November 2006

What Lies Beneath? U.S. Foreign and Domestic Policy after the 2006 Elections

The incoming Congressional leadership has outlined legislative priorities including reducing the deficit, raising the minimum wage, repealing some tax cuts, addressing the costs of college, requiring the government to directly negotiate with drug companies to secure lower prices for Medicare beneficiaries, taking a firmer hand on trade agreements, and increasing subsidies for alternative fuel technologies and greenhouse-gas controls. AEI scholars Joseph Antos, Claude Barfield, Kenneth P. Green, Kevin A. Hassett, and Frederick M. Hess discussed these issues during the first panel of z November 20 AEI event.

Last week’s midterm elections sent a clear message to America’s leaders on foreign policy. But what is the message on foreign policy? Out of Iraq or timelines for Iraq? Talks with Iran or forget about Iran? Some have speculated that the Bush doctrine has failed. Does the return of senior officials from the administration of George H. W. Bush signal that this president is ready for status quo ante? A new secretary of defense and a new Congress will face up to the same old challenges and more. Can we anticipate new strategies on Iraq, Iran, and North Korea? Will the new Congress end America’s embrace of Putin’s Russia? And what about the rise of China? AEI scholars Leon Aron, Dan Blumenthal, Frederick W. Kagan, Danielle Pletka, Michael Rubin, and Gary J. Schmitt discussed U.S. foreign policy in the new Congress during the second panel.

Domestic Policy Panel

Joseph Antos
AEI

The key to health policy is money, and the Democrats are quickly finding out that they may not have enough. There are three big areas in health policy: Medicare, health insurance, and the Food and Drug Administration (FDA).

Democrats are planning to allow Medicare to negotiate prescription drug prices. Will it be successful? Such an arrangement would imply that the government sets a formula for prices, which would raise drug prices in the long run for everyone.

The Medicare Payment Advisory Commission claims that Medicare Advantage plans are overpaid. Democrats could try to reallocate some of that money to prescription drug benefits. Democrats may want to bundle all these issues and put them in a veto-proof bill. Also, the State Children’s Health Insurance Program is up for reauthorization next year. Democrats are willing to increase funding for the program, but money will be tight.

The FDA needs a new commissioner. Senator Charles Grassley (R-Iowa), outgoing chairman of the Senate Finance Committee, has objected to the appointment of Dr. Andrew von Eschenbach, which could ultimately doom the nomination. The Prescription Drug User Fee Act also needs to be reauthorized. This will increase FDA funding and may also result in changes intended to promote public safety.

We should not expect any good new health policy ideas for the next two years. The nominees for the next presidential elections will pick up that issue in 2008.

Claude Barfield
AEI

The House is split between moderate and liberal Democrats on social issues, but that is not the case on trade. Anti-trade Democrats will be replacing pro-trade Republicans. The Democratic Party is not likely to follow Bill Clinton’s ideal; “compete, not retreat” may become “retreat, not compete.” Harry Reid, incoming Senate majority leader, has voted against every free trade arrangement, including the North American Free Trade Agreement. Democrats are likely to maintain their anti-trade and anti-globalism agenda.

Reid has also stated that trade promotion authority (TPA) will not be renewed. If there is a breakthrough in the Doha round, Democrats will be pushed to extend TPA. However, the chances of such a breakthrough by spring are much less than 50-50. If the administration can convince Congress that they have received most of what they wanted out of the Doha round, the Democrats may be compelled to renew TPA. The Robert Rubin wing of the party, which includes former President Bill Clinton, is likely to take a stronger pro-trade stance.
 
Nevertheless, Democrats will try to reshape trade policy. There will be much stronger labor and environmental restrictions. The current stance is that the United States is trying to force other countries to follow existing rules, rather than imposing new rules on them. A Democratic Congress is likely to change that philosophy and to force other countries to adopt new regulations.

Kenneth P. Green
AEI

There is a dearth of good ideas on environmental policy. Speaker Nancy Pelosi (D-Calif.) and the Democrats have stated several priorities. They want to impose California’s greenhouse gas cap--a 25 percent reduction in greenhouse emissions nationally by 2020--raise Corporate Average Fuel Efficiency standards (CAFE), end subsidies to the fossil fuel and petroleum sector, and extend subsidies to the “renewable” energy sector.

Whether the Democrats can impose California’s gas cap and some sort of national trading system depends on opposition from President Bush and the Republicans. Such a move is also likely to be challenged in court. The subsidies to the petroleum sector can be axed; however, it is questionable whether subsidies to “renewable” energy will be large enough to have any significant impact. They will have to deal with the consequences of higher energy prices. CAFE increases are reasonably possible, but their benefits are questionable.

Most of the existing environmental statutes have their own built-in review system. It is unclear what the Democratic Congress can do to change things, other than holding more hearings to question agency heads. Other items, such as EPA regulation of carbon dioxide, are before the Supreme Court. Democrats probably do not want to impose any new regulations before 2008. Expect hearings to exceed action by a considerable margin.

Frederick M. Hess
AEI

Democrats will need money to implement new ideas in education policy. Education was not a priority in the last elections, and there are few clear partisan divisions on the issue. Thus, it is unclear how a Democratic Congress may impact education.

