The midterm elections of 2010 and the widely anticipated shift toward a more Republican Congress will bring significant changes to domestic and foreign policy which will have a major effect on our clients’ businesses both here and abroad. The Government Relations Practice Group of Arent Fox has prepared the following initial analysis and commentary on the 2010 election results:  

The Context

Going into last night, there were 17 competitive Senate seats, six held by Republicans and 11 held by Democrats. Although the Senate race in Alaska is yet to be finalized, the new balance appears to be 53-47 with Harry Reid of Nevada remaining as Majority Leader. These results signal a return to the close party division that was the hallmark of the Senate prior to the 2008 elections, and a further movement away from 2009, when Sen. Reid had as many as 58-60 Democratic Senators and could count on a few moderate Republicans (Sens. Snowe, Collins, Specter at the time) to provide the 60 votes needed to curtail a filibuster and to help get landmark stimulus legislation passed.

For the first time since 1994, there were more than 100 competitive House races going into last night, and Democrats were defending 93 of them.

The Republicans have picked up a net of more than 60 seats in the House, recapturing the majority after four years in the minority. As of Friday afternoon, November 5, the Republicans had a 239-187 majority with 9 races still not finalized. Their net gain eclipsed their historic 1994 gain of 52 seats and included the defeat of committee chairmen such as Ike Skelton, D-Mo. from Armed Services, John Spratt, D-SC from the Budget Committee and James Oberstar, D-Minn. from Transportation and Infrastructure. The carnage knocked off fiscal conservative Democrats (“Blue Dogs”) as well as more liberal members of the Democratic Caucus, with health care reform, TARP, and climate change votes coming back to haunt many Members.

Not to be overlooked, there were 30 competitive governors’ races, with Republicans picking up 11 of them and with another two still to be decided. Also, 11 state legislatures have flipped and three more remain too close to call. Republicans now control 25 statehouses and may wind up with 28. This has importance at the federal level because the 2010 Census results will necessitate a redrawing of US Congressional districts for future elections.

Where did these results come from? Polling and less scientific research suggests that what drove voters in this cycle to be more anti-incumbent and more anti-Democrat than usual were the jobless recovery, lingering recession, a perceived lack of focus on job creation and preservation, as well as the perception of government overreaching (health care reform) and wasteful spending (bailouts, stimulus). It should be noted that the Tea Party movement embraced these themes and when one looks at the incoming Republican freshman class, although not homogenous, it will generally be large, eager, and opposed to the size and intrusiveness of government.

As noted below, our collective experience tells us that the increased polarization in Congress and the specter of divided government mean that gridlock may be an unfortunate byproduct of Election Day but there will be plenty of new policy initiatives offered and debated.

There is some faint hope for increased bipartisan action in the 112th Congress. The voters have clearly indicated that they want results – not partisan bickering and political gamesmanship. The most likely incoming Speaker of the House, Rep. John Boehner, R-Ohio, is a mainstream Republican with a long track record of working with Democrats on those issues where they can find common ground. The most likely new House Majority Leader, Rep. Eric Cantor, R-Va., has disavowed any prospect that the House would shut down the government in a showdown with President Obama. Both new Republican leaders, however, will have to deal with a freshman class that is likely not conciliatory.

Looking ahead, one group of Members who are waking up to a potentially new troubling reality are “marginal” Democrats running in the 2012 Congressional elections (those with a margin of victory that is fairly small). With 50 states having to analyze their congressional district boundaries now that the 2010 Census is complete, and with a total of 29 Republican governors (with 2 more gubernatorial races still undecided), we expect that new district lines will be drawn to create new Republican seats in the US House of Representatives in time for the next election.

House of Representatives

New Policy Directions

The election returns made it abundantly clear that the American people are very unhappy with the state of the economy and Congress’ efforts to deal with continued high unemployment. At the same time, they are extremely wary of increased federal spending and the concomitant increase in long-term debt. We expect the new House leadership will attempt to reduce overall spending while using tax policy to promote job creation and preservation. In the near-term, the new Republican House leadership may attempt to extend its self-imposed moratorium on the practice of earmarking federal funds for special projects. (There is no indication that the Senate Democrats are prepared to go along with an earmark moratorium, just as they have not in 2010 in the face of a unilateral decision by House Republicans and some Senate Republicans to cease seeking such line items.)

