Following billions of dollars in campaign spending, the American political landscape looks largely the same after last Tuesday’s elections. Defying most of the political analysts, President Obama won re-election, in part, by winning every "battleground state" except North Carolina (and he lost there by less than 100,000 votes). But the Republicans retain control of the House of Representatives- albeit a slightly narrower majority- and Democrats retain control of the Senate, having gained one Senate seat and one Independent seat (Angus King of Maine, who is expected to caucus with the Democrats). There are a handful of House seats that are still too close to call. Despite these small shifts, the power dynamic in Congress remains essentially status quo. The more things change, the more they stay the same.
One of the conclusions that can be drawn is that voters do not want widespread changes; they just want results. Congress and the President return to Washington in November with a message to work together to seriously consider issues dealing with the economy and jobs. Exactly what can be accomplished during this Lame Duck session of Congress is now the subject of great speculation, but one thing is clear – unless agreements are reached prior to the end of 2012, the “Fiscal Cliff” that looms could severely cripple any chance for economic recovery.
Congress returns on November 13th to a crowded to-do list. Among those issues that must be dealt with ahead of the holiday recess is the Fiscal Cliff, which refers to the pending impact of mandatory government cuts through sequestration and the expiration of the “Bush Tax Cuts”. The impact of these dual policies will be the biggest- and perhaps the only- issue that the Lame Duck Congress considers.
Other issues, including the Farm Bill, the Defense Authorization bill, even consideration of Hurricane Sandy Supplemental Relief legislation will take a back seat to resolution of the "Fiscal Cliff."
Sequestration is the result of the Budget Control Act of 2011 that raised the debt ceiling and mandated cuts in spending equal to 1.2 trillion over ten years. While some programs and entitlements are spared, most agencies will see across-the-board cuts to their programs equal to 8.2%. However, 50% of the program cuts would come from the Defense budget, a possibility that both sides of the aisle want to avoid. These spending cuts, especially in defense, would have a deleterious impact on a number of industries with concentrations of government contracts. The other 50% of cuts would come from non-defense discretionary spending, and although Medicaid and some other vital programs aimed at low-income Americans are spared, many anti-poverty programs are not immune and would be dramatically impacted by the sequester.
Bush Era Tax Cuts
The other element of the Fiscal Cliff is the package of tax provisions that are set to expire on December 31st or have already expired. These include the Bush Tax Cuts of 2001 and 2003, the 2% payroll tax cut, the AMT patch, tax cuts expanding EITC and new education credits included in the stimulus package, and a group of mostly small business and energy tax provisions known collectively as the “tax extenders”. Should all of the tax provisions be allowed to expire, federal tax collections will increase by more than 20% in 2013 (a potential $2,000 tax increase on average for middle-income earners), leading to a contraction in gross domestic product and a creating a challenge for continued economic recovery.
Gridlock or Compromise?
Both parties in the Congress and President Obama have signaled their determination to avoid both sequestration and the fiscal cliff- with caveats. While the President has stated that he will veto any legislation that extends the Bush era tax cuts to top earners, he also declared in one of the presidential debates that the sequester would not go into effect, somewhat reducing his leverage in negotiating by taking the threat of the sequester off the table. The President reiterated his views in a press conference on November 9th regarding his priorities for the lame duck session of Congress.
While some members seem publicly optimistic about a “grand bargain” being worked out in the lame duck session, expectations that Congress will pass some smaller piece of legislation to get through the next three or six months, dominate. While no one really knows what the term and scope of a Lame Duck session will mean, the fact that this Congress is one of the least productive in American history would argue for reduced expectations. It would not surprise many analysts if Congress were to delay the impact of the Fiscal Cliff by passing extenders on both sequestration and the sunset date of the tax cuts. However, we anticipate that some agreements would need to be achieved to attain that outcome, including a possible AMT patch, payroll reduction extension, and physician Medicare reimbursement solution in the Lame Duck. An additional factor is the reality that the debt ceiling limits will need to be addressed in the 1st Quarter of 2013, the same dynamic that created the sequestration policy in 2011.
