What Will Republicans Do to the Economy?

Well, it's a new government now.

Republicans stormed the House. The Senate is nearly split. And after two years of playing a form of defensive offense, the White House will be playing defense against Republicans that will see their election as a mandate to cut, cut, cut -- spending, taxes, and regulations. Where should we be looking to spot glimpses of the next government action on the economy? To find out, I spoke with Kevin Hassett, Bloomberg columnist and economist with the American Enterprise Institute. Here is our conversation:

What should we watch with the GOP holding the House?

One of the interesting things to game is what happens with the deficit commission. With the GOP in office, that commission now includes the chair of the Ways and Means committee [Dave Camp] and the chair of the Budget committee [Paul Ryan]. When the commission comes out with a report, the committee chairs will be there in place to enact it. So the commission is the place to focus your attention.

What should we expect from that deficit report?

Look at Paul Ryan's roadmap. And multiply everything by zero-point-two.

Roadmap lite?

Roadmap very lite. That's what you should expect. On the other hand, the GOP didn't really push the roadmap during the campaign season, so we don't know how much of it they'll be willing to embrace in Congress.

Ryan's roadmap is all about cutting spending. He keeps tax levels very close to where they are today. Are you saying we should expect a deficit commission that is all spending cuts and nothing on the tax side?

Well, I think there's going to be no big tax reform. They've all gone nowhere. And so many Republicans have taken this pledge not to raise taxes. Maybe they'll conclude that eliminating tax deductions is different. Maybe you cap the mortgage interest deduction or the state tax exclusion.

In the next year, I feel like Republicans are going to call for hundreds of billions in spending cuts, and Democrats are going to say no. Where can we expect to see actual compromise?

Corporate taxes. Pretty soon we're going to have the highest corporate tax rate in the world, when Japan cuts its rate. It's pretty hard to be on the wrong side of the Laffer Curve, but I think we're on the wrong side of the Laffer Curve with corporate income taxes. Taxes are so high that we're losing money. We're chasing capital away.

Let's zero in on the spending cuts. We're not going to cut Medicare, because Boehner mocked that idea during health care reform. I don't see the will to make deep defense cuts. Will the cuts happen in Social Security and non-security discretionary spending?

With Social Security, we know what options we have: delay the retirement age, push the cap out, grow it at a faster rate. All of this can be done very slowly. Within spending, it shouldn't be too hard to cut. Even after you take the stimulus away, spending will continue to rise, forever. We really did jump to a new path. I think you're going to start hearing about sequestration, removing a percentage of everybody's budget and putting hard caps on each department's budget.