Sunday, January 10, 2010

Politics on the Potomac in 2010

Congressional elections will be held this fall. The campaigning has begun already, as some incumbents announce their retirements and would-be replacements jockey for position. In a time when the economy is all government, all the time, the upcoming elections will be the driving force behind federal economic policy. Here's what the new year is likely to bring.

Continued Stimulus. The Obama administration has to combat unemployment in a big way, and federal spending is the only measure that can be implemented quickly enough to have an impact before the elections. If the Fed curtails some of its accommodative measures, look for Obama administration replacements--the recent lifting of the cap on assistance for Fannie Mae and Freddie Mac (see could pinch hit for the Fed's announced curtailment of mortgage-backed securities purchases in March 2010. Don't be surprised if there is one form or another of federal assistance to the states. State employees are often unionized, and the Democratic Party will be under pressure to protect its most loyal constituencies. Although the Dems will need the independents to hold onto their majorities in the House and the Senate, you don't win if your base stays home (John McCain's 2008 presidential candidacy serves as Exhibit A in this regard).

Health Insurance Reform. The Democrats have enough control of Congress this term to pass legislation reforming health insurance. They will, because they need bragging rights for the fall. They won't pass a perfect bill, and the Republicans will turn up the whining about principles and costs. But the Republicans underestimate how grateful numerous ordinary Americans will be for progress on the health insurance problem. Medicare Part D, which has one of the most obtuse structures imaginable, is now popular and regarded as a success. When the Democratic bill is passed, the score will become advantage, Dems.

The Fed Will Stay the Course. For better or for worse, the Fed has locked itself into a policy of easy money and overtime pay for its printing press staff. The Governors have made explicit their priority of alleviating unemployment, essentially promising to keep rates ultra low until the bread lines dwindle. Nothing in the annals of mission creep--not even fiction like Joseph Heller's Catch-22--approaches the never ending expansion of the Fed's activities. It's grown from being a lender of last resort to failing banks, to knight errant in the fight against inflation, to promoter-in-chief of economic growth, to banker for an asset-bubble beset international financial system, and now to grand poobah of employment opportunity. Next, perhaps, the Fed will provide borrowing facilities to distressed states and countries. Why not? The sovereign debt market is looking uglier by the day--perhaps the UK might circle the drain--and the Fed lends to just about everyone else.

Inquisition on the Right. A major confounding factor for the Republicans will be their internecine struggle between the zealots of ideological purity and the devotees of inclusiveness. The Republican Party has been shrinking, and now may encompass only its hard core of faithful. The Democrats can do little to win these people over. But they can do much among themselves to damage the party. The Savanarolas of the far right are stoking the flames, but the outcome may have been recently presaged in upstate New York, where the true believers won the Republican primary only to see the Democrats win the general election. The Republicans will be shrilly communicating with us a lot in the days leading up to the elections. But their impact on policy will be minor.

No changes in the cast until late November. The same faces will appear on the Washington reality-potboiler through the election season. The Obama administration will probably keep its current cabinet in place, lest the President appear to be a poor judge of people. After the election, Team Obama will surely check out the list of free agents. With the 2012 elections just around the corner in Washington time, cabinet members who have accumulated baggage can expect to take an express train out of town.

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