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The Brookings Institution POLICY BRIEF February 2003 Policy Brief #115 Related Brookings Resources AFTER THE MID-TERMS:CONGRESS, THE • Agenda for the Nation Henry J. Aaron, James M. PRESIDENT, AND POLICYMAKING IN 2003 Lindsay, and Pietro S. Nivola, E.J. DIONNE JR., BRUCE KATZ, JAMES M. LINDSAY, editors (forthcoming, 2003) THOMAS E. MANN, PETER R. ORSZAG • “The Economic Effects of Long-Term Fiscal Discipline” THE POLITICAL CONTEXT William G. Gale and E.J. DIONNE JR. AND THOMAS E. MANN Peter R. Orszag (Urban-Brookings Tax Policy resident George W. Bush played for Center, December 2002) high-stakes in the 2002 midterm http://www.brookings.edu/ views/papers/gale/20021217. Pelections and won. Despite the abysmal htm record of previous presidents who campaigned •Tense Commandments: Federal Prescriptions and City Problems aggressively to try to reverse the traditional Pietro Nivola pattern in midterm elections—the party in the (2002) White House almost always loses seats—Bush • Protecting the American Homeland risked his post-September 11 popularity and Michael E. O’Hanlon, political standing to return the Senate to President Bush delivers his Peter R. Orszag, Ivo H. Republican control and increase his party’s annual State of the Union Daalder, I.M. Destler, address to a joint session of David L. Gunter, Robert E. narrow House majority. He countered a Congress Jan. 28, 2003. Litan, James B. Steinberg (2002) sluggish economy and a sour public mood by • Organizing the Presidency focusing the campaign agenda on the threat from Iraq and the politics of Stephen Hess homeland security. He traveled extensively during the last weeks of the (2002) campaign to mobilize party loyalists in targeted Senate and House races. President Bush shaped the outcome of the 2002 elections, and now his decisions on foreign and domestic policy will determine what Congress does and how, if at all, policy will be affected.

Republican gains were, in fact, modest. ratification the president had not won in The president’s party picked up two seats securing the White House in 2000. in the Senate and six in the House; a small number of votes made the But Republican post-election euphoria difference between victory and defeat. A was quickly tempered. In a December The near-record number of incumbents runoff, Sen. Mary Landrieu (D-La.) won Brookings returned to office, suggesting that the reelection by emphasizing her Institution electorate was not in the mood for independence and criticizing the White change. Nonetheless, Bush’s victory was House on local issues, notably the 1775 Massachusetts Ave., N.W. substantial, and amounted to the political protection of domestic sugar interests. Washington, DC 20036

All Policy Briefs are available on the Brookings website at www.brookings.edu. POLICY BRIEF

Senate Republican leader of health and retirement programs with a lost his leadership position larger role for the private sector, and, of after remarks at a celebration for retiring course, a resolution of the confrontation Senator (R-S.C.) that with Saddam Hussein. seemed to endorse Thurmond’s segrega- tionist past. The speed with which the The president’s agenda seems guaranteed White House orchestrated Lott’s to generate vehement opposition from replacement as majority leader by Democrats. He is likely to have good luck Republican under- in pushing his agenda through the House, scored the political difficulties the race where the Republican leadership holds a issue still poses a president who received tight rein on its members and has the fewer than one in ten votes among African- parliamentary means to prevail with a Americans. The administration’s vulnera- slender majority. His prospects are much bility on the economy was underscored by less certain in the Senate, where moderate E.J. Dionne Jr. is a senior fellow in the replacement of two key members of his Democrats and Republicans may be less Governance Studies at economic team, and the revelation that amenable to Bush’s ideas, especially on Brookings and a columnist for had moved to revive its taxes, than they were in 2001. . capacity to build nuclear weapons raised questions about Bush’s focus on Iraq and The president’s extraordinary post- the competence of the administration’s September 11 approval ratings have divided foreign policy team. dropped since the midterm elections. The economy seems mired in a jobless These post-election setbacks did not recovery. The efficacy of the president’s much affect the president’s domestic and economic stimulus package, as a stimulus, foreign policy agenda. His moves were was questioned even by conservatives who Bruce Katz is founding director of the Brookings seen, depending on the observer, as either supported its provisions. And the Center on Urban and bold and courageous, or brazen and program’s size and tilt toward the higher- Metropolitan Policy, a senior fellow in reckless. Bush renominated controversial income taxpayers prompted even Economic Studies, and judicial appointees; proposed another Republican senators to question its logic. the Adeline M. and Alfred I. Johnson Chair. large package of tax cuts, including the Electoral defeat only sharpened elimination of taxes on dividends; rejected Democratic opposition and unified rather calls for revenue sharing with fiscally than divided Senate Democrats, who need distressed states; challenged the only forty-one votes to frustrate most University of affirmative action administration initiatives. program before the Supreme Court; insisted on a lower domestic spending cap Bush’s boldness could make him the most for the 2003 fiscal year in a confrontation effective party builder since President James M. Lindsay is a with the Senate; approved a plan to deploy William McKinley and an even more senior fellow in Foreign Policy Studies at an initial phase of a national missile effective ideological leader than Ronald Brookings. defense system; and accelerated the Reagan. His willingness to gamble is the buildup of military forces in the Persian defining characteristic of his presidency. Gulf. Much more will soon follow from Moreover, by laying out such a conservative the White House, including , domestic program, Bush could move the ambitious plans to restructure federal political center to the right and force his

