We don't want gridlock," says Thomas J. Corcoran Jr., CEO of FelCor Suite Hotels Inc., in Dallas. "The mood is different now. Everyone seems to have a desire to work together."

Democrats had hoped for a stronger election mandate. But they, too, have accepted the voters' verdict. "A late surge of money, plus the fact that the GOP did itself some good this summer by acting responsibly, helped save Hill Republicans," says University of Maryland lecturer William A. Galston, formerly a top Clinton policy adviser. "At the margin, there was the feeling that voters don't really know what Bill Clinton is going to do. People still think he needs somebody around to chaperone him."

On that point, voters and political scientists agree. Democrat Tom Summy, 60, an Iowa City construction executive, is typical of the ticket-splitting breed. He cast a ballot for Clinton, but backed GOP candidates in other races. "It's a sign of the distrust of politicians," he says. "People don't want one party with total control."

By rendering a split decision just two years after they ended 40 years of Democratic dominance of Capitol Hill, Americans are demanding a continued check on Clinton's submerged liberalism and the more overt big-spending tendencies of congressional Democrats. At the same time, they want to counterbalance the Gingrich-style guerrilla tactics that led to two government shutdowns over what was painted as an overzealous GOP drive to slash the social safety net. "There might be a new consensus emerging," says Marshall N. Carter, Chairman of Boston's State Street Boston Corp. "Americans want government to be concerned about those in need, but to use Republican means."

This desire for centrism clearly shaped the contours of the campaign. Clinton, who once intended his domestic legacy to be national health insurance, wound up running as the champion of fiscal conservatism, family values, and crime-fighting initiatives. Many of the GOP congressional incumbents who once brandished copies of the Contract With America became advocates of bipartisan cooperation once they hit the campaign trail. They boasted of votes for raising the minimum wage, extending health coverage to job-switching workers, and passing environmental laws. "People are not looking for a revolution," says Representative Marge Roukema (R-N.J.), a leader of the Hill's key centrist bloc. "They're looking for moderate consensus-building." Adds Republican business lobbyist Wayne Valis: "We're all about to become raging incrementalists."

Certainly the reelected Clinton, scarred by his rocky first couple of years in office, harbors no thoughts of grand second-term monuments. The top items on his agenda: cutting a bipartisan deal to balance the budget by 2002, fixing the short-term imbalance in the Medicare trust fund, shoring up Social Security, pushing education initiatives, and continuing progress towards deregulation. The only new item on the list: campaign-finance reform. Reacting to public anger over the Administration's involvement in the Donorgate scandal, White House planners have brazenly vowed to put new curbs on campaign spending.

MUCH ANGER. The drive for bipartisanship, however, could easily be derailed by dueling ethics inquiries. Stung by Clinton's teflon-like ability to deflect Dole's character barrage, many Republicans want to brake the President's momentum with a new wave of congressional investigations. The targets range from First Lady Hillary Rodham Clinton's legal woes to improperly obtained White House FBI files to questionable contributions to the Democratic National Committee. Says one senior GOP Hill staffer: "There are some very angry people up here who believe the President lied his way to reelection."

Democrats will counter by pressing the House ethics committee's ongoing probe of Gingrich's finances and ties to a conservative political committee. If both sides launch competing probes, the result could be "political warfare at its worst," warns former House Democratic Whip Tony Coelho, who quit Congress after his own brush with an ethics flap in 1989. Adds Lewis E. Platt, CEO of Hewlett-Packard Co.: "We need to get to the bottom of the issues. But I'm concerned about it tying up an enormous amount of [Congress'] time. It could be very disruptive." In the end, says a top White House aide, "Republicans will have to get over it, and we'll start getting down to business. We both have a clear interest in doing this."

In the meantime, Clinton will be busy reassuring the business community. Soon after he returns to Washington from Little Rock, he'll send executives a signal of his desire to make the balanced budget a top priority. How? By underscoring that second-term economic policy will remain in the hands of probusiness moderates. Although Commerce Secretary Mickey Kantor is likely to depart, Treasury Secretary Robert E. Rubin will stay on. Along with new Budget Director Franklin D. Raines, a former Fannie Mae executive, Rubin & Co. are supposed to keep Wall Street happy. The markets reacted to Washington's new power equation with euphoria, soaring to a new record on Nov. 6. And the good vibes would keep rippling if Clinton persuades North Carolina investment banker Erskine B. Bowles, who has been reluctant to come to Washington, to be Chief of Staff, replacing Leon E. Panetta. Says a senior Clinton adviser: "The markets need to know there's going to be no backing off on fiscal restraint."

Still nursing the wounds from the campaign, Republicans mutter that Clinton will backslide. But as a lame duck, he'll have other preoccupations. "Clinton will be thinking about his place in history," says Will Marshall, president of the centrist Progressive Policy Institute. "He'll feel less need to placate his party's factions." Adds White House Political Director Douglas B. Sosnik: "We're going to see government from the center."

The Administration's first priority in January, says White House domestic policy chief Bruce N. Reed, "will be to balance the budget." With both sides in agreement on a zero-deficit goal by 2002, the clash will be over the details. The fiscal plan Clinton offered a year ago called for a 15% cut in domestic spending over the next five years--nearly 30% after inflation. That's unacceptable to most Democrats and even many Republicans. Thus, additional savings will have to come from entitlements, especially Medicare.

