The exuberance about the president's year-end rebound was legitimate and deserved. Repealing "don't ask, don't tell" was genuine civil rights progress, and the passage of START established once again that critical foreign policy issues can still transcend the acid ideological battles raging in Washington.
Yet these successes seem big only in the context of diminished expectations. Even at year end, the serious battles were lost, not won. Stimulus claims aside, extending the Bush tax cuts binds the hands of the White House on the most important budget issues for the next two years and was also horrendous policy.
Moreover, none of the lame-duck victories confront the most critical issue facing us: transforming our economy so it can create jobs, raise middle-class incomes, and compete in the long-term internationally. One loss in particular, of great import, went almost unnoticed: the defeat of the $1.2 trillion federal spending authorization for the next budget year. Instead, Congress passed a continuing resolution that funds the government through March 4 but does not have within it any of the necessary funding for implementation of heath care or Wall Street reform. Instead of having budget priorities set by the White House and the Democratic Congress, control of the next budget slipped away to House Republicans. Why the White House did not ensure that passage of the budget was part of the tax-cut agreement is a mystery, but it's in keeping with their generally weak negotiating strategy.
The critical takeaway from the lame-duck session is that Republicans have maintained their unity on all things financial, breaking only on START and a social-values issue where moderate Republicans were given some leeway. On taxes and spending, they did not break rank.
This bodes ill for the coming year, when the critical fights will be about money.
For starters, Republicans are angry at the perception the president got the better of the lame-duck session, and they are eager to push back hard in the new year. The incoming Republican House leadership —aggressive and conservative to the core, and driven by what it believes is a Tea Party mandate—whatever that may mean—is eager to flex its muscles on budget issues. Having locked in the Bush tax cuts for at least the next two years, and probably longer, the White House has much less room for the types of investments it would like to make. The capacity of the White House to do any of the things it desires to do to transform our moribund economy now depends on its capacity to bring the Republican House along with it.
In this context, the White House has to move with warp speed in January to seize the initiative on revenues and spending. The Republicans are sure to announce their arrival in early January with a series of policy pronouncements designed to define the debate. In this environment, the White House should not wait until the State of the Union to outline its agenda. The president should act immediately, or else he will seem to be playing catch-up.
So, the president should first announce a major tax overhaul somewhat in line with what the Simpson-Bowles budget commission sought. Many objectives could be accomplished: First, many of the distortive tax expenditures hidden in both the personal and corporate tax codes could be eliminated. Second: This could lead to a dramatically simplified code—long sought by the public at large.Third: Because of elimination of the tax expenditures, rates could be lowered across the board, making the endeavor, if sold properly, very popular. Fourth: Most significantly, more revenues would still be generated, a necessary objective for both deficit reduction and what remains of the president's agenda.
The public understands that there are two areas of our domestic economy that must be transformed for us to be competitive going forward: education and energy. The public realizes that education is the key to middle class success, and the dollars needed, if paired with a tough Michelle Rhee-Arne Duncan reform agenda, are manageable. So the president should also rapidly expand the popular Race to the Top and make it the centerpiece of our new competitiveness.
With respect to energy, President Obama should seek a grand bargain: Go full throttle on nuclear energy, something the Republican Party has long sought, while simultaneously making a full commitment to other clean energy sources—natural gas, solar, wind, and other renewables.