Throughout 2011, we expect that the new Republican leadership will focus on attempting to reduce overall federal spending through the regular budget and appropriations process. There may be creative efforts to link appropriations bills with tax initiatives to encourage job creation and retention. There are likely to be two major policy debates in 2011. We expect that the new Republican House leadership will attempt to repeal outright or roll back elements of the recentlyenacted health care reform law. If an effort to repeal or drastically alter the health care reform law as a free-standing bill fails, we expect that the House will attempt to use the appropriations process to delay implementation to a number of elements of the law. There may be well more than 100 separate appropriations required to continue implementing the law, so House Republicans could zero out such line items for the subsequent fiscal year and try to bring implementation to a halt. We also expect the new Republican House leadership to stimulate new debate over the existence of Fannie Mae and Freddie Mac and their ongoing roles in the domestic real estate and financial markets.

The election of a new Republican majority in the House and a narrower Democratic majority in the Senate will generate new interest in an area of economic policy that has languished for two years - trade. The replacement of a trade-skeptical Democratic House with a pro-business but populist Republican coalition, teamed with a Senate that has retained bipartisan support for free trade, creates an opening for new trade policy initiatives that may allow the Obama Administration new latitude to open international markets for US goods and services. The election of strong trade advocates in difficult races (e.g. Pat Toomey in Pennsylvania, Rob Portman in Ohio) coupled with the defeat of key protectionists (e.g. Phil Hare in Illinois), coupled with the marginal role trade played in many winning campaigns and the fact that many junior members will have never voted on a major trade agreement, creates a dynamic that will allow early action on several deferred trade initiatives. We may expect action this year in Congress on three pending but inactive bilateral free trade agreements with Colombia, Panama and South Korea. Although economic conditions may make these proposals controversial, and some new members of Congress may face local protectionist pressures, strategic security concerns will give added impetus to these existing agreements in a conservative Congress. Also look for a renewed interest in US engagement in the World Trade Organization.

Changes in Congressional Committee Leadership

The election of a Republican majority with so many new Members represents a massive power shift in the House, with an especially strong conservative tide in Southern and Western states. However, the balance of power for this majority is new members from politically competitive parts of the Mid-Atlantic and upper Midwest regions, with key recruits from states like New York (4), Pennsylvania (5), Ohio (5), Indiana (2), Illinois (3), and Wisconsin (2). With a common commitment to fiscal conservatism, many of these freshmen can be expected to reflect the diverse interests of their local communities. The Republican leadership will face the challenge of confronting divisive issues with a broad coalition.

GOP leaders will face a difficult challenge immediately in organizing the House: where to put the freshmen. As Minority Leader, Boehner declined to assign new Members to top committees (Appropriations, Energy and Commerce, Financial Services, Ways & Means). This policy is likely to be seriously tested by the addition of at least 84 new House Republicans, many of whom are political newcomers impatient with traditional governance. In 1994, Speaker Newt Gingrich allowed freshmen on key committees after a similar wave election and the math suggests that there may well end up being a repeat of that decision.

The new majority will reorganize the House with massively reconfigured, and possibly streamlined, committee structures. The new Republican majorities on the key House committees shaping economic policy will produce legislation that reflects a new emphasis on fiscal reform, regulatory restraint, tax relief, and free markets. All of the House committees, including the critical Energy and Commerce and Ways and Means Committees, will change their membership ratios to reflect a Republican majority, adding a large number of new Republican members and displacing junior Democrats.

The Energy and Commerce Committee will have a new chairman, pending resolution of Rep. Barton’s eligibility. (He is currently term-limited and would need a waiver to chair the panel.) Possible candidates include Rep. Fred Upton, R-Mich., Rep. John Shimkus, R-Ill., Rep. Greg Walden, R-Ore., and Rep. Cliff Stearns, R-Fla. Under new leadership, the committee is expected to support pro-supply energy policies, regulatory reform, and new challenges to health care reform.