Another possible scenario for the Lame Duck could be the consideration of a number of “must-pass” bills while Congressional negotiators hammer out the framework of a grand bargain that would be enacted early in 2013. It could be expected that among the bills that would be considered in this environment would be the Farm Bill, the Defense Authorization Bill, a Cyber Security Bill and the FEMA Supplemental legislation.
While Republican leadership positions are expected to remain the same, there will be a significant movement taking place in House committees. As a result of term limits, senior Republican members will be shifting chairman positions. Congressman Paul Ryan is likely the only Chairman who will be granted a waiver to continue on in his role as Budget Committee Chairman for the next two years.
Committee Chairs Expected to Remain the Same:
- Agriculture: Frank Lucas (R-OK)
- Appropriations: Harold Rogers (R-KY)
- Armed Services: Buck McKeon (R-CA)
- Education & the Workforce: John Kline (R-MN)
- Energy & Commerce: Fred Upton (R-MI)
- Oversight & Government Reform: Darrell Issa (R-CA)
- Veterans’ Affairs: Jeff Miller (R-FL)
- Ways & Means: Rep. Dave Camp (R-MI)
Committee Chairs that will Change:
- Budget: Rep. Paul Ryan is termed-out, but is likely to seek and receive a waiver to keep his post chairing this committee. If Ryan is not granted the waiver, Rep. Scott Garrett (R-NJ) is most senior behind him, but may have competition from Tom Price (R-GA) and RSC Chairman Jim Jordan (R-OH).
- Financial Services: Current Chairman Spencer Bachus (R-AL) is termed-out and his likely successor is Rep. Jeb Hensarling (R-TX) who, although not the most senior on the committee, is a high profile, rising star in the Republican Party.
- Foreign Affairs: Also termed-out is Foreign Affairs Chairwoman Ileana Ros-Lehtinen (R-FL). She has endorsed Rep. Ed Royce (R-CA), but he is likely to be challenged by another subcommittee Chairman, Rep. Chris Smith (R-NJ).
- Homeland Security: Rep. Candice Miller (R-MI), Rep. Mike Rogers (R-AL), and Rep. Michael McCaul (R-TX) are all vying for the top spot to replace term-limited Rep. Steve King (R-IA). Rep. Miller is thought to have the inside track.
- Judiciary: Rep. Bob Goodlatte (R-VA) is the front-runner to replace termed-out Rep. Lamar Smith (R-TX).
- Natural Resources: Current Committee Chairman Doc Hastings is hoping to assume the Chairmanship of the House Rules Committee from retiring current Chairman David Dreier. If he is successful, Rep. Rob Bishop (R-UT) is a likely successor for the top post at Natural Resources.
- Rules: Rep. Pete Sessions is vying for the position at the top of the Rules Committee, but will be challenged by Rep. Doc Hastings (R-WA).
- Science and Technology: Current Chairman Rep. Ralph Hall (R-TX) is term-limited and two potential candidates for the post are Rep. James Sensenbrenner (R-WI) and Rep. Lamar Smith (R-TX).
- Transportation: Rep. Bill Shuster (R-PA) is the all-but-certain candidate to replace term-limited John Mica atop the Transportation & Infrastructure Committee.
As a result of Democrats retaining the majority in the Senate, leadership positions are anticipated to stay the same. Some shuffling will occur at the top of several committees because of retirements.
Committee Chairs Expected to Stay the Same:
- Agriculture, Nutrition and Forestry: Debbie Stabenow (D-NI)
- Appropriations: Daniel Inouye (D-HI)
- Armed Services: Carl Levin (D-MI)
- Banking, Housing and Urban Affairs: Tim Johnson (D-SD)
- Commerce, Science and Transportation: Jay Rockefeller (D-WV)
- Environment and Public Works: Barbara Boxer (D-CA)
- Finance: Max Baucus (D-MT)
- Health, Education, Labor, and Pensions: Tom Harkin (D-IA)
- Judiciary: Patrick Leahy (D-VT)
- Rules: Chuck Schumer (D-NY)
- Small Business and Entrepreneurship: Mary Landrieu (D-LA)
Committee Chairs that will Change:
- Budget: Patty Murray (D-WA) is next in line to assume the chairmanship from retiring Kent Conrad (D-ND). Murray is currently the chair of the Veterans’ Affairs Committee, a position she sought and a policy area about which she is passionate. There is some speculation she may try to hold on to that position, but we believe she will assume the chairmanship of the Budget Committee.
