The Competitive Edge: Lame Ducks and the Economy

A host of tax, budget and regulatory issues will still be on the table when Congress reconvenes after the November election. Will the two parties be able to put aside their differences and act?

The U.S. Congress decamped from Washington in late September without addressing a host of major questions that -- for better or worse -- will have a large bearing on the future course of the economy. As I write in early October, most political commentators forecast a large change in Congress, with the Republicans likely to be in control of the House of Representatives next January. Congress will reconvene in November for a "lame-duck" session in a chastened mood with the announced intention, according to House Speaker Nancy Pelosi, of addressing many of the tax, budgetary and regulatory questions they have avoided in the last six months. This scenario promises a volatile and uncertain legislative session that merits very close attention from the business community.

Taxes lead the list of issues that need resolution. Without action in the "lame-duck," we will see higher personal taxes, higher taxes on capital and on estates, and expiration of both the research and experimentation tax credit and the limits on the alternative minimum tax. Raising taxes in the current sluggish economy can only have negative effects on growth, investment and job creation.

Congress also failed to pass a budget for the fiscal year that started Oct. 1, hence placing no restraints on the massive deficit spending that requires debt financing. On the regulatory front, the lame-duck Congress could revive the "card-check" legislation. The Obama administration also has proposed stringent new ozone emission standards that a recent Manufacturers Alliance/MAPI study showed would cost more than $1 trillion annually between 2020 and 2030, reduce GDP by 3.6% and result in the loss of over 7 million jobs by 2020, if implemented. The Environmental Protection Agency also is contemplating limits on carbon emissions. A determined Congress could block both actions. Speaker Pelosi and Senate Majority Leader Harry Reid also have promised to consider the Korean Free Trade Agreement, a much-needed measure to boost U.S. exports to the fastest-growing region in the world. This agreement was first sent to Congress for approval in 2007!

Given the near gridlock that characterized the last six months in Congress, the prospects for any meaningful action on any of these major issues is questionable at best for the lame-duck session. The likelihood that scores of members will be involuntarily retired probably sours their mood and saps their motivation to take on the major issues. This dynamic leaves the president in a key role. He could, if he were to follow the precedent of Bill Clinton after the massive Democratic losses in the 1994 congressional elections, begin to move to the center and work on compromises with Republicans and conservative Democrats. This might involve, for example, compromising on the expiration of the so-called "Bush-era tax cuts" on income and capital by extending them for two years, as Obama's former budget director Peter Orszag has suggested and as dozens of Democrats in Congress have urged. If the president chooses not to compromise, his veto power ensures defeat of any legislation he chooses. He also could move ahead with regulations such as the new ozone rule.

How the president chooses to act in these circumstances is thus crucial to resolving the many outstanding issues. For the tax increases that automatically become law absent congressional action, the environmental rules and the trade agreements, all must have his support to go into effect. And all have a material impact on our sluggish economy, not only due to their direct effects but also due to the way they influence confidence about investing and hiring in the domestic market.

Thomas J. Duesterberg is president and CEO of the Manufacturers Alliance/MAPI Inc., an executive education and business research organization in Arlington, Va..

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