2 Policy Brief #115 February 2003 POLICY BRIEF opponents to define compromise as White House is moving grudgingly toward something far less reasonable than they talks with the North Koreans. Any deal would have thought a few months ago. Washington and Pyongyang strike to But the president’s boldness in foreign resolve the crisis could require Congress policy risks the very kind of unintended to approve aid. This would likely provoke consequences that conservative thinkers opposition from lawmakers who argue that have warned against for a generation, and such deals constitute appeasement. his domestic program risks opening Bush’s Thomas E. Mann is a senior fellow in already established image to the charge Congress will also take up President Governance Studies at that he is an unabashed sympathizer with Bush’s proposal to create a Millennium Brookings and the W. Averell Harriman Chair. the interests of the wealthy. Challenge Account to provide aid to devel- oping countries that are pursuing sound FOREIGN POLICY economic and governance policies. While JAMES M. LINDSAY politically appealing on its face, the Despite the fact that the proposal raises numerous practical diffi- faces immediate and dramatic challenges culties, not the least being how to ensure abroad, foreign policy was not at the Congress can adequately oversee the forefront of congressional races during the program and how it affects other foreign Peter R. Orszag is the 2002 mid-term elections. But it will aid programs. Joseph A. Pechman Senior Fellow in probably feature prominently in the public Economic Studies at debate in 2003. Committees Brookings. The results of the 2002 mid-term elections Iraq tops the likely list of foreign policy mean that Republicans will now chair issues. Congress voted in October 2002 Senate committees. Despite the partisan 108th to authorize the use of military force to switch, however, the ideological balance CONGRESS oust Saddam Hussein. So lawmakers will on the committees that handle defense HOUSE Republicans: 229 be on the sidelines as President Bush and foreign policy will move only slightly. Democrats: 205 decides whether to go to war. Should that The chairmanship of the Senate Armed Independents: 1 happen, congressional debate on what the Services Committee has moved from Carl SENATE Republicans: 51 United States should do to shape a post- Levin (D-Mich.) to (R-Va.). Democrats: 48 Hussein Iraq could be lively. Many Over the years, Armed Services has largely Independents: 1 members favor a sustained American pursued a bipartisan approach to legis- House Speaker: military presence with the aim of helping lating. And in the wake of September 11, , R-Ill. to create a democratic Iraq. Many others, Democrats and Republicans on both sides House Majority Leader: skeptical of nation-building, want an of Capitol Hill have found little to quarrel Tom DeLay, R-Texas expeditious withdrawal of U.S. troops about in the defense budget. House Minority once the war ends. Leader: At the Foreign Relations Committee, Nancy Pelosi, D-Calif. North Korea’s nuclear weapons program is Joseph R. Biden Jr. (D-Del.) has passed Senate Majority another potentially contentious topic. the gavel to (R-Ind.). Lugar Leader: Bill Frist, R-Tenn. Despite elevating preemption to a central is a moderate internationalist whose Senate Minority role in U.S. strategy, the Bush adminis- approach to foreign policy resembles Leader: tration has for now ruled out military Biden’s in many ways and departs sharply , D-S.D. action on the Korean Peninsula. The with the unilateralism that other Senate

