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Republican Wins Shut Obama's Opening to Enact Sweeping Change
2010-11-03 02:47:12.404 GMT
(See {ELECT <GO>} for more national election coverage and
{EXT4 <GO>} for state and local news.)
By Mike Dorning
Nov. 3 (Bloomberg) -- The window for President Barack Obama
to accomplish big things may have closed.
Obama came to office expressing admiration for Ronald
Reagan and Franklin Roosevelt because of their ability to
achieve change on a grand scale from the White House.
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.
Fed Action
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.
Shifting Focus
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.
Fewer Jobs
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.
Depressed Growth
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.
Cash Balance
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."
For Related News and Information:
Stories on the U.S. economy: TNI US ECO <GO>
To graph S&P 500 under Obama:SPX <Index> COMP D 1/20/2009 <GO>
News on U.S. consumers: TNI US CONS <GO>
To chart the unemployment rate: USURTOT <Index> GP <GO>
News search on the recession: STNI USRECESSION <GO>
On the credit crisis: NI CRUNCH BN <GO>
Top government stories: TOP
Stories on TARP: TARP <GO>
Winners, Losers in TARP: BTCPP <Index> MRR4 <GO>
U.S. Economic Forecasts: ECFC <GO>
Federal Reserve monetary policy: FOMC <GO>
To graph the budget deficit: FDEBTY <Index> GP <GO>
--Editors: Joe Sobczyk, Bob Drummond.
To contact the reporter on this story:
Mike Dorning in Washington D.C. at +1-202-624-1971 or
mdorning@bloomberg.net.
To contact the editor responsible for this story:
Mark Silva at +1-202-654-4315 or
msilva34@bloomberg.net.
