Economy turns voters left, but may delay agenda

By Donald Lambro (Contact) | Wednesday, November 5, 2008

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ANALYSIS:

America took a sharp left turn Tuesday with the election of Barack Obama and a more liberal Congress, voting for a change in the economy's direction, U.S. troop withdrawals from Iraq and a nationwide system for affordable health care.

The economy's nose-dive into recession, deeper job losses and a collapsed stock market that flattened worker retirement accounts were the driving forces behind the liberal freshman senator's victory, according to exit polls of some 10,000 voters. Six in 10 voters said the economy was the most important issue facing the country.

Mr. Obama's historic election as the first black president and the Democrats' hefty gains in the House and Senate were expected to lead to higher taxes on upper-income Americans and businesses to pay for tax cuts or refunds for low- to middle-income workers and pump-prime the economy with new spending to repair the nation's aging infrastructure.

But some analysts said the economy's weakness and the declining tax revenues that have produced sky-high deficits could force the Chicago Democrat to delay key parts of his agenda, including his tax increases and some of his tax cuts, until the nation's finances improve.

Mr. Obama's conservative critics predict that he will use his electoral mandate to usher in a wave of new federal programs to expand the welfare state beyond the working poor to the middle class through the tax system and seek a broad range of reforms long sought by his party's staunchest allies among organized labor, trial lawyers and the environmental lobby.

"His election tilts the playing field to the left that will involve a range of issues making it easier for labor to unionize businesses and collect dues, automatic arbitration favoring unions, making it easier for trial lawyers to file lawsuits, and reimposing the fairness doctrine to silence conservative talk radio," said Michael Franc, vice president for government relations at the Heritage Foundation.

Perhaps Mr. Obama's single biggest economic reform is his proposed refundable tax credit for low- to middle-income Americans that Mr. Franc sees as an attempt to "make more and more people with truly middle-class incomes become dependent on the government for their benefits."

"They are trying to extend the welfare state up through the working poor and working class to the middle class," he said.

"These would be programs run through the tax code that hand out money to an identified group of beneficiaries for a specified amount without having to create a whole other agency," he said. "You can create dependency but without the bureaucracy."

But other economic, fiscal and political analysts maintained Wednesday that much if not most of the Democrat's ambitious spending proposals - and possibly his tax increases - could be severely constrained next year as a result of the recession and a monster 2009 budget deficit estimated to reach nearly $1 trillion.

"If anything, it might be a gradual turn to the left. Obama has seemed to come across as a rather pragmatic, cautious politician who doesn't go out on a limb," said election analyst Rhodes Cook.

"I think Obama would start more gradually and take the temperature of the situation and how things are playing and not throw the Hail Mary pass right off the bat."

Economists said the declining economy, expected to shrink even further in the fourth quarter just as Mr. Obama will be preparing to take office in January, could pose a huge obstacle to his middle-class tax cuts and spending plans.

"The financial meltdown will have a way of constraining him. They really can't do a whole lot of anything until they get the financial markets under control," said William G. Gale, vice president of the Brookings Institution and director of its Economic Studies Program.

"When the financial house is on fire, the first thing he may want to do is put out the fire and that could take some time," Mr. Gale said.

"He could decide not to raise taxes in an economic downturn. The non-tax issues are going to take priority - financial reforms, energy and health care. It may be that tax increases being as controversial as they are, that is something they might want to pull back a little bit," he said.

"He's entering into an incredibly difficult situation with two major challenges. One, the economy that will require measures that cost money, and the budget which will require just the opposite," said Maya MacGuineas, president of the Committee for a Responsible Federal Budget.

But the biggest problem for Mr. Obama will be dealing with a far more liberal Democratic Congress "that has a lot of pent-up spending demands and a country where there's a lot of demand for new government involvement," Ms. MacGuineas said.

"The short-term challenge for him will be to push back against the immense pressure that's going to come from Congress to spend, spend, spend at a time when smart politicians will dress up their favorite programs as stimulus measures even when they're not," she said.

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