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Republicans favor. Lugar has a reputation of enthusiasm but a lack of demonstrable for being independent minded. When he results. Moreover, Democrats had largely served as chair of Foreign Relations in the resigned themselves in the short term to mid-1980s, he at times found himself watching the administration proceed with publicly at odds with on its deployment initiatives. foreign policy. Trade debates may also be affected on the The Intelligence Committee chairmanship margins. Republicans are less sympathetic moves from Bob Graham (D-Fla.) to Pat than Democrats to demands that trade Roberts (R-Kan.). Roberts hopes to deals incorporate environmental and labor encourage intelligence community standards. Still, the administration officials to be more candid by holding probably will not make trade policy a more of the committee’s hearings behind priority over the next two years. President closed doors. Along with its House Bush wants to avoid being a one-term “[Bush’s] moves counterpart, the Intelligence Committee president like his father. He has spent were seen, will continue to explore what, if any, kinds considerable time tending to the interests of intelligence reform should be under- of swing states like Pennsylvania, West depending on taken in response to the failures of Virginia, and Michigan. Free trade is a the observer, September 11. In all likelihood, no major policy loser in all these states. as either bold and legislation will pass until after the independent panel that Congress estab- A wild card in the foreign policy debates in courageous, lished last fall to investigate the attacks the 108th Congress is whether Democrats or brazen and completes its report, which is expected to will regain the nerve to criticize President reckless.” be in mid-2004. Bush. Like the rest of the country, Democrats rallied around the White In the House, the line-up of Republican House after the September 11 attacks. If committee chairs is largely unchanged. the president’s approval ratings continue Henry Hyde (Ill.) continues as chair of the their slow decline—and a quick victory in International Relations Committee. Porter Iraq could change that—Democrats may Goss (Fla.) remains as chair of the gain the confidence to voice contending Intelligence Committee. On Armed views. The result would be more fractious Services, Duncan Hunter (Calif.) has congressional decision-making than in the replaced Bob Stump (Ariz), who retired. past year.

Why the Mid-Term Election Mattered THE ECONOMY Republican control of Congress will have PETER R. ORSZAG a modest impact on the congressional One of the crucial issues that will define foreign policy debate. Missile defense will economic policy during the 108th likely get more enthusiastic support now Congress is whether Democrats will be than if the Democrats had retained control able to offer a credible alternative vision of of the Senate. This may not have much America’s long-term budget priorities that practical impact. The main obstacle to can compete with the Bush adminis- missile defense efforts today is not a lack tration’s proposals. Democrats suffered in

4 Policy Brief #115 February 2003 POLICY BRIEF the mid-term elections in part because “dynamic scoring”—a controversial they failed to take a firm stand on the practice that involves incorporating the administration’s 2001 tax cut or to offer a macroeconomic effects of tax cuts or viable and coherent alternative to the spending changes when calculating administration’s economic policies. economic proposals.

In January 2003, House Democrats First, and perhaps most important, the assembled a plan for stimulating the Bush administration has staked out what economy in the short term, focusing on some consider an extreme position in fiscal relief and tax cuts for the debate over whether long-term deficits middle class. An important change was matter. Contrary to previous Republican that rather than responding to the admin- and Democratic administrations, Bush istration, as had occurred so frequently administration officials seem to downplay during 2001 and 2002, the Democrats the significance of budget deficits, arguing were able to unveil their package before that there is little or no connection “Despite the partisan the administration’s own short-term plan between long-term budget deficits and was released. For its part, the Bush admin- interest rates. switch, the ideological istration’s priorities are clear: more tax balance on the cuts. Its proposal to exclude dividends Indeed, current administration officials committees that from taxation at the individual level and to criticize concerns over the long-term accelerate scheduled reductions in deficit as “Rubinomics.” But in February handle defense and marginal tax rates demonstrates that the 1991, then-President Bush’s Council of foreign policy will administration has decided not to pursue Economic Advisers wrote in its Economic move only slightly. an overarching and ambitious tax reform Report of the President that “economic ” plan, but rather to continue the recent theory and empirical evidence indicate pattern of pursuing more fundamental that expectations of deficit reduction in changes in a series of small steps. Such an future years, if the deficit reduction approach may make sense politically, but it commitment is credible, can lower does not make sense from an economic interest rates as financial market partici- perspective, because it obscures the fiscal pants observe that the government will cost of the changes as a whole, and it be lowering its future demand in the undermines many of the efficiency gains credit market.” associated with true tax reform. The Council of Economic Advisers in The Bush administration’s success in both the Reagan and Clinton administra- enacting more tax cuts is likely to hinge on tions shared this view, but the new Bush three related factors: the argument over administration apparently does not. whether long-term deficits matter for the economy; the ability of the administration The debate over the precise relationship to convince centrist senators that its between deficits and interest rates, proposals make sense; and whether the moreover, may obscure the more funda- Joint Committee on Taxation and the mental point: All else being equal, larger Congressional Budget Office adopt budget surpluses or smaller budget

