The Observer: Democrats beat Bush with an economy drive

EXTRACT: With the international mood on climate change shifting, and Britain keen to push the issue, after the government’s hard-hitting Stern review, the oil giants, including BP and Shell, will be nervously watching events on Capitol Hill.

THE ARTICLE

The party’s frugal and protectionist stance has helped it win votes as America teeters on the brink of a recession, says Heather Stewart

Sunday November 12, 2006

Iraq may have stolen the headlines when President Bush was given a ‘thumping’ in last week’s US elections, but the economy wasn’t far behind, as the Democrats capitalised on flagging wages and fears of cut-price foreign competition to accuse Bush of squeezing working families.

Now, with the Democrats promising a ‘new direction for America’, analysts are asking how their long-awaited victory in Washington will shape the world’s largest economy, amid mounting fears that the downturn in the US housing market will spiral into a full-blown recession.

One early casualty of a Democrat Congress may be further progress in smashing down barriers to free trade. Politicians in Europe, including Tony Blair, had hoped that the Doha round of international trade talks, which stalled earlier this year, could be nursed back to life once the mid-term elections were over. But many Democrats have fiercely protectionist views, stoking the fear of ‘unfair’ competition from fast-growing developing countries, such as China.

Bush had tried to push through a Doha deal in the face of scepticism from Congress, with the support of free-trading Republicans; but few analysts now expect the talks to resume until there is a new President. ‘It looks as though the world may have reached a temporary plateau in terms of liberalisation of trade and capital markets,’ says Stephen King, chief economist at HSBC.

The Republicans’ lavish farm subsidy bill is due to be renegotiated next year, amid pressure for budget cuts; but Collin Peterson, the new Democrat chair of the House agriculture committee, which will be key to the debate, has a record of supporting handouts to farmers.

Not only are the Democrats unlikely to pursue further trade liberalisation, there is also a risk that new protectionist measures could be passed, such as the much-debated Schumer-Graham Bill, tabled by Democrat Chuck Schumer and Republican Lindsey Graham, which would slap tariffs of 27.5 per cent on all Chinese goods.

On domestic policy, the new House majority leader Nancy Pelosi has named a number of measures she wants to pass. There is likely to be a small increase to the federal minimum wage, for example, which has now been stuck at $5.15 for almost nine years.

Environmental policies are also likely to shift towards the top of the agenda. Bush has already announced a review of energy policy, which is likely to focus on increasing the use of new technologies such as bioethanol, in an attempt to head off more radical action.

With the international mood on climate change shifting, and Britain keen to push the issue, after the government’s hard-hitting Stern review, the oil giants, including BP and Shell, will be nervously watching events on Capitol Hill.

Former Democratic presidential contender Al Gore has been busily promoting his climate-change film, An Inconvenient Truth, and advocating punitive carbon taxes. Such measures would be unlikely to escape the presidential veto; but the Democrats will probably refuse to sanction fresh drilling for oil in environmentally sensitive areas, such as Alaska.

The Democrats also hope to attack America’s spiralling health bills, by allowing the government’s giant Medicare agency to negotiate drug prices directly with pharmaceutical firms – ‘putting people ahead of drug companies,’ as its campaign literature put it. The drugs companies, such as GlaxoSmithKline and AstraZeneca, will be directly in the firing line if this measure passes, and are likely to lobby hard against it.

Spending new money is unlikely to be popular for a party that has criticised Bush for squandering the government surplus built up over the Clinton years and abandoning the Republican tradition of small government to plunge into the red. The Democrats will seek to curtail new spending on programmes they dislike, and could even insist that every extra dollar is offset by a cutback elsewhere.

With the US on the brink of an economic slowdown, however, the budget deficit is likely to get worse before it gets better, handing the Democrats a weapon to beat Bush with in 2008.

The President has already conceded that he will have to sacrifice his controversial plans for privatising the social security system, which were already unpopular in a Republican-controlled Congress. And he will also almost certainly have to abandon the idea of renewing his cherished tax cuts. The $2 trillion package, passed in 2001, is due to expire in 2011, under a so-called ‘sunset clause’. Bush had aimed to extend the cuts, but they have long been criticised by the Democrats as favouring the rich, and the sunset clause looks set to stay.

Mooted changes to the way interest rates are set also look less likely to be adopted by the Democrats. Federal Reserve chairman Ben Bernanke has said he would like to follow the Bank of England, and adopt an explicit inflation target, instead of its current mandate of aiming at price stability and full employment. However, analysts say the Democrats are unlikely to look kindly on the idea of dropping the reference to safeguarding jobs.

Who wins in 2008 will depend on how the long-predicted economic slowdown plays out over the next two years. House price inflation has plummeted from double-digits to zero in a matter of months, threatening consumer spending and jobs. And, although foreign policy has dominated debate in the past few months, more often than not ‘it’s the economy, stupid’. Voters who have lost their jobs, and watched the value of their homes crumble, are likely to be more concerned about the state of Middle America than the Middle East.

http://www.guardian.co.uk/usa/story/0,,1945631,00.html