Sobering up after the election

Some predictions and some castor oil for the politicians left standing after Nov. 2.

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College students know: Weird stuff happens here

Some predictions and some castor oil for the politicians left standing after Nov. 2.

With two weeks left until Election Day Nov. 2, I already have mailed my ballot to the King County Elections Office where, I trust, it will not be lost or miscounted.  As I made my ballot choices, I considered the challenges elected officials must meet next January.
First, here is what I foresee post-Nov. 2, after having spent time in several states over the past month.  First, Republicans will gain a narrow majority in the House of Representatives. Second,  Democrats will maintain a narrow Senate majority (unless Pacific-time-zone Democratic Sens. Harry Reid, Barbara Boxer, and Patty Murray all are defeated).  Third, a reorganized Obama White House will have no choice but to attempt bipartisan governance-by-consensus in 2011-2012. (President Bill Clinton followed a similar path in 1995-6 after Democratic losses in 1994 mid-term elections).

Now, to the challenges in the new year.
The challenge we cannot avoid:  Although recession officially has ended, we are in for a protracted period of financial/economic stagnation, adjustment, and the need to reduce the mountains of private and public debt incurred in recent years.
During the shakeout of 2009-10, jobs were lost which will never be reclaimed.  Businesses learned to do the same work with fewer employees, thus increasing their productivity.  But many in the workforce will not return to the jobs they lost; those lacking new education and training will find themselves in lower-wage spots.  The Obama administration predicted an 8 percent unemployment rate by mid-2010.  Unfortunately, we are stuck at a 9.5 percent level and likely will not hit the 8 percent target (still 4 percentage points above a "normal" unemployment rate) until mid-2011.
The housing market is still shaking out.  The recent halt to foreclosures will slow a bit the national foreclosure wave which has hit even Washington state.  But the foreclosure moratorium will hurt already weak banks that hold the mortgages and will only delay the final shakeout and home-price corrections that will be necessary to exit the mortgage crisis.  When this shakeout ends, homes will be more affordable.  But many prospective buyers will choose to be renters, until or unless they have a 25 percent-or-better downpayment at hand.
The Federal Reserve, not fearing near-term inflation, has signaled its intention to keep interest rates near zero and to continue to buy government securities.  The latter action is seen by some Fed officials as feeding down-the-road inflation.  But, right now, Chairman Ben Bernanke believes (correctly, in my view) that the risk of a near-term downward economic spike outweighs the longer-term inflation risk.   He will push the Fed to keep economic growth and jobs foremost on its agenda.
Looking forward, the country must deal with unprecedented levels of private and public debt.  Federal deficits of at least $1 trillion annually are locked in over the next 10 years.   President Obama and the new Congress will have little choice but to defuse this debt bomb however they can.   Social Security and Medicare fixes have been on the table for two decades but, during that time, presidents and Congresses have avoided offending the constituencies that benefit from them.

Social Security can be fixed more easily than Medicare by raising the eligibility age; adjusting slightly downward the annual cost-of-living adjustments; lifting the lid on income subject to Fed/FICA withholding; and reducing benefits extended to non-senior citizens.  Marginal discretionary spending (i.e., non-entitlement and defense spending) must be reduced.  The Pentagon budget must be cut (which implies withdrawals from both Iraq and Afghanistan).  And, if possible, "tax expenditures" — also known as loopholes, deductions, credits, exemptions, exclusions and preferences — must be reduced.
Tax expenditures seldom come up in public debate.  That is because they were enacted in the first place to benefit sectors, companies, and individuals with political clout.  Elected officials, at all levels, talk about "removing loopholes" but, in the end, do not get beyond talk.
You might be surprised to learn that 250 tax expenditures — double the number at the beginning of this decade — exist at federal level. If repealed even gradually, the bipartisan Committee for a Responsible Budget estimates they could yield nearly $2 trillion in new tax revenue over the coming decade.  Among these tax expenditures is the home-mortgage interest deduction.  Homeowners can deduct up to $1 million annually for their mortgage payments.  Repeal of the deduction would bring the federal treasury about $100 billion annually.  But the home-mortgage deduction is like motherhood, right?  Yet many countries, including Canada, have no such deduction.  The deduction inflates the housing market and makes housing less affordable.  It should be revisited.  
Here in Washington state, state and local "tax expenditures" total more than three times the size of the state's biennial budget. Successive governors and gubernatorial candidates, including Gov. Chris Gregoire, have pledged to review and reduce these favors extended not only to Boeing and Microsoft but to often obscure enterprises with a political sponsor.  But, year after year, new tax expenditures are added.  Gregoire, on taking office, gifted the biotech industry with fresh ones.
At federal, state, and local level, political dialogue always seems to center around "getting more tax revenues."  There are recent proposals for a value-added-tax — a national sales tax which exists in many European and other countries.  Others suggest a makeover of the inheritance tax.  Here at home, Initiative 1098 would impose for the first time a state income tax, but only on upper-income taxpayers.   But the revenues already are there — if elected officials would stop giving them to the politically favored as tax expenditures and return them to the public tax base.
Will anything happen? It is unreasonable to expect, you might say, that the White House, and previously partisan congressional Democrats and Republicans, could take on a Big Bang agenda which simultaneously would tackle entitlement (i.e., Social Security and Medicare) spending, Pentagon spending, and a tax code riddled with rifle-shot favors for those with political juice.  Perhaps so.  But the times call for it. Delay will only make the debt-gap worse and therefore harder to address later on.  
The Obama administration is undergoing change both in the White House and cabinet.  Obama has been focused over the past two years on passing landmark legislation and doing big things.   He and the new Congress will be confronted with The Biggest Thing when they report for work in January — that is, to put the country back on stable financial and economic footing.   If I still were on the active list, I would advise Obama to go for it.  
Both Obama and congressional leaders of the new Congress will be assessing their options after Nov. 2.   We should look for early signs of bipartisanship and cooperation. The odds are against their achieving it.   But standup leaders sometimes can make such things happen.  Let us hope.


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About the Authors & Contributors

Ted Van Dyk

Ted Van Dyk

Ted Van Dyk has been active in national policy and politics since 1961, serving in the White House and State Department and as policy director of several Democratic presidential campaigns. He is author of Heroes, Hacks and Fools and numerous essays in national publications. You can reach him in care of