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deficits raise the nation’s income over the scheduled, future tax cuts under the 2001 long term. tax legislation, and making those tax cuts permanent. A crucial question will be Courting the Centrists whether Republicans can successfully With Republicans holding a razor-thin argue that fiscal discipline does not matter, majority in the Senate, these issues will and whether Democrats can rebut that manifest themselves in the fight for case. That debate will be fundamental to centrist lawmakers’ votes. Under Senate whether the Senate approves the tax cuts rules, tax cuts typically require sixty votes, sought by the administration, and it may so convincing at least some Democrats to be affected by the new leadership at the vote for a tax cut is essential to its passage. Joint Committee on Taxation and the Some methods of enacting tax cuts that Congressional Budget Office. “Electoral defeat sunset within the next ten years only only sharpened require fifty votes, but since some THE ELECTIONS AND Republicans senators—including Lincoln DOMESTIC POLICY Democratic Chafee of and John McCain BRUCE KATZ opposition and of Arizona—seem opposed to the adminis- Since November, analysis of the mid-term unified rather than tration’s tax plans, even obtaining fifty elections has focused largely on restored votes in the Senate would require some Republican control in the Senate and the divided Senate Democrats. Centrist Democrats in the narrow partisan divide in Washington. But Democrats, who Senate, including John Breaux (La.), such assessments leave out an equally need only forty-one Dianne Feinstein (Calif.), and Max profound (and related) development. Baucus (Mont.), have expressed concerns Thanks in part to the elections, the stage votes to frustrate about long-term deficits. Whether those is now set for a major new debate over the most administration concerns are sufficient to prevent these proper relationship between the federal initiatives.” senators from embracing the adminis- government and the nation’s states and tration’s proposals remains to be seen. cities. Already, in fact, GOP gains in Congress and new White House A final related issue involves the Joint assertiveness are heightening tensions Committee on Taxation and the between Republicans in Washington and Congressional Budget Office. The political leaders of all stripes in states and directors of these congressional offices localities. A significant new fight over have recently departed; the Republican federalism seems near. leadership has suggested that their replacements support dynamic scoring. In this respect, the election has thrown The change is controversial because the into relief a troubling drift in the American results are sensitive to the assumptions federalist system. For some time, employed. Democrats are concerned that Washington has been absent from the dynamic scoring could be abused to state and local scene where it should have underestimate the costs of tax cuts. been present, and intrusive where it should have been absent. But now, The fight during the coming months will emboldened by their mid-term gains, the center on new tax cuts, accelerating White House and Republican congres-

