What’s Next? A Strategic Drift toward the Center
Business + Economy

What’s Next? A Strategic Drift toward the Center

Iva Hruzikova/The Fiscal Times

Make no mistake, this is the do-or-die year to get serious about reducing the long-term federal deficit. Both parties have been chastised by voters and are finally getting the idea that they have to answer to the will of the people. Can they come together? Our experts are as divided as Congress itself.

Lawrence Haas, former communications director to Vice President Gore, thinks Washington policymakers will swing toward cooperation in 2011. “In a divided Congress, the deal cut in late 2010 on tax cuts and unemployment benefits presages progress on the budget and tax policy. The two parties will cap discretionary spending in legislation to raise the federal debt limit. The consensus will grow that the tax code is too complicated, too unfair and too harmful to growth, so Congress will also lay the foundation for tax reform, though it probably will not complete the task in 2011.”

But Jodie Allen, senior editor at the Pew Research Center, sees the tax cut compromise as a congressional concession to powerful lobby groups. Allen says, “Congress will continue to ignore public opinion on any issue about which a powerful lobby disagrees. Our founding fathers endowed us with a system of checks and balances. But increasingly, it seems, it’s the checks that determine the policies that govern us.”

The new Congress has more to deal with than lobby groups. The formidable Tea Party may pull Republicans to the libertarian view that government is a necessity one has to endure. TFT writer and reporter Elaine S. Povich, who has profiled new House Speaker John Boehner and many other D.C. bigwigs, says the Republican leadership will keep its distance from the inflammatory views of the Tea Party. Boehner of Ohio has been on the Hill for years. So have other newly powerful House Republicans — none a bomb thrower. “While Boehner rode the Tea Party’s surge, expect him to cast a cold eye now,” Povich says. 

Democrats will not be passive about the GOP’s “cut and grow” deficit- reduction plan, according to TFT political analyst Kirk Victor. He says they “will rely on Sen. Chuck Schumer of New York to set strategy this year, but look for Dick Durbin of Illinois to plot a separate course. The liberal-leaning lawmaker’s support for the president’s fiscal commission suggests he may proceed less as a partisan spear thrower and more as a dealmaker, and Durbin may strengthen his position if he and Schumer duke it out to succeed Majority Leader Harry Reid of Nevada.”

The Debt, the Deficit, the Deep Divide
“Fiscal matters will dominate the 2011 agenda and then roll over into 2012 election politics,” says G. William Hoagland, head of CIGNA’s Public Policy Group. “Expect the president’s 2012 budget to be austere and bold. The House will build on it, and when it passes a budget, an automatic debt-limit bill will go to the Senate. The debt debate will result in statutory caps on discretionary spending, debt-to-GDP triggering targets, and automatic spending and taxing measures.”  

Hoagland may be right, but there’s trouble ahead, according to veteran Washington journalist Dan Morgan. “Mired in debt and a stagnating economy,” he says, “the country is drifting into uncharted waters. Democrats and Republicans will cut spending and close tax loopholes in 2011, and this will tighten the screws on the middle class. These pressures will strain the social fabric and produce a politics we can scarcely imagine. As public services, education grants, unemployment benefits, health care, safety nets and job-creating Pentagon programs are cut to get the fiscal house in order, anger could boil over into street violence. Fasten your seat belts.”

The first serious confrontation is likely to take place over the debt ceiling.  The federal debt reached a new milestone this year — more than $14 trillion — and is likely to exceed the existing limit by this spring. George Hager, editorial board member of USA Today and a TFT contributor, believes, “The debt limit will empower congressional hardliners on both sides this year. Tea Party activists will demand major spending cuts and possibly the elimination of a department or agency. The first vote in the House to raise the limit will fail, with major market repercussions. Treasury will finesse the limit, and the hardliners will reject concessions on entitlements or taxes.”

It’s the Stupid Economy…
We’ve a hit a number of all-time highs in the past few months — Apple’s stock price, food prices, silver prices. But the number on everyone’s mind is unemployment. Will we have a jobless recovery that will ultimately sap resources from state and local governments? Our analysts looked into the crystal balls. 

