It appears likely that the Republicans will retake the House of Representatives and that they will draw close to equality in the Senate following the November 2 mid-term elections. If so, the GOP will have to make some hard choices on economic policy. The alternatives are clear but each is difficult to effect:
1. Policy Inaction: This would be disastrous for the long-term success of the GOP. Of course, they could simply stymie all of the President’s legislative initiatives and harass him with respect to his regulatory initiatives. Such a position would be harmful to the country and disastrous for the Party as 2012 approaches.
2. Compromise with the President by securing permanent support for the Bush tax cuts in return for Stimulus IV: This would be harmful to the country, given the size and projected rate of growth of the national debt as a percent of gross domestic product. It would place narrow party goals above the preservation of the American Dream.
3. Compromise with the President, requiring him to abandon card check and cap and trade legislation, together with any further fiscal stimuli in return for a fully-fledged reform of income taxes, along flat- rate lines, without exemptions, designed to lift overall federal taxes to 20 per cent of gross domestic product, and for harsh public sector cuts, designed to reduce federal spending, inclusive of entitlements, to 20 percent of gross domestic product by no later than 2015: This is the responsible option. It would return the GOP to its Barry Goldwater roots of reducing the size of the state and overall budget balance. It is also the successful option, both for President and GOP, since it is likely to guarantee both re-election in 2012.
Public choice suggests that Option 3 will not be chosen, by either President or by the GOP, because it offends against the principle of pandering to concentrated interests while offlaying the costs onto the dispersed general population. Sometimes, however, divided government succeeds where unified government cannot, in achieving welfare-enhancing outcomes.