Later today, all of the members of the House and a third of the Senate will be sworn in and the new reality in Washington will officially set in. The initiatives that will roll out of each body in the coming days and weeks will be a radical departure from the Democratic dominance of the past years. However, we expect that the most serious proposals will also be strikingly different from the long list of priorities that existed for both parties during the last two shifts in power. In addition to the Congress, President Obama will begin to reveal selectively his reaction to the new political reality and what his priorities for the next year will look like.
Austerity, Spending Cuts, Deficit Reduction
No matter what wording you choose, the amount of money spent and collected by the federal government, as well as the amount of debt that is sold to cover the shortfall, will be the key driver of the 112th Congress. Several key flash points will arise in the coming months around this issue, which will also demonstrate the new balance of power and personalities in the new Congress.
Continuing Resolution and Rescission of Unspent Stimulus Funds
First, will be the Continuing Resolution that funds the government until March 4 coupled with a vote to increase the debt ceiling. These initial battles will highlight the conflicts of the new Washington reality, as Senate Minority Leader McConnell (R-KY) works to retain party unity -- amidst promised efforts by Senator DeMint (R-SC) to lead opposition to any measures he and other like-minded Senators deem insufficient for reducing spending as well as the size and reach of government. Speaker Boehner (R-OH) and his House Leadership team will face similar issues in keeping the new class of Tea Party-backed freshmen Republicans happy, while attempting to craft legislation that has a chance of passing the Senate. One of the first areas where this dynamic will be at work is with the promised rescissions to already appropriated Federal spending from the Recovery Act (the stimulus).
Potential Grand Bargain on Spending
Other examples of the new reality will be the potential for closer cooperation between moderate Democrats and Republicans in the Senate. One of the key indicators to watch in this regard will be the reaction of other Senators to the introduction, by Mark Warner (D-VA) and Saxby Chambliss (R-GA), of the bi-partisan Deficit Commission's findings in statutory language. The release of the President's budget in February may also be an opportunity to outflank Republican Congressional leaders on deficit reduction and there are rumors it will contain cuts to defense spending that would certainly result in clear winners and losers in the sector. Secretary Gates is expected to announce these cuts, thought to be around $100 billion in size, as early as this week after receiving approval from the White House.
Attacks on Obama's Health Care Policy
Second, is health care policy, notably the implementation of the Affordable Care Act (ACA). A repeal vote has already been scheduled in the House for January 12, but as we have said before, this will be simply symbolic and the Democratic Senate Leadership has already written to Republican House Leadership saying they will not take up the matter.
The real focus of Republicans, some Democrats, and the key variable in this debate, will be just how much opponents of the ACA will be able to chip away at funding through the Appropriations process and through small bi-partisan deals, such as small business expense reporting on 1099 IRS forms. New Ways and Means Committee Chair Dave Camp (R-MI) has already been making statements to this effect, and he may have a willing partner in Senate Finance Committee Chairman Baucus (D-MT), who attempted to repeal this portion of the ACA in the lame-duck period of the 111th Congress.
Neutering the EPA and FCC Third, House Energy and Commerce Committee Chair Fred Upton (R-MI) has indicated he will seek to use the Congressional Review Act to prevent the EPA from regulating greenhouse gases and the Federal Communications Commission (FCC) to enforce new "Net Neutrality" rules.
The biggest variable of all is how the Obama administration will adjust to the new reality
I believe that the President's choice will be driven by the state of the economy. Should the Administration decide that "green shoots" have blossomed, unemployment is falling, and growth is in fact increasing, this will free the President to act in a more moderate and pro-active manner, working alongside the new dynamics in Congress. Rallying his base will be less important and he will be able to garner at least partial credit for economic recovery.
Washington and Wall St.
Indicators of this path include the potential appointment of Bill Daley from JP Morgan Chase as Obama's Chief of Staff and rumors of a deal to reform Social Security along the lines of the Deficit Commission recommendations, as part of a grand compromise to ensure that the debt ceiling is increased and any spending cuts also hit traditional Republican priorities such as defense spending.
An initial move in one direction by the Administration does not necessarily preclude a later shift, should the economic or political situation change. Additionally, no matter what develops in terms of legislation, the Executive Branch agencies and regulators will continue to implement the President's agenda, particularly the ACA and the Dodd-Frank Act. There may be disruptions of the funding needed to fully implement each act, but the rule-writing will continue nevertheless.
Agency Oversight/Investigations Another worry for the agencies besides funding, is the new Chair of the House Committee on Oversight and Government Reform Darrell Issa (R-CA), who has promised to hold hearings on several topics including: how regulation affects job creation; Fannie Mae, Freddie Mac and the FHA; as well as the Obama Administration's foreclosure mitigation efforts; the disparate findings of the Financial Crisis Inquiry Commission; and the FDA's food and drug safety review processes. Responding to these investigations is expected to divert a great deal of attention within Executive Branch agencies towards defending Administration actions and away from implementing new priorities.
Vacancies at Financial Regulators
The rising number of vacancies of key leadership positions at various financial agencies and regulators will also act as a yoke on rule making. Vacancies include the regulator of Fannie Mae and Freddie Mac, theFederal Housing Finance Agency (FHFA); the Office of the Comptroller of the Currency (OCC); the new Consumer Financial Protection Bureau (CFPB); the new Office of Financial Research at Treasury; the National Economic Council (NEC); the Federal Reserve Board of Governors; and other lower level but critical positions at the Treasury Department. The longer these positions go unfilled, the more implementation of regulations will be delayed -- a potential point of leverage for Senate Republicans.
The bottom line for the next few weeks and months is that although Republicans will seek to roll back the legislative successes of the first two years of the Obama administration as much as possible, they will make little progress. The Senate holds potential for some bipartisan activity on select issues such as spending and social security, but the focus should be on the President's choice of governing style for the last two years of his term. This, in turn, will define how he runs his reelection campaign.