The No Child Left Behind (NCLB) Act is scheduled for reauthorization in 2007, and the current circumstances are unlike those in 2001. Support among both parties is unclear. It is important to note that both Congressman George Miller (D-Calif.) and Senator Ted Kennedy (D-Mass.), incoming chairmen of the House and Senate Education Committees, were strong supporters of NCLB in 2001. However, they have expressed that the administration has not met its funding commitments. Much depends on how the Democrats plan to meet their budget restrictions. Reauthorization will require bipartisan cooperation between the administration and pro-NCLB Democrats.

In the area of higher education, Democrats have committed to reducing guaranteed interest rates for college loans, increasing funding for Pell grants, and increasing tax credits for college students. All of these policies will readily find support among Republican ranks, and the president will be reluctant to veto them. However, they may cost between $20 and $30 billion to implement, and this depends on how the Democrats handle the budget. Both parties are divided on increasing accountability for colleges and universities, so it is unclear what may emerge.

Kevin A. Hassett
AEI

The lame duck session of Congress is likely to push as many items as possible to the next session. The Democrats have advocated a pay-go tax policy and thus have to appear to abide by it. However, enforcing pay-go will be difficult since the Democrats have so many items on their agenda.

The alternative minimum tax (AMT) poses a serious concern. Since the AMT does not allow deduction of state and local taxes and since Democratic states have more taxes, it is largely a tax on Democrats. Next year the AMT is projected to capture 23 million people, as opposed to 4 million this year. The Democrats want to patch it up for another year. However, such a patch will cost them $50 billion for just one year.

Any measures to raise federal taxes will probably be obstructed by Republicans. There may also be attempts to cut oil subsidies. The Democrats need another $100 billion to address their agenda, and pay-go is a major constraint. The Democrats may decide to scrap pay-go or to stick with it. If they do not follow pay-go, which is the more likely option, then we will observe some form of negotiation between the administration and the Democrats. If they do follow pay-go, it is hard to predict what will happen. It is always the party in opposition that supports such a restriction.

Foreign Policy Panel

Michael Rubin
AEI

The Baker-Hamilton Commission will loom large over the policy debate in the coming months. It seems the commission believes that engagement with Syria and Iran and a reopening of the Arab-Israeli peace process will be critical to success in Iraq. However, there are many difficulties with this approach.

With respect to Iran, negotiations are problematic as it is difficult determine which portion of the government is actually determining policy. Similarly, European engagement with Iran has led to increased trade but not corresponding improvement in domestic conditions or a slowing of Iran’s nuclear program. Indeed, if Iran’s nuclear development continues, the United States will be increasingly deterred from pressuring the state. Syria, on the other hand, seems to have little interest in Iraqi stability, demonstrated by its continued harboring of supporters of the Iraqi insurgency, undercutting one of the core assumptions of the commission. Also, going to Syria for help may mean forgiving Damascus for interference in Lebanon. Finally, dealing with the Arab-Israeli crisis, while important, does not address much deeper ideological problems with radical Islam.

Leon Aron
AEI

Aside from Russia’s recent accession to the World Trade Organization (WTO), there will be little good news coming from the Kremlin. As President Vladmir Putin has largely rejected liberal and democratic values, the relationship between the United States and Russia must now be based on shared interests. This will make relations between the two countries increasingly unstable. The United States’ five main interests in Russia--nuclear nonproliferation; energy stability; the War on Terror; the containment of a potentially resurgent, authoritarian China; and Russia’s transition to liberal, capitalist democracy--will therefore be a greater challenge in the coming years.

Gary J. Schmitt
AEI

Despite a major second term effort to revitalize transatlantic relations, there may be little progress on this front in the near future. While the coming NATO summit may well bring Australia and Japan into the fold, Europeans view the recent U.S. election as creating a lame duck president. Coupled with domestic political considerations in Europe, this should cool down any warming in U.S.-European relations that has been taking place. Within the United States, the time between now and the State of the Union address provides President Bush a window to put forward plausible policy alternatives on Iraq.

Frederick W. Kagan
AEI

The current military situation in Iraq is not the subject of much debate. The Iraqi army is entirely reliant on the U.S. Army for support and logistics, meaning that, in all probability, a pullout will lead to Iraq’s collapse and an increase in the already substantial sectarian violence. Proposals to redeploy troops outside of Iraq are tantamount to a pullout.

Iran’s influence over the militias within Iraq seems to be limited, and there is already too much weaponry within the country to make closing Iraq’s borders an effective option. The only tenable choices are to adapt military strategy and stay in, or to pull out and let the country collapse. The next few months should see much debate on this subject in Washington, leading to a discernable course of action sometime next year.

Dan Blumenthal
AEI

While North Korea continues to pose a problem for U.S. foreign relations, it seems that the administration will continue to rely on China to deal with the situation. Even though the likelihood that China will deliver a change in North Korea is slim, the United States may have to compromise on policy with China, especially with respect to Taiwan, if there is to be any chance of success. Because of the North Korean nuclear threat, Japan will feel pressure to remilitarize. And despite Democratic rhetoric, it appears unlikely that they will seek to change the current multilateral strategy when dealing with China.

AEI interns Waseem Alim and Adrian Myers prepared this summary.