What Victory Means for the GOP
The Republican sweep of both chambers of Congress sets the stage for a bolder GOP agenda. The big personal win for President Bush gives him momentum, if not a mandate, to go forward with his domestic and international priorities on taxes, Iraq, and homeland security. How far he goes in the next two years will largely depend on the prosecution of a possible war with Iraq and the strength of the economic recovery. It will also depend, in part, on how the Democratic Party reconstitutes itself in the face of defeat.
The danger now facing the Republicans is overreach. The economy, and the nation, will require a carefully balanced package of policies in the near term. The end to divided government may raise expectations beyond the limits of what can be accomplished. However great the Republicans' midterm political victory, the majorities in the Senate and House of Representatives are still narrow. President Bush would be wise to reach out to moderates in his own party and among the Democrats in seeking to implement his agenda. The simple truth is that the economic recovery is wobbling and faces unusual uncertainties from a looming war abroad and terrorism at home. However difficult it may be, a bipartisan stimulus package by spring will probably be needed to keep the economy growing. President Bush would also do well to follow through on his multilateral course of working through the U.N. to build an international coalition against Saddam Hussein. It is the best way to rid Iraq of weapons of mass destruction while avoiding a Middle Eastern backlash that could jack up the price of oil and jeopardize the recovery.
THE ECONOMY NEEDS A BOOST. We have a few suggestions on how the President should proceed. The economy needs a serious insurance policy against another downturn. The Federal Reserve helped out on Nov. 6 by cutting interest rates by 50 basis points, but a strong fiscal boost is needed as well. The President will be tempted to follow up on his party's victory by trying to make the $1.3 trillion income- and inheritance-tax cuts permanent. He shouldn't. What the country needs now is immediate stimulus, and accelerating both the 2004 and 2006 income-tax cuts to 2003 does just that.
But the prudent course is to wait to implement the later income-tax cuts. Remember, the surplus revenue projections behind the big tax cuts made in 2000 were based on a high-tech bubble that has since burst. It may be that the stock market will soar high enough once again to generate the kind of tax revenues from capital gains that we saw in the '90s, but it is doubtful. And stock options are on their way to being expensed, which will cut income-tax revenues. If the economy and stock market grow fast enough to allow them, fine. But we should be prepared to pull the outyear tax cuts back to pay for higher defense and other spending needs. It also makes sense to cap the limit for exempting the inheritance tax at $5 million. That would allow nearly all families and owners of small businesses and farms to pass on their inheritance. Above that, the estate-tax exemption becomes a gargantuan benefit for a few thousand people. The GOP proposals to end the double taxation of dividends and limit the liability to asbestos lawsuits should also be on the table. They can help investment and investors.
PRAGMATISM, NOT IDEOLOGY. The Democrats lost soundly in the midterm elections because their economic message to the voters was off-key. First, they obsessed about fiscal restraint and balancing the budget--a Hoover-like position that makes little economic sense in the face of today's slow growth and deflation. Then they misjudged the economy by running a Rust Belt type of campaign emphasizing safety-net issues for blue-collar workers at a time when the classic "misery index"--the combined unemployment and inflation rate--has remained low.
But President Bush should consider some Democratic proposals, such as extending unemployment insurance, helping strapped states with more federal money, and cutting taxes for low-income workers. No one knows how the war on Iraq is going to play out or what its impact on the economy will be. Corporate America's drive to boost profits will probably send unemployment significantly higher in 2003. War uncertainty could cut consumer spending and business investment as well, causing job loss. Next year will prove crucial in President Bush's bid for another term in 2004. A spike in the misery index could put a spike in his campaign. Adopting some safety-net provisions not only makes economic sense for Bush but political sense as well.
The Republican victory will finally get Congress to pass the President's Homeland Security Act. It's about time. A recent Council on Foreign Relations report shows that little has been done to prepare America for another terrorist attack. Firefighters and police, for example, still cannot talk to each other over the same radio frequency in U.S. cities. One way to pay for security would be to reduce the huge 10-year $182 billion agricultural subsidy program passed to attract Midwest farm votes. Such subsidies also hurt the GOP's own ideological stands on free trade and corporate welfare.
Finally, the GOP victory will no doubt tempt President Bush to back off on his Administration's drive to reform accounting, corporate governance, and conflicts of interest on Wall Street. Much progress has been made in punishing wrongdoers, but it would be a mistake to think that only a few rotten apples are to blame. Serious systemic problems led to the corruption and scandals. If the Securities & Exchange Commission doesn't finish the job, then New York Attorney General Elliott Spitzer and 49 other state attorneys general will try to do so.
Congratulations to the President and his party on their political victory. They ran a pragmatic campaign. Now they should run a pragmatic economic policy.