While candidate Clinton zapped Republicans for menacing the health-care program for seniors, newly reelected President Clinton knows he'll have to both squeeze budget savings from Medicare and ensure its long-term stability. If he's prepared to strike a quick budget deal, including $150 billion or so in Medicare savings, the GOP congressional majority is likely to go along.

Republicans are also inclined to accept another Clinton initiative: creation of a bipartisan commission to find a long-term fix for runaway Medicare spending. Some Clintonites would like to have the panel appointed right after the 105th Congress convenes, so recommendations could be issued within a year. Despite some initial reluctance--part of the GOP's general post-election sulk--Republicans will probably sign on.

Swirling around all the talk of entitlement reform is the explosive issue of partial privatization of Social Security. Supported by Wall Street and many on Main Street, a dramatic step to boost the trust fund's return on investment has strong backing from Hill Republicans. The Administration may use yet another commission to stall any shift, while pushing less radical changes in the program, such as another hike in the retirement age. Another early test of both parties' commitment to reform: Will they tie annual Social Security cost-of-living increases to a more realistic measure of inflation, rather than the artificially high Consumer Price Index?

NO HOPE. While some progress seems assured on entitlements, the prognosis is less optimistic for tax restructuring. As long as Clinton resists a major overhaul of the tax code, Republicans have little hope of pushing a reform bill through Congress. About the best they can hope for is a continuing round of hearings aimed at spotlighting the need for a major revamping of the system.

In truth, Clinton and most lawmakers are great fans of targeted tax breaks. And there will be plenty of them in the next Congress. In '97, the President will have to deliver on his promise of middle-income tax relief. And he'll push for college-tuition tax credits, a capital-gains break for home sellers, and tax incentives for employers who hire former welfare recipients. Insiders expect a major effort to reform the taxation of foreign-source income as well. And it won't be a surprise if a broad capital-gains tax cut bubbles its way to the surface as a deal-sealer.

The biggest threat to business will be a Democratic assault on corporate subsidies, which seems likely even with the GOP in control of Congress. "Corporate welfare will be a big, big item," says Gillian Spooner, a partner at the accounting firm KPMG Peat Marwick. Among the potential targets are rules that permit companies to use prior-year operating losses to reduce their current tax liability and those that limit favorable tax treatment of hybrid securities that are equities masquerading as debt.

The welfare-reform debate could prove to be a litmus test of bipartisanship--just as it was in 1996. Clinton vowed to amend last year's historic bill by making two key changes: restoring benefits for legal immigrants and providing more incentives for business to hire poor mothers. Republicans will resist major revisions, which would be expensive, but they might go along with some modest work incentives. Says former White House Staff Secretary John D. Podesta: "Chances for [Democrats'] restoring the entitlement are nil."

Clinton proposals to make further small-scale expansions in health coverage also face tough sledding. He'd like to build on last year's insurance portability bill by providing benefits for the unemployed, and may try to extend coverage to children of working-class parents through the Medicaid program. Both ideas will be fought by the Republican majority. "The liberal agenda now runs to these micro-mandates rather than direct spending," says Republican theorist William Kristol. "Business has every reason to resist them."

Corporate lobbyists have other concerns. At the top of the list: deregulation of the $200 billion electric-utility industry. That will pit Big Business, which largely favors the idea, against small business and consumer groups, who fear higher rates. While not a partisan spat, "This is a huge issue," says R. Bruce Josten, senior vice-president of the U.S. Chamber of Commerce.

House Republicans hope to renew their push for another pet business issue: legal reform. In the 104th Congress, GOP hardliners fumbled the effort by pushing for a bill that went overboard on restricting punitive damages and requiring that losers of lawsuits pay legal costs. This time they'll scale back their ambitions. Business may have to settle for a modest revamping of product-liability laws.

SCROOGES? Other measures, such as Democratic-backed initiatives to let workers keep pension benefits as they shift jobs, will have an excellent chance. So will a restructuring of federal job-training programs. A good bet: Workers will be given vouchers to pay for their own training, and government-mandated programs will wither.

Thus far, Clinton has avoided ideological spats over his selections for the federal bench. He'll have to tread more carefully when it comes to the U.S. Supreme Court. In what could be his most lasting legacy, he'll have a chance to pick as many as three more justices for the Supreme Court. That would mean he will have chosen a majority of the High Court by 2000. The GOP Senate will make trouble for any court pick viewed as out of the mainstream.

Taken as a whole, Clinton's Act II is not an agenda for a major shakeup of the status quo. It does, however, reflect the new shared power equation in Washington, a calculus that pits a widely distrusted and ethically challenged President against a Republican Congress that many voters suspect consists of insensitive Scrooges. Under this scenario, says one contented business lobbyist, "Nothing big or even vaguely partisan moves. It's something my people can live with."

So, two cheers for divided government. It seems to be the unambiguous verdict of the electorate. It isn't giving Corporate America the willies. And in the end, if Republicans and Democrats refrain from their natural impulse for partisan bloodletting, it could even produce a centrist agenda in tune with America in an era of diminished expectations for government--and shattered faith in politicians.

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