New blue goals on Hill: tax cuts out, higher wages in

With the blue shift in Congress, lawmakers' priorities are likely to change in a way that touches both Main Street and Wall Street.

Look for attempts to raise taxes on the rich, instead of an extension of President Bush's tax cuts. Keep in mind that guest-worker legislation, opposed by conservative members of Congress, may become doable. And be ready for the possibility that Congress will put the spotlight on the bulky trade gap and competition with China.

Although the election outcome will probably spell policy shifts for certain segments of the economy, benefiting some and disappointing others, it's not likely to cause an appreciable shift. The consensus remains for modest growth, with the unemployment rate rising slightly.

"The outlook is for subpotential growth through the spring as the housing correction unwinds and for a small rise in unemployment, putting [the jobless rate] closer to 5 percent, through the summer," says Mark Zandi, chief economist at Moody's Economy.com.

In any event, international markets will be watching the action in Washington carefully, Wall Street analysts say.

"The biggest issue is to watch how the dollar reacts," says Joe Quinlan, chief market strategist at Banc of America Capital Management in New York. "With all the foreign purchases of our debt, this is still very important. Foreigners don't want tough talk on trade or isolationism."

However, many of the new Democratic members of Congress were elected from districts that have lost jobs to China. At the very least, these lawmakers are likely to get hearings to draw attention to the weaknesses and flaws in current trade policy.

In fact, on Wednesday, a coalition of labor groups and newly elected Democrats held a news conference to talk about their desire for new trade policies. Rep.-elect Joe Donnelly (D) of Indiana's Second Congressional District recounted how a large auto parts plant in Kokomo is threatened with closure unless the workers take steep wage cuts.

"Trade is a huge issue in my district," he said. "We are shipping jobs overseas." Mr. Donnelly defeated Rep. Chris Chocola, who voted for NAFTA and the Central American Free Trade Agreement.

The new legislators will make it more difficult for the Bush administration to get congressional approval for bilateral trade deals, including a US-Peru agreement that needs approval to be implemented. Mr. Bush is still negotiating agreements with Colombia, Thailand, and South Korea.

These lawmakers will also fight Bush's attempt to renew "fast-track authority" – the right to present a trade bill to Congress, which can only vote for or against it, with no changes. This may doom future trade agreements, such as the multinational negotiations known as the Doha Round.

"Doha is more dead with the Democrats than the Republicans," says Clyde Prestowitz, president of the Economic Strategy Institute in Washington. "But it probably doesn't matter who takes over. It was dead regardless."

Still, Democrats are far from united over trade. "Congressman Charles Rangel, who [is likely to] become chairman of the House Ways and Means Committee, is a strong supporter of current trade policies," notes Alan Tonelson, a research fellow at the US Business & Industry Council, which represents smaller companies in Washington. "He has said in recent weeks he thinks trade is one issue he thinks a new Democratic House can cooperate with the president on."

While some trade legislation may wither, Mr. Quinlan is even more concerned that with Democrats leading committees, the result could be opposition to foreign companies buying US firms. "There could be more scrutiny and there could be a longer process, which by itself could keep foreigners out of the US markets," he says.

In terms of tax cuts, it is now unlikely that Congress will extend them past their expiration date in 2010. This could result in the maximum tax rate moving from 35 percent back to 39.6 percent.

"The Democrats won't want to give the Republicans a victory," says Stan Collender, a budget expert and managing director at Qorvis Communications in Washington. "But it's likely Congress will do a one-year fix on the alternative minimum tax so it doesn't cut so deeply into the middle class."

Proponents of raising the federal minimum wage think it's likely to happen if Democrats are in charge of both the House and Senate. The presumptive new speaker of the House, Nancy Pelosi, has said it is a priority for her. On Tuesday, voters in six states approved minimum-wage increases indexed to the inflation rate.

"The next step is at the federal level," says the Rev. Paul Sherry of the Let Justice Roll Living Wage Campaign, a nonpartisan group in Cleveland. "We want to be ready to move when the new Congress convenes."

Quinlan worries that Washington may become gridlocked as Democrats seek to position themselves for the 2008 presidential race by passing laws that will be vetoed. "We can't afford two years of dithering," he says. "We have a low savings rate, energy-dependence issues, and the need to pay for mounting healthcare costs."