MID-TERM ELECTION POST-MORTEM

Here’s my take on what will happen.

Control of the House and enough votes to filibuster any legislation to death in the Senate effectively gives Republicans the ability to jam a stick in the spokes of the Obama administration’s wheels. As John Stewart pointed out, Republicans were quick to characterize their victories as a “tidal wave” and equally quick to disavow any responsibility such a tidal wave might portend for future legislation. “A tsunami of nothing,” Stewart called it.

From these two postures, the Republican strategy should be perfectly obvious: proposing legislation popular with their base (like repealing Obamacare and Financial Regulation) but with no chance of passage or presidential signature, and kyboshing anything the Obama administration and/or the Democrats might put forward unless the Democrats are willing to give in to major Republican demands. Accordingly, the Republicans will be content to produce legislative gridlock and blame the Obama administration for the consequences of the resulting paralysis or demand and get major concessions in exchange for modest Democrat legislative goals. Either way, Republicans benefit.

We can only hope that the dollar sinks fast enough to spur exports as the new (and only logical) engine of economic and job growth. Much will depend on whether China allows the yuan to appreciate. If exports fail to revive the U.S. economy, the U.S. economy will stagger along with no job growth, creating yet more misplaced anger toward Obama and happiness among Republican contenders for 2012.

The Republicans will trot out their one-note samba: restore the Bush tax cuts for everyone, especially their rich and powerful elite paymasters. If Obama acquiesces, the deficits will soar yet more, heightening the prospects of a hyper-inflationary future and generational warfare.

Frankly, the best thing for Obama and the country would be to hang tough and let all the Bush tax cuts expire for everyone. The fear that a tax increase at this stage would “abort the recovery” is, in my view, overblown, based on a typically shallow understanding of macro economics. While on the one hand, moderately higher tax rates would cut into personal consumption, dampening growth, on the other, it would stimulate economic activity when the government spends it. Narrowing the deficit gap with higher taxes would also promote recovery in housing and bolster economic growth by keeping long-term interest rates low in two ways: 1) By reducing the government’s need to crowd the capital markets to underwrite the deficits that would otherwise result from tax-rate cuts, and 2) By reassuring nervous lenders of the administration’s resolve not to let the deficit spiral into hyper-inflationary territory. Low interest rates offer the additional attraction of further depressing the dollar, aiding U.S. net exports as engine of economic growth. Republicans understand only the part about taxes cutting into personal consumption, and ignore or are oblivious about the rest. They don’t understand that money is just as much removed from the private sector in taxes as it is by government borrowing, so the economic effect of raising tax rates moderately or borrowing should be a wash. The main difference is whether current or future generations will foot the bill for today’s government.

The Republicans will also attempt to disassemble “Obamacare” and financial regulation (under the guise of shrinking an intrusive government and preserving “freedom” and individual choice), to no avail, as I stated previously. But it will give them a platform on which to run in 2012. And if the Democrats are as inept and fearful about selling the benefits of health-insurance and financial reform as they were in 2010, the strategy might well pay off for Republican presidential hopefuls in 2012. If they are then successful in dismantling the Obama health-insurance and financial reforms, we’re in for Bush II redux.

In short, if you liked the Panic of 2008, you’re gonna love a divided Congress now and a Republican administration in 2012.

What this election demonstrated, was that the electorate can be expected to vote their pocketbooks, and do little more than express their present discontent by voting for the opposition, with little regard for or understanding of the consequences of opposition policies.