Parsing the Republican economic agenda

November 3, 2010: 12:08 PM ET

The Republicans now have a platform to voice their positions on economic policy, even if their bills never land on President Obama's desk. Here's how they'll likely approach the hotly debated issues.

With the midterm elections behind us, the stage is now set for the 2012 presidential election. Like Democrats, Republicans on the campaign trail spent much of the time touting job creation. But now that the GOP dominates the House, what does it mean for the economy? Many experts say it likely won't create any big waves in economy policy, at least not immediately. Republicans want to accomplish the same thing the Democrats do: Position their party for the next presidential election.

Here's a look a four hot-button economic issues and how Republicans might approach them.

Stimulus part two:

With Republicans running the House, another big spending package to help stimulate the anemic recovery becomes even less likely. Debt-conscious Republicans generally don't want the government to spend more and some Democrats who think it's a good idea are probably too nervous to support another large-scale stimulus. While candidates touted job creation on the campaign trail, President Obama trumpeted support for another round of spending and tax breaks to give the economy a much-needed jolt. From the looks of it, the president tried to distinguish his new proposal from the first $862 stimulus package of 2009, which is often criticized for being too small and misdirected to create substantial jobs.

So another large stimulus package is now off the table, at least unless the economy takes another turn for a severe recession. What's more, the Republican victory will probably invite a push for more control over federal spending, although any real attempts to reduce the federal deficit (which is at 9% of GDP) will probably be delayed for as long as possible amid high unemployment, according to a Capital Economics report released last week.

Bush tax cuts:

Though most experts agree that fiscal policy decisions will probably freeze with Republicans dominating the House, a compromise for tax cuts enacted in 2001 and 2003 is probably bound to happen, says James E. Campbell, political scientist at State University at Buffalo.

What has come to be known as the Bush tax cuts that essentially reduced rates across the board on income, dividends and capital gains is set to expire at the end of this year. It's a hot issue that's divided the parties for some time: Most Republicans want to see the cuts extended, while some Democrats think it should expire.

What has complicated the matter is the timing in which these cuts are set to end: Nearly 15 million people are jobless, and the implications of letting taxes rise at a time when many find themselves financially unstable could hurt the parties, Campbell says. President Obama's latest proposal falls somewhere in the middle – he would extend the reductions, but allow the tax cuts to expire for individuals making more than $200,000 and families making more than $250,000.

It's anyone's guess what will transpire in the end, but one of the first items on the economic policy agenda for Republicans and Democrats alike is to pass a compromise.

Free trade policies:

A Republican-led House would typically add support for free trade deals opposed by unions. But given the nation's uncertain economy, the sea change on Tuesday probably won't do much for free trade.

Republicans have proven to be more protectionist, especially in the few months leading up to the midterm elections. In late September under the prior Congress, 99 Republicans joined 249 Democrats to strengthen punitive measures to pressure China to appreciate its renminbi.

Indeed, House Republicans earlier this year called for Congress to approve trade deals with Colombia, South Korea and Panama. Yet the weak economic recovery might likely stand in the way, especially if the Federal Reserve's expected purchase of $500 billion worth of long-term securities doesn't end up boosting the economy as much as officials hope, according to Capital Economics. Protectionist policy, economists say, is a possibility since it's one of the few alternative economic policies that has bipartisan support and could help accelerate growth.

Fate of government-backed mortgages:

Now that Republicans dominate the House, it's tough not to wonder if mortgage finance giants Fannie Mae (FNMA) and Freddie Mac (FMCC) might finally fall out of government control, if not exist on a much smaller scale.

The concept has long been sort of a pie in the sky idea among many Republicans, who argue that the programs have been too costly and highlights the risks of the government's large role in the mortgage market. It's unclear what might happen to Freddie and Fannie, but Republicans have long tried to scale down the programs – perhaps most recently in May when Sens. John McCain (Ariz.), Richard Shelby (Ala.) and Judd Gregg (N.H.) proposed to end government control of the companies within two years.

Even with Republicans controlling the House, more risks than gains might follow any wind down of Freddie and Fannie. For one, it could encourage a flight from U.S. bonds and destabilize the market. Like Democrats, Republicans are positioning their party to win the presidency in 2012 and any extreme measures are highly unlikely.

Read more:

Freddie Mac sees no housing recovery soon

A new day on Wall Street

Trade and Tea Party: Not exactly a happy couple

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About This Author
Nin-Hai Tseng
Nin-Hai Tseng
Writer, Fortune

Nin-Hai Tseng covers economics and finance. Before joining Fortune, Tseng was a reporter at The Orlando Sentinel and a public affairs associate at GE. She holds an MPA from Columbia University and a BS in Journalism from the University of Florida. She lives in New York City.

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