TFT columnist James C. Cooper says, “Consumer spending in 2010 has already exceeded expectations. Labor income has accelerated, and stock market gains are replenishing household wealth. With households weighing in at 70 percent of GDP, consumers could be the growth surprise for 2011.”

John Berry, an expert on Fed policy and a TFT columnist, agrees that GDP growth above the original estimates of 2.5 percent is likely, but he cautions, “The prospect of stronger growth has already caused longer-term interest rates to rise, but they are not likely to surge in 2011. The risk in this improved scenario: a spillover from Europe if political leaders cannot cope with national defaults.”

Karen Dynan of the Brookings Institution predicts, “Monetary policy will hold steady in 2011. The Fed is unlikely to have an appetite for expanding its purchases of Treasury securities, but it is also unlikely to unwind monetary stimulus. Even with good growth, we are still several years away from full employment.”

…and Money in Your Pocket
Conditions seem right for another strong year for stocks, according to Sam Ro, a TFT blogger. “Corporations will stay lean, which should leverage profits further. Analysts now expect earnings per share of around $95 for the S&P 500 in 2011; a p/e multiple of 15 gets you to 1425 in the index by year end.” 

Not so fast, Sam. Your colleague Vahan Janjigian thinks that unemployment will fall to around 8 percent by year end, prompting demand for new homes and sending shares in homebuilding companies higher. “The rest of the stock market won’t do as well: The market has already priced in an improving economy. Bonds will fall in 2011. The Fed will start raising rates by year end,” Janjigian says.

Sorry, Vahan, you’re down two to one with this prediction from TFT columnist Ann Reilly Dowd. “U.S. stocks could deliver some positive surprises in 2011, particularly if retail investors, sick of puny yields and risks in bonds, return to them. But inflation in China and elsewhere could hit emerging markets. If you’ve had a good ride, consider taking profits.” 

The Paper Tiger Called “Financial Regulation”
No matter how much bureaucratic paper shuffling is imposed on Wall Street, the moneymakers are in control. Katherine Reynolds Lewis, a TFT reporter, expects more pushback against FinReg. “The 2010 law mandates more than 300 rules, but corporate lobbyists will resist all of them, and they will get attention in House hearings and then proposed legislation to curb regulatory efforts. A repeal of the reform is unlikely, but look for weakening around the edges and loopholes in the center.”

Author Scott Patterson whose book The Quants explains how high-speed trading has changed the markets, says that the securities industry is worried about the “unintended consequences” of new regulations.  “For more than a year, regulators in Washington have endlessly debated the good, the bad and the ugly aspects of recent technological developments. Yet little has been done. Next year, all of the talk could turn into action — and that's what many in the industry fear. Many say the markets are better off left alone.”

The 800 Pound Gorilla — Health Care Reform
Stuart Butler, who directs the Center for Public Innovation at The Heritage Foundation, says, “House Republicans will impede reform, and states and corporations will press for waivers and exemptions as they seek to retake the initiative. Republican governors and state legislatures will consider withdrawing from Medicaid and assigning low-income residents to federally subsidized exchanges. Employers will hear from their accountants that they could save thousands per employee if they urge employees into the exchanges. The result — a financial and operational crisis in the Affordable Care Act this year, forcing Congress to reopen legislation before its major provisions are implemented.”

TFT columnist and author David Ewing Duncan sees an upside in   health care spending: “Federal funding for life-science research and development will miss the austerity bomb in 2011. The expected partisan jam-up in Washington may by default keep funding neutral for the National Institutes of Health and other primary R&D agencies, if only because no one is clearly in charge. The NIH and other agencies spend $40 billion a year on health R&D. Too much of this goes to basic science and too few treatments result. If the R&D establishment is smart, it will take this year to redirect spending to more tangible gains — avoiding the risk of having some of its R&D treasure taken away.”

Related Links:
The Disappearing Political Center (Brookings)
After House Vote, What's Next for Health Care Law Repeal? (The Atlantic)