The Ways and Means Committee will be chaired by veteran conservative Rep. Dave Camp of Michigan, a seasoned Hill insider with a long involvement in tax, trade, and health policy. The committee will take a lead role in protecting Bush era tax levels, restarting the congressional trade agenda, and shaping the Republican strategy on replacing healthcare reform legislation. Republican efforts to stimulate the economy or reform the tax code are likely to be focused here.

The Budget Committee will be chaired by Rep. Paul Ryan, R-Wis., a young conservative policy leader who authored the influential “Roadmap” for Republican budget policy, integrating entitlement reform, discretionary spending reductions, and fundamental tax reform to produce economic growth. Ryan will be expected to balance Republican pledges to control deficits and restrain taxes with difficult and politically difficult spending cuts.

The Appropriations Committee is expected to be chaired by either Rep. Jerry Lewis, R-Calif., who is the current top Republican on the panel or Rep. Harold Rogers, R-Ky. Either will be called upon to oversee controversial spending cuts and rationalize new GOP pledges on earmarks.

Other new committee chairs, including Rep. Darrell Issa, R-Calif., (Government Reform), Rep. John Kline, R-Minn., (Education and Labor), Spencer Bachus, R-Ala., (Financial Services), Rep. Sam Graves, R-Mo., (Small Business) and Rep. John Mica, R-Fla., (Transportation and Infrastructure), can be expected to produce conservative legislation and provide aggressive and highly critical oversight of the Obama Administration and its policies.

In the House, Florida is poised to reap some benefits of the elections, including Rep. John Mica (as noted above), as well as Rep. Ileana Ros-Lehtinen, R-Fla., being the prospective chair of the Foreign Affairs Committee, and Rep. Jeff Miller, R-Fla., being the likely chairman of the House Veterans Affairs Committee. (It is unclear whether that will work against the effort of Rep. Cliff Stearns, R-Fla., to pursue the House Energy and Commerce Committee Chairmanship, where he is not most senior and is trying to leapfrog other Members.)

Enhanced Oversight

Prior to the election, House Republican leaders made no secret of their plan to use Congress’s investigatory powers to conduct aggressive oversight of Obama Administration programs. The Government Reform Committee under its new chairman, Rep. Issa, is expected to conduct a wide range of investigations under the broad jurisdiction of his committee. There and in other committees, we also expect very aggressive oversight of the Treasury Department, particularly its handling of the TARP program and implementation of the new financial reform bill. The Department of Homeland Security is also likely to face intense scrutiny over its response to recent terrorist threats. Education Secretary Arne Duncan’s new initiatives are also likely to be the subject of multiple oversight hearings, particularly the Education Department’s new rules governing student loans to for-profit colleges and universities. Finally, we expect that the Department of Health and Human Services will face scores of oversight hearings in the 112th Congress over its implementation of healthcare reform.

Senate: Recipe For Gridlock?

As noted above, with the election of at least 16 new Senators, the Democrats will have a working majority of 51 and we expect the two Independents, Sen. Bernie Sanders, I-Vt., and Sen. Joe Lieberman, I-Conn., will continue to caucus with them and help provide a larger margin of majority. By maintaining their majority, albeit narrowly, Senate Democrats can partner with the Administration to block House Republican policy initiatives while still controlling the floor to attempt to build coalitions to secure passage of Democratic priorities. An added bonus is that by denying the Republicans the majority, Senate Democrats managed to reduce the number of problematic oversight investigations that would be possible if Senate Republicans held the gavels.

As of this writing, the Republicans picked up a net gain of six seats, including the Illinois seat once held by President Obama, and several of the Republicans who won are more conservative than their Republican predecessors. While Majority Leader Reid fended off a tough challenge from Sharron Angle, two of his colleagues found their Senate careers derailed, including Blanche Lincoln, (D-Ark., and chair of the Agriculture Committee), Russell Feingold, (D-Wis., and the co-author of the McCain-Feingold campaign finance law). The evening started looking slightly brighter for the Democrats when the races were called for their candidates in Delaware and West Virginia, but as the night wore on, the flip to Republicans in Pennsylvania (former Rep. Pat Toomey), North Dakota (Gov. John Hoeven), and Indiana (former Sen. Dan Coats), meant that the Majority Leader would have far less of an ability to muster support for the Administration’s initiatives in the upcoming 112th Congress.

