Wednesday, July 7, 2010

What Will Divided Government Be Like?

All signs currently point to large Republican gains, if not a takeover of Congress in the midterm elections. Barack Obama, a liberal Democrat, will still occupy the White House however. What might divided government look like over the next two years?

In terms of policy, I’m not sure. A Republican congress will be disinclined to support any more stimulus, and inclined to pursue sharp cuts in government spending overall to tackle deficits. Obama of course, believes that government must spend until the economy is well on its way back to health and the private sector can pick up the slack. What we may end up with is a series of compromise measures that alternatively allows short term stimulus and then imposes severe cuts on programs like unemployment compensation. This scenario becomes even more possible if Democrats manage to retain control of at least one house of Congress. It’s hard to see bond markets being reassured by these sorts of gyrations in policy.

Of course there is a best case scenario as well. With Republicans—who are ideologically opposed to the current size of government—to help him, Obama might be able to rein in entitlement spending like Social Security and Medicare, something the country desperately needs to stave off fiscal disaster. With Obama leading the way on this issue, many Democrats might also support needed reforms to the programs. Such action would go a long way to assuring global markets that the government is indeed serious about protecting its fiscal health, and this could lead to lower interest rates on US bonds, which will in turn make it easier to pay off the debt that government does take on.

Republicans will not get everything they want, even if they control both houses of Congress. Obama will veto any attempt to repeal healthcare legislation passed this year, and I just don’t see Republicans getting a 2/3 majority to override a veto. At every turn, they will have to compromise as much as Obama will.

Politically, a divided government could be interesting. While many observers remember the 1990s fondly, it is important to remember that government actually shut down in 1995. Government employees were furloughed and passports went unprocessed. There was even the prospect that retirees would not receive their Social Security checks in the mail. Resurgent Republicans might demand that their leaders tack hard to the right on a range of issues. Meanwhile Obama will be under pressure from his liberal base not to cave in to Republicans. While compromise might eventually happen, so might shutdown as happened in 1995.

Politically, a divided government could produce political benefits for both sides. Republicans pushing for, and producing meaningful cuts in government spending will bring disgruntled Tea Partiers back into the fold for the foreseeable future and fire up their base for the 2012 elections. For his part, Obama can compromise on entitlement spending, and then turn around and say to crucial elderly voters that his hand was forced by heartless Republicans. Such a ploy would be cynical, but it also might be effective. Of course, people see evidence all around them of the failure to put government on a sustainable fiscal path. Swing voters might be ready to accept cuts in a way they weren’t 10 years ago.


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