Valliere: Democrats Need a Hail Mary

Stunning new polls – both public and internal – show that the Republicans may exceed New Gingrich’s 52-seat House gain in 1994, which would easily top the 39-seat magic number the GOP needs to capture the House. And the Senate, where the magic number is 10, is suddenly in play.

Yet at the White House, it appears that someone put Ambien in the water coolers. President Obama’s aides are talking about a modest package of small business tax cuts, and perhaps new spending on transportation infrastructure – which has no chance of passage in the Senate.

Rank-and-file Democrats are in full panic mode.

Their anxiety may intensify this Friday, when the August jobs report is expected to show that the economy continues to decelerate. Clearly, they need a pre-election Hail Mary pass.

More and more Democrats recognize the obvious: monetary policy is nearly out of gas, spending is politically toxic, and therefore tax stimulus is the only game in town – and therein lies an intriguing Hail Mary.

When lawmakers return to town on Sept. 13, what if Obama brings together leaders of both parties and hammers out the following deal – extend the Bush tax cuts indefinitely for 97% of Americans, and perhaps for two or three years for the wealthiest Americans.

Photo by: Pete Souza

President Barack Obama

The impact would be electrifying.

It would give financial markets a sense of certainty – it would instantly end the pervasive anxiety that the top dividend rate might soar to 39.6% on Jan. 1 if nothing is done. Stocks could rally dramatically.

And for businesses, sitting on over $1 trillion of un-invested cash, a sense of tax clarity could begin to open up their coffers. The uncertainty is a major reason why new hiring has been so anemic.

A tax cut deal is a no-brainer. Investors and businesses desperately need a jolt of confidence, and a sense of certainty on tax policy – in September, not in an unpredictable lame duck session – would be an enormous pre-election positive.

The obstacle, of course, is politics. Are there enough moderates, like Sen. Evan Bayh (D-Ind.), who simply want to do the right thing – who recognize that this is a terrible time to raise taxes on anybody?

The progressive left despises the Bush tax cuts; many Democrats would never agree to extend them for everyone. And the Republican leadership has succeeded with an obstructionist agenda that shuns any kind of compromise; why would they relent on an issue that should help them this fall?

September will be a crucial test of Barack Obama’s very shaky leadership skills. He can bring both parties together and insist on a tax deal that would instantly restore some sense of predictability among investors and corporate leaders. Or he can preside over a decelerating economy and an election debacle. Isn’t that choice a no brainer?

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Greg Valliere is Chief Political Strategist at the Potomac Research Group, a Washington-based firm that advises institutional investors on how government policies affect the markets. Greg has covered Washington for over 30 years, starting his career as an intern at The Washington Post, then co-founding The Washington Forum in 1974 to bridge Wall Street and Washington. He has held several positions, including Director of Research, for Washington-based firms, including the Schwab Washington Research Group. Greg is an exclusive commentator for CNBC-TV, where he appears regularly on most of the network’s programs.