Midterm Elections 2010: Spending Wars

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Introduction

Editor’s Note: This is part of a series on the foreign policy implications of the 2010 midterm elections.

Congressional candidates in the 2010 midterm elections found the growing U.S. debt and persistent joblessness tough campaign challenges. Traditional proposals to tame unemployment--more government spending or tax cuts--were hard sells for U.S. voters worried about the country’s growing federal deficits and a ballooning public debt, which is expected to rise to 62 percent of gross domestic product (GDP) this year. Both parties staked hopes for midterm gains on convincing voters they can both create jobs and rein in deficits. After losing control of the House of Representatives to Republicans and six Senate seats, the Democratic minority will be challenged to pursue its plans for stimulus-led growth  combined with rules to offset new spending. The Republican party wants to extend Bush-era tax cuts of 2001 and 2003--set to expire this year--to wealthy Americans and small businesses and to reduce the size of government. Neither party is expected to make concessions on fiscal cuts being debated by the president’s bipartisan deficit commission. But with unemployment likely to stay above 9 percent into next year, both parties will remain under pressure to implement policies that foster fiscally responsible growth ahead of general elections in 2012, possibly with a payroll tax holiday or lower business taxes.

The Spending Debate

U.S. President Barack Obama kicked off the midterm campaign season by announcing three new economic policies (WSJ) to revive the flagging economy: a $50 billion infrastructure-spending plan; expanding and making permanent the lapsed research-tax credit for business; and a measure allowing businesses to write off 100 percent of their investment costs through 2011. Obama’s plan would also create a national "infrastructure bank," through which the federal government would issue low-cost loans for transportation projects to local governments. Many Democratic lawmakers, supported by labor unions and demand-side economists, have rallied behind Obama’s bid for more federal spending. Some three-hundred economists and forty civic and labor unions released a statement arguing for aggressive new spending in September to create jobs, increase tax collection, and ultimately reduce the government deficit.

Republican candidates capitalized on increasing voter concern about the government’s growing role in the economy. In a September 2010 Rassmusen poll, 61 percent of U.S. voters said cutting government spending and deficits would do more to create jobs than the president’s $50 billion infrastructure plan. The poll noted a fault line between "mainstream Americans," who tend to "trust the wisdom of the crowd more than their political leaders," and "political class" voters, who "tend to trust political leaders more than the public at large and are far less skeptical about government." Fifty-two percent of "political class" voters said increasing government spending is a better way to create jobs, while 83 percent of "mainstream voters" preferred cutting taxes. That "mainstream voters" sentiment has fueled support for the Tea Party movement, whose candidates heavily campaigned on reducing the federal deficit. An April New York Times/CBS poll of Tea Party supporters found 45 percent thought reducing the federal government should be the movement’s main goal.

The point was not lost on more conventional Republican candidates, either. Republican Senators Tom Coburn of Oklahoma and John McCain of Arizona released a report in August singling out one hundred projects funded by the Obama administration’s economic stimulus plan that they called wasteful, highlighting stimulus-funded construction work that appeared to be inefficient and disruptive to local businesses.

House Republican leader John Boehner (R-OH), who will become House Speaker with Republicans in control of the chamber, staunchly opposed Obama’s infrastructure spending initiative (WSJ), saying, "If we’ve learned anything from the past eighteen months, it’s that we can’t spend our way to prosperity." He advocates cutting back spending to 2008 levels on programs not tied to national security. Democrats sought to undermine his stance by highlighting Boehner’s record on spending. A television ad by the Democratic National Committee criticized him for opposing additional aid to states for teachers and Medicaid (included in a $26.1 billion bill signed by Obama in August to help states facing budget gaps), while supporting tax cuts for businesses that shifted jobs and profits overseas.

Democratic strategists tried to maintain influence in Boehner’s home state of Ohio. The swing state tipped to Obama during the 2008 election but swung back to Republicans under mounting voter frustration on joblessness. Democratic candidates struggled in open races for Ohio’s  governorship, Senate seat, and several House seats. The state’s July unemployment rate of 10.3 percent, meanwhile, exceeded the national average (WSJ), 9.6 percent, in August.

Support for White House spending policies waned in many embattled Democratic states. Ohio Lieutenant Governor Lee Fisher, the Democratic candidate for Ohio’s open Senate seat,  lamented the tardiness of Obama’s spending proposals, while Senator Michael Bennet (D-CO) said he would "not support additional spending in a second stimulus package." Many Democratic incumbents, who lost their primaries this election cycle--including Senator Arlen Specter (D-PA), Representative Alan Mollohan (D-WV), and Representative Carolyn Cheeks Kilpatrick (D-MI)--had seats on powerful (CSMonitor) appropriations committees and targeted earmarks to their constituents. Meanwhile, traditionally budget-minded Republican candidates also came under fire from Democratic campaign strategists for seeking funds for their own districts and attending ground-breaking ceremonies (WSJ) at stimulus-funded projects, even as they rallied against Obama administration spending missteps.