What this means for policymaking is unclear. While it is true that there is increasingly a need to get 60 Senators to agree to move much legislation given the filibuster rules of that body, not just Majority Leader Reid’s job got tougher overnight with the drop in Democratic members. Republican Minority Leader Mitch McConnell, R-Ky., will have an emboldened caucus replete with new Tea Party Senators (Rand Paul from Kentucky, Marco Rubio from Florida, and Mike Lee from Utah to name a few) and some who have been there for a while, like South Carolina’s Jim DeMint, who has emerged as a conservative hero for his procedural obstructions and demands for fiscal discipline. Some new GOP Senators can be expected to criticize the party “establishment” and if Sen. McConnell wants to engage in bipartisan negotiations on various issues, he may find himself taking arrows from some of his newly minted colleagues.

It may be that the Senate will become a legislative graveyard for House Republican initiatives, since Sen. McConnell won’t have a majority to work with. This would give Republicans something to campaign on nationally in the 2012 presidential and congressional elections. Or, Democrats and Republicans who are interested in finding a way to tackle pressing issues may look for ways to cobble together 60 votes, risking alienating those on the far left and far right, and some legislation could make its way through.

One of the earliest indications of what we can expect will be the handling of budget and tax matters in the upcoming lame duck session and in the beginning of the 112th Congress. The FY11 appropriations bills need to be finalized and there are a number of tax provisions that need to be extended lest they expire (which would result in tax increases for corporations and many individuals). Similarly, the national debt ceiling will need to be addressed and could create an early 2011 dynamic where Majority Leader Reid has to agree to some spending reductions and/ or tax relief initiatives in order to get legislation through the Senate.

Coloring the legislative agenda will be the fact that the President looks weaker than he did two years ago and many Democratic senators who are on the ballot in 2012 will be far less likely to toe the party line blindly. The Democrats will have 23 seats to defend in two years, compared to only 10 Republican seats. Already, Sen. Ben Nelson, D-Neb., has voted with Republicans on a number of important votes, and one could expect that swing-state senators up for re-election may push Reid behind the scenes to compromise more with the Republicans. Also making Sen. Reid’s job tougher, but possibly easing it for Minority Leader McConnell, there are several Republicans (Orrin Hatch of Utah, Olympia Snowe of Maine, Scott Brown of Massachusetts, Bob Corker of Tennessee) who at times have strayed from their party and could face primary challenges of the kind that knocked off Utah Senator Bob Bennett in this cycle and expected GOP Senate nominee Rep. Mike Castle in Delaware, and who, as a result, may stay more in the Republican camp on key votes.

Since there is very little Senate turnover in terms of chairmen of committees, one can expect that overall legislative agendas won’t change dramatically in terms of proactive efforts. However, these chairmen will now have to contend with the likely passage of confrontational legislation from House Republicans and while the Democrats control the gavels in Committee, they will have to contend with the possibilities of floor ambushes by rank and file Republicans eager to push initiatives comparable to the House Republican agenda.

In terms of the changed Senate landscape, Agriculture Committee Chairman Blanche Lincoln’s loss opens up a gavel on a critical committee. Senior Senators on the Democratic side include Sens. Leahy, Vt., Conrad, ND, Harkin, Iowa, Baucus, Mont., who may be reluctant to give up their existing committee chairmanships. That means the Agriculture gavel could go to someone like Michigan Senator Debbie Stabenow.

Committee party ratios will be changed to reflect the narrower Democratic majority, which could mean that other than attrition, some Democratic Senators will lose plum assignments while Republicans, including freshmen, will have an abundance of options. The Finance Committee is losing Lincoln and the retired Jim Bunning, R-Ky., so we can expect a couple of new Republican Senators there for the debates over taxes and Medicare policy. With Senate Banking and Urban Affairs Committee Chairman Chris Dodd of Connecticut retiring, it paves the way for South Dakota Senator Tim Johnson to take the helm of that Committee, almost unthinkable a few years ago when he suffered a stroke and severe health complications. Sen. Johnson told Reuters this week that he does not expect to overhaul the just-enacted Dodd-Frank law but does expect to conduct oversight and that there may be “fine tuning “of that law under his chairmanship.

