U.S. voters, angry at a stubbornly high unemployment rate and motivated by a notion that government bailouts have helped those who needed it least, are expected to turn against incumbent Democrats in droves in Tuesday’s highly anticipated midterm elections.
If the elections live up to the predictions, the Republicans will take control of the House of Representatives and possibly even the Senate, leaving President Barack Obama, a Democrat, at the helm of a divided government.
While no one believes a Republican-controlled Congress can miraculously cut the unemployment rate in half and offer an immediate jolt to the slumbering U.S. economy, analysts expect a marked shift in fiscal policy, away from deficit spending and toward budget cutting and deficit slashing.
Jay Ritter, a finance professor at the University of Florida, sees a Republican-controlled House of Representatives focusing quickly on the country’s $1.3 trillion deficit for the fiscal year that ended September 30.
Ritter recalled that when Republicans, led by then-Speaker of the House Newt Gingrich, took control of the House in 1994, midway through Democratic President Bill Clinton’s first term, the result was a budget surplus at the end of Clinton’s second term in 2000.
“The Clinton-Gingrich divide turned out to be good for turning around a deficit,” said Ritter. “That said, given the huge deficits right now I’m a little skeptical we’ll be seeing a surplus any time soon. But I do think it will have a moderating influence on government spending.”
A Republican-controlled House could also be expected to vote quickly to extend all of the Bush-era tax cuts, an issue the Democratic-led body agreed to postpone until after the elections. The President wants to extend the cuts only to households making less than $250,000.Most recently, talk has centered on a plan that would extend the tax cuts permanently on those making less than $250,000, while extending the cuts on incomes above that threshold for two more years.
Whatever the results of Tuesday’s elections, slashing the nation’s 9.6% unemployment rate and kick-starting the stalled economic recovery will undoubtedly prove elusive.
“Unfortunately, there’s no magic bullet. The reality is that the short and intermediate-term ability to reduce unemployment and get the economy moving is pretty limited,” said Ritter.
Republicans must win 40 seats to gain control of the 435-member House and 10 to take the 100-seat Senate. Most political analysts see the Republicans taking at least 50 House seats, but not enough to wrestle control of the Senate.
The Democrats have controlled the White House and held comfortable majorities in the House and Senate since Obama was elected two years ago. The president has used that majority to pass such controversial pieces of legislation as the health-care reform bill that squeaked through Congress in March, and a less controversial financial-reform bill that became law in July.
Some Republicans have said they hope to repeal Obama’s health-care legislation entirely and scale back aspects of the financial reform. Critics of the new laws argue they impose too many costs and restrictions on U.S. business and are the primary reasons the economic recovery has stalled.
Another Republican target is stimulus spending, whether in the form of government funding for infrastructure projects or quantitative easing by the Federal Reserve, in which the Fed buys debt to lower long-term interest rates and pump cash into the economy.
In sum, the economy is by far the overriding issue on the mind of the electorate as voters head to the polls on Tuesday.
Here are some of the key races that could shape U.S. fiscal policy in the coming years:
Nevada Senate – current Senate Majority leader Harry Reid is in a tight and bitter race with Tea Party favorite Sharron Angle. If Angle replaces Reid in the Senate, the Democrats lose a powerful member of their Congressional hierarchy, and Obama loses a close ally.
Illinois Senate – Obama has made frequent trips to Illinois to stump for Democratic candidate Alexi Giannoulias in a battle against Republican Congressman Mark Kirk to fill the seat left vacant by Obama’s election to the White House. As in Nevada, the race is tight and bitter.
Connecticut Senate – Democratic state attorney general Richard Blumenthal was supposed to win easily. But Republican candidate Linda McMahon has spent heavily, dipping into her personal fortune earned as head of the entertainment empire the World Wrestling Federation. Now the race is close.
Virginia Fifth Congressional District -- Democrat Tom Perriello rode Obama’s coattails to victory two years ago in a mostly conservative district. Perriello’s vote for Obama’s health-care reform has put him on the defensive against Republican state Sen. Robert Hurt.
North Dakota at large Congressional – Democrat Earl Pomeroy, a nine-term veteran, is also on the defensive, having voted for stimulus packages and various financial bailouts. Republican competitor Rick Berg is getting a lot of help from his party’s national organization.
Florida Eighth Congressional – first-term Democrat Alan Grayson made health-care reform a priority. Now that is coming back to bite him as many voters have soured on federal spending and all manner of government programs. His competitor is Daniel Webster, a veteran of Florida Republican politics.
California Governor – Californians are being forced to decide who they dislike more: politicians or CEOs. Democratic candidate Jerry Brown has held every political post in California, or so it seems. But California’s fiscal house is a mess and voters may be looking for a new face. Meg Whitman is the Republican candidate and she’s reportedly spent $150 million of her own fortune earned as the former head of online auction site eBay (NASDAQ:EBAY) to push Brown into retirement.