- Energy & Natural Resources: Ron Wyden (D-OR) is in line to succeed retiring Chairman Jeff Bingaman (D-NM).
- Foreign Relations: Senator John Kerry, who is considered the potential successor for Hillary Clinton as Secretary of State, currently chairs the committee. Should the chairmanship be vacated, New Jersey Senator Bob Menendez is most senior on the Committee.
- Homeland Security and Governmental Affairs: Retiring Senator Joe Lieberman clears the path for Tom Carper (D-DE).
- Veterans’ Affairs: Should Murray become Chair of the Budget Committee, Senators Bernie Sanders (I-VT) and Sherrod Brown (D-OH) are possible contenders for the position at the top of the VA Committee. While Sanders has slightly more seniority, the policy area is closer to Brown’s priorities.
- Indian Affairs: With the retirement of Senator Daniel Akaka (D-HI), Maria Cantwell (D-WA) is next in line for the chairmanship, having been passed over two years ago. However, Jon Tester (D-MT) may also be a contender, coming from a state where Native Americans comprise more than 6% of the population.
It is pro forma after every election- regardless of whether the incumbent survives or not- for the members of the President’s cabinet to submit letters of resignation, allowing the President to accept the resignation or to ask the Secretary to stay on. There are major changes expected in the cabinet for President Obama’s second term. Our thoughts on who might be leaving and their likely successors are outlined below.
Secretary of State:
It is widely known that Sec. of State Hilary Clinton would not stay on for an Obama second term. Wide speculation puts Senator John Kerry as the top prospect to assume the post. This would create a vacancy in the Senate and the need for a special election in Massachusetts or Governor appointment of a Senator. Recently defeated Senator Scott Brown (R-MA) would have a good chance of success in a special election. Because of that possible dynamic, outgoing Senator Richard Lugar of Indiana has been mentioned as a possible successor. Also on the short list: U.N. Ambassador Susan Rice and National Security Advisor Tom Donilon.
Secretary of the Treasury:
Current Secretary Tim Geithner has said that he would step down after Obama’s current term. Erskine Bowles- former Clinton Chief of Staff and co-chair of the deficit reduction panel- has been floated as a top contender. Jacob Lew, current White House Chief of Staff and former Director of the Office of Management and Budget is also considered a top contender.
Secretary of Defense:
Leon Panetta has signaled his desire to retire and leave his post as Secretary of Defense. Possible top contenders for the cabinet position include former Defense Undersecretary Michele Flournoy and Ashton Carter, current Deputy Defense Secretary.
Secretary of Transportation:
Ray LaHood has not ruled out another term as Secretary of Transportation, but has not indicated a desire to stay in his current post. Should LaHood step down, Los Angeles Mayor Antonio Villaraigosa is seen as the front-runner, but other top contenders could be former Pennsylvania Governor Ed Rendell and Rep. Steve LaTourette (R-OH).
Secretary of Energy:
Current Secretary Steven Chu has indicated a desire to step down, but given the difficulty the President may face in Senate confirmation of a new nominee, he may be encouraged to stay on. Possible contenders for the post, should Chu resign, are former Senator Byron Dorgan (D-ND), and Dan Reicher, Clinton’s Assistant Secretary of Energy Efficiency and Renewable Energy.
Office of the Attorney General:
Attorney General Eric Holder is likely on his way out, clearing the way for his likely successor, current Secretary of Homeland Security Janet Napolitano. The list of potential successors for Secretary Napolitano at Homeland Security is too broad for even speculation.
Secretary of Commerce:
President Obama hasn’t had a commerce secretary since June, when John Bryson was involved in a car crash. A number of administration officials might be interested in the post, including Ron Kirk, President Obama’s U.S. trade representative since early 2009; Fred Hochberg, president of the Export-Import Bank; and Karen Mills, the administrator of the Small Business Administration, a post that President Obama elevated to Cabinet-level status earlier this year.