Democrats, Republicans need to work together

There are areas for potential compromise and cooperation

November 03, 2010|By Peter Morici

Republicans don't have a mandate to impose a rigid conservative agenda.

Voters want less government and smaller deficits, but polls indicate upward of 80 percent want Republicans to compromise with Democrats to get things done.

Like Bill Clinton in 1992, President Barack Obama mistook his 2008 victory as a mandate for an aggressive liberal agenda: socialized medicine, bailouts for Detroit and Wall Street, and an obsession with race and gender on everything from preschool enrollment to judicial nominations. And like Mr. Clinton, President Obama got his House speaker fired as a result.

To keep their gains, Republicans must work with the president on taxes, spending, regulation, health care and trade.

President Obama wants higher taxes on families earning more than $250,000. That would catch 50 percent of small business profits and stifle job creation. Republicans should settle for repealing the Bush tax cuts for families earning more than $1 million, and declare victory.

Without legislation, the estate tax snaps back to 55 percent, with a $1 million individual exemption in 2011. President Obama advocates a 45 percent rate and a $3.5 million exemption, while many Republicans would prefer 35 percent and $5 million. The solution: Settle for 40 percent and $4.25 million. That's $8.5 million for couples who create a cumbersome family trust. Eliminate that paperwork too.

In 2007, Nancy Pelosi became speaker and federal spending and the budget deficit were 19.6 percent of gross domestic product and $161 billion, respectively. For 2011, President Obama projects 25.1 percent and $1.3 trillion. More regulators and industrial policies that don't create taxpaying, private jobs contribute mightily. The financial crisis and the BP disaster were caused not by too few regulators but by bureaucrats too cozy with industries they are paid to watch.

To accomplish less-costly, more-effective reform, listen to former Federal Reserve Chairman Paul Volcker and write rules that ban objectionable behavior (similar to anti-laundering and racketeering laws) but avoid thousands of pages of narrow rules that businesses can game like the tax code. Then prosecute, not bail out, malefactors.

Such compromises on the scope and focus of regulation would require slimmer bureaucracies and help reduce spending and reduce deficits.

Perhaps the toughest area for compromise between Republicans and Democrats involves fixing Obamacare.

Provisions of the health care reform legislation that Americans like — such as barring insurance companies from denying coverage for preexisting conditions and permitting children to stay on parents' policies until age 26 — drive up insurance costs. Canceling mandates on individuals and business to buy insurance, as Republicans advocate, would increase federal outlays.

Half the funding for Obamacare comes from cuts in Medicare and Medicare reimbursements, and pressures are mounting for Congress to once again delay those. Democrats and Republicans should come together in other places to find the money. Americans pay much more for drugs, and they support hospital and health insurance bureaucracies that Europeans do not bear.

However, what neither party acknowledges is that guaranteeing health care for everyone requires European-style price regulations, even if the private sector continues to provide the insurance function.

The president wants free trade agreements with South Korea and other nations, but the trade problems causing continued high U.S. unemployment are China's intransience on exchange rates and barriers to imports. Addressing those problems requires countermeasures that veer from free market principles.

By linking support for free trade agreements to pragmatic responses to Chinese mercantilism, Republicans could continue U.S. leadership for broader, global free trade.

Health care and trade crystallize the challenges both parties face. Most Americans neither want liberal Democrats' brand of Euro-statism nor believe that markets, deregulation and tax cuts solve all problems.

This means both parties will have to step back from ideological orthodoxy. The party that defines a credible, Bill Clinton-style "third way" will win a mandate to govern for the next decade.

Peter Morici is a professor at the University of Maryland's Smith School of Business and former Chief Economist at the U.S. International Trade Commission. His e-mail is pmorici@rhsmith.umd.edu.

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