6 Policy Brief #115 February 2003 POLICY BRIEF sional leadership appear fixed on pursuing National Governors Association recently their own ends regardless of state or local issued a statement contending that “[t]he need or sentiment. most powerful immediate economic stimulus the administration could have The most critical disconnect has been over recommended would have been to provide money. The states now face a collective assistance to states to forestall planned deficit of over $60 billion due to sagging spending reductions and tax increases.” revenues and the soft economy. In order to The Democratic Governors Association balance their budgets, states have already has gone further, proposing an alternative raided their “rainy day” reserves and stimulus plan that includes $50 billion in tobacco settlement funds, which means grants to the states. Although the governors (twenty-four of whom are new) Republican Governors Association has now face a series of almost impossible remained formally supportive of the “The mid-term choices. Do they raise taxes? Do they cut president, some Republican governors, elections appear or prisons? Do they slash local such as Robert Taft of , have publicly revenue sharing or education? Do they expressed disappointment that the to have widened delay fixing roads or do away with entire president’s proposal did not include fiscal an emerging divide departments? Such decisions could have relief for the states. between a major national implications, not least because they seem sure to slow economic The Bush plan also sharpens the simultaneously recovery and shred the already tenuous distinction between Democrats and aloof and social safety net. Republicans at the national level. House meddlesome Democrats have recommended a $31 At the same time, the Bush adminis- billion package of state aid that includes a Washington on tration—which, including the president, temporary increase in the federal share of the one hand and has four former governors in senior Medicaid payments. Sen. (D- fiscally strapped leadership positions—seems insensitive Mont.), the ranking member of the Senate to the fiscal plight of the states. The Finance Committee, has proposed $75 states and president’s economic stimulus plan billion in block grants to the states. By localities on contains no fiscal relief for states and contrast, House and Senate Republicans cities. And the plan’s centerpiece—elimi- have remained almost uniformly silent on the other.” nating taxes on corporate dividends— the issue of state aid. Only a few junior would actually cost states an additional Republican senators, including Susan $4 billion to $5 billion since state income Collins of Maine and Gordon Smith of tax laws generally follow the federal Oregon, have bucked the party trend. system. The president’s plan would also Brookings gratefully lessen the attractiveness of tax-free In short, rising fiscal tensions between acknowledges the bonds, a major staple of state and local Washington and the states appear likely. generosity of the capital investment strategies. Virginia Wellington Federal Inaction, Federal Meddling Cabot Foundation Meanwhile, the president’s plan is sowing The widening gap between Washington for its support of the discontent among a powerful group: the and Main Street extends beyond fiscal Policy Brief series. nation’s governors. The bipartisan policy. States and cities also are uncertain

Policy Brief #115 February 2003 7 POLICY BRIEF about Washington’s willingness to help impose inflexible work requirements that them meet homeland security challenges will restrict the ability of states and as well as comply with new federal counties to tailor programs to local labor mandates included in the recently enacted market realities. On economic security for education and voting reform laws. the working poor, there is talk of compli- cating access to the highly successful On homeland security, no more than earned income tax credit and even of Recent Policy Briefs $500 million of the $3.5 billion desig- increasing the tax burden of the working •“A ‘Master Plan’ to Deal With North Korea” nated by President Bush’s initial poor. In each case, the Republican admin- Michael E. O’Hanlon homeland security plan for supporting istration and Congress seem determined (January 2003) “first responders”—local police, fire, and to tamper with programs that have served •“The New National Security Strategy and emergency medical crews—has yet the nation’s states and localities well. Preemption” materialized. States and localities have Michael E. O’Hanlon, Susan E. Rice, James B. also incurred huge costs in their efforts In sum, the mid-term elections appear to Steinberg to coordinate responses to terrorist have widened an emerging divide (December 2002) threats and provide law enforcement between a simultaneously aloof and •“Trust in Charitable Organizations” personnel to the nation’s 429 meddlesome Washington on the one Paul C. Light commercial airports. On education hand and fiscally strapped states and Reform Watch #6 (December 2002) policy, the 2001 No Child Left Behind localities on the other. It has also begun •“The Telecommunications Act imposed costly testing requirements to recast Republican leaders—traditional Crash: What To Do Now?” on states (estimated at $1 billion proponents of federal devolution—as Robert E. Litan annually) without funding the tests’ hostile to state needs and power. Do these (December 2002) design and implementation. policy trends represent a permanent shift •“The IMF’s Dilemma in Argentina: Time for a in Republican thinking about federal/state New Approach to On other core issues, the threat is federal relations or only a temporary tactical Lending?” Carol Graham and meddling, rather than inaction. On maneuver? The answer to that question Paul Robert Masson welfare policy, Congress—following the will have major implications for domestic (November 2002) administration’s lead—seems poised to policy in the coming decade. Editor Elana Mintz Production/Layout Tell us what you think of this Policy Brief. Mary Liberty E-mail your comments to [email protected]. Vice President of Communications Ron Nessen The Brookings Institution NONPROFIT ORG. U.S. POSTAGE Senior Director 1775 Massachusetts Ave., N.W. of Communications Washington, D.C. 20036 PAID Robert Dabrowski FREDERICK, MD The Brookings Office PERMIT NO. 225 of Communications 202/797-6105 [email protected]

The views expressed in this Policy Brief are those of the authors and are not necessarily those of the trustees, officers, or other staff members of the Brookings Institution.

Copyright © 2003 The Brookings Institution

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