Five of the 12 Republican Senators on the Appropriations Committee lost re-election, retired or ran for other elective office, meaning that there will be as many as eight or nine new Republicans on the Committee. We will be watching to see if the newly assigned members are given to consensus and who support a Congressional role in earmarking part of agency budgets, or whether many of them are budget hawks who asked for a seat at the table in order to push for budget cuts.

The Senate Health, Education, Labor, and Pensions Committee will not have nearly the same kind of turnover for Chairman Tom Harkin to contend with. Assuming that Ranking Minority Member Mike Enzi of Wyoming will continue in that role, he should have at least two new Members to assist with health policy, education reform, and oversight on labor and OSHA issues. The Senate Energy and Natural Resources Committee should continue to be the location for debate over energy policy and, by extension, climate change (even though the Environment and Public Works Committee has jurisdiction over EPA). New Mexico Senator Jeff Bingaman has tried mightily to push through Renewable Portfolio Standards, which would mandate a certain percentage of electricity generation must be from renewable energy sources (like wind, solar, geothermal). It is unclear whether Ranking Republican Lisa Murkowski will win her write-in campaign for re-election in Alaska – if not, North Carolina Senator Richard Burr, who has not been a major player on many energy issues such as oil and gas, will become the Ranking Minority Member. Senators Chuck Grassley of Iowa and Orrin Hatch will likely swap gavels to become the Ranking Minority Members on the Finance and Judiciary Committees.

Conclusion – Who Are The Real Winners?

The big winners are those who took the best advantage of campaign finance reforms. Dozens of 501(c)(4)s, independent expenditure groups and “super PACs” may have dominated candidate and party spending. We estimate $4 billion was spent on campaigns this cycle, up from $3.1 billion in the prior presidential years. (Owners of television and radio stations are also winners since they pocketed a lot of those funds through sale of advertising spots.)

The next winner is the likely incoming Speaker of the House, Rep. John Boehner of Ohio, who was a prodigious fundraiser for Republican candidates throughout the nation. Conventional wisdom is that he will be the overwhelming choice for Speaker, but it will be interesting to see how he and other leadership candidates fare among the 84 incoming Republican freshmen who, having run against established Washington, may not be as wedded to their seniority as the current Republican Members are. (Note that just this afternoon, Rep. Mike Pence, Chairman of the House Republican Conference stepped down from his perch as the 3rd highest ranking Republican Member, citing the potential for new opportunities to serve Indiana and the nation, which is likely an allusion to a possible presidential run in 2012.) Boehner may continue to collect dividends from these elections because some current Democratic Members of Congress may defect to the GOP as well in order to maintain their own personal status as members of the majority.

A key question in deciding how big a win this was for House Republicans is whether they will be successful in establishing a unified front and in convincing Tea Party voters that they got the message. An early test will be whether during the lame duck session that starts November 15, House Republicans will support extending the Continuing Resolution that has kept the government operating since October 1 (and which represents a flattening of federal spending) or whether they will agree to a massive omnibus appropriations bill to just bring the current process to a close and then will start attacking new spending when the next budget cycle begins this spring. We predict they will look like “winners” in the eyes of Tea Party voters if the House Republicans pursue the longer Continuing Resolution strategy so they can show immediately that they are trying to reduce Democratic spending proposals right away.

On the Senate side, some say Republican Leader Mitch McConnell is the real winner. He does not control a majority of the Senate, so the Obama Administration cannot criticize him for how he runs it, but at the same time he has enough Senators in his caucus to make Republican support necessary for the passage of most legislation.

A real winner here is Marco Rubio, the newly elected Republican Senator from Florida, whom we believe has a chance for significant longevity in the Senate. He will become an immediate impact player on Latino issues and US-Cuba relations.

Senate Democrats are also winners because they managed to retain their majority and can attempt to shape policy on issues where the Republicans are willing to engage.