Some Republican candidates have played up these contradictions to get a leg up in primary races. Scott Walker, a Republican gubernatorial candidate in Wisconsin, won the Republican nomination (WSJ) after he opposed stimulus spending in his own state. In a television ad, Walker railed against an $810 million stimulus grant for a high-speed rail (WSJ) connection between Milwaukee and Madison, calling it a "perfect example of the out of control taxing and spending in Washington and Madison."

The Deficit and Tax Cuts

With a $1.3 trillion deficit, and a nearly $800 million stimulus package underway, the Obama administration pledged last February (Independent) to halve the deficit to 3 percent of GDP by 2013. One year later, after failed efforts to move Congress on the issue, the White House announced the creation (TheHill) of a bipartisan debt commission to come up with a long-term fiscal reform plan by December 2010, though Republican lawmakers warned the commission’s recommendations could lead to tax hikes.

In September, the Obama administration proposed permanently extending (TheHill) the George W. Bush-era tax cuts, scheduled to expire on January 1, to families earning less than $250,000 a year. Republicans said they would only move forward with extending middle-class cuts if top U.S. earners were included. Some Senate Democrats backed away from the proposals, arguing that locking in low rates for the majority of U.S. taxpayers was unaffordable. Other conservative Democrats worried about being branded as tax-hikers by their Republican opponents if they do not support extending the tax cuts for all. Senate Budget Committee Chairman Kent Conrad (D-ND) and Senator Ben Nelson (D-NE) alternatively proposed an extension of all the tax cuts, to be reevaluated when the economy is stronger. In a September Wall Street Journal op-ed, House Republican Whip Eric Cantor said a proposed freeze on all tax rates was "a vote the taxpayers of this country deserve before November." Cantor framed the battle over taxes as a "fight to allow businesses, taxpayers, and private industry to keep more of their money so that they can provide real stimulus and lasting growth to the economy." Obama has said Republican lawmakers are "holding middle-class tax relief hostage" by insisting that all Bush-era tax cuts be extended.

Lawmakers debated holding a vote on the issue before Election Day but ultimately left the issue (BostonGlobe) dormant until a lame-duck session in mid-November. Proponents of extending the tax cuts lacked the sixty votes (WSJ) needed to break a Senate filibuster by Democrats who want to extend the cuts to the middle class only, while Democratic lawmakers lacked the sixty votes to break a Republican filibuster of a limited tax-cut extension. Some analysts think that resolving the issue will be easier post-election when political posturing recedes; others argue the two camps could become more entrenched. In a September New York Times column, recently departed White House budget director and CFR fellow Peter Orszag said getting a deal in Congress would require a compromise to keep high-income tax cuts for two years and then end the cuts altogether.

Other Democratic legislators, meanwhile, are pushing for cuts (BostonGlobe) to the defense budget. A group of more than fifty senators (Reuters) and House lawmakers, including Representative Ron Paul of Texas, a Republican favored by Tea Party supporters, sent a letter to the Obama debt commission pointing out that defense spending accounts for 56 percent of all discretionary federal spending, adding that nearly 37 percent of the growth in discretionary spending is from the Pentagon’s base budget, which falls outside supplemental war spending.

The Long-term Outlook

Even with Republican lawmakers making significant midterm gains, building consensus on spending and job policies will still depend on an ongoing economic debate (WashPost) over unemployment’s root causes. Some think the country’s joblessness is mainly tied to structural problems, such as people who can’t relocate to take new jobs because they are tied to unpaid mortgages elsewhere, or workers’ skill sets in industries like manufacturing not matching firms’ job openings in higher-tech sectors. In a recent speech, the president of the Federal Reserve Bank of Minneapolis Narayana Kocherlakota said, "Firms have jobs, but can’t find appropriate workers. The workers want to work, but can’t find appropriate jobs."

The Obama administration, by contrast, attributes the short-term lack of hiring to a lack of spending and investment that keeps firms from hiring more workers. "Firms aren’t producing and hiring at normal levels simply because there isn’t demand for a normal level of output," said former chairwoman of the White House Council of Economic Advisors Christina Romer in a recent speech. This school of thought, shared by many Democrats, tends to support more fiscal or monetary stimulus.

Some economists, including Harvard University’s Edward Glaeser, stress that neither lawmakers nor the president should be judged by the jobless rate or proposed short-term fixes, since many drivers of persistent unemployment began several decades ago and are difficult to counter (WSJ). In a recent New York Times blog post, Glaeser writes, "It is impossible to look at the current unemployment rate and determine whether the benefits of stimulus outweighed its costs. Each stimulus program needs to be evaluated independently to determine the relationship between its costs and benefits, and that argues against using current unemployment as a metric of success."

Some analysts argue Obama’s electoral fortunes hinge on his and the Democratic party’s ability to effectively articulate this point to voters. They say voters have not been adequately adjusted to country’s new economic reality of painful and extended slow growth. "The president has done an effective job of making sure we did not slide into the next Great Depression," said Democratic consultant Chris Lehane in a recent Washington Post article. "But absent the articulation of a broader big idea that people buy into, it is a challenge to tell people things could be worse and that we are headed in the right direction long term."