The economy has slowed to a feeble 2-percent growth rate, unemployment is stuck at nearly 10 percent, Democrats had their clock cleaned in the elections, and a discouraged President Obama wants to compromise with the Republicans on tax cuts.
In what appears to be the start of a policy-making reversal on the economic centerpiece of his 2008 campaign -- raising the top tax rates on incomes of $200,000 or more -- Obama is crying uncle and sending signals that, in the words of the Republicans and even some Democrats, "this is not the time to be raising taxes."
Certainly not on struggling small-business owners, entrepreneurial risk-takers and much-needed venture capital investors in the midst of a mediocre recovery.
Changing his tone in the aftermath of the GOP's sweeping gains in Congress, Obama said on CBS's "60 Minutes" that a GOP proposal to extend the Bush administration's full array of tax cuts for another two years is a "basis for conversation."
For the past two years he has been arguing that the government cannot afford to retain the Bush tax cuts for millionaires, even though the two top tax rates also apply to millions of small employers, working couples, anyone who has a capital gain, or those who live on dividends.
Now he is shifting to a fallback position, saying, "My No, 1 priority coming into this (congressional debate) is making sure that middle-class families don't see their tax rates go up on January 1."
That is the date when the 2001 and 2003 Bush tax cuts will expire if the president and the Republicans cannot agree to continue them, either permanently as Republicans would like, or for an extended period of time.
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Obama has the ultimate presidential weapon, the veto, but he has also signaled that he does not want to be the one blamed for letting all the tax rates rise on low-, middle- and upper-income Americans.
The Republicans, however, hold the stronger hand, even in this Democrat-run, lame-duck Congress. As many as 30 to 40 House Democrats, many of whom were defeated, either signed a letter to Speaker Pelosi urging temporary extension of the tax cuts, or expressed in their campaigns opposition to any income tax hike at this time.
In the Senate, at least four Democrats are on record as opposing tax increases now, and others, who will be among the 23 Democrats facing re-election in 2012, will likely join them out of self-preservation.
Obama and Democratic leaders have blamed the Republicans for blocking a vote on the tax cuts. But it was a divided White House and opposition from Democrats in both chambers that has led to the end-of-the-year tax showdown.
Obama's advisers have been debating strategy on the tax cuts for more than a year, unable to reach a clear consensus. Democrats in the House, fearful of the traction the GOP was getting on the issue as the economy weakened, refused to walk the tax-hike plank until the Senate acted first.
Senate Majority Leader Harry Reid planned to take up the "soak the rich" tax bill in September, until he found that he didn't have the 60 votes needed. Several liberal Democrats who were in tight races urged him to postpone any vote until after the elections.
The day after the GOP's stunning victory, the White House sent feelers out to Republican leaders for a compromise. One offer was to separate the Bush tax cuts for upper-income earners from the other tax brackets, extending them for different time periods. Another was to raise Obama's tax threshold to $500,000 or $1 million.
Virginia Rep. Eric Cantor, the No. 2 House GOP leader, shot that idea down on "Fox News Sunday." "I am not for decoupling the rates," he said. "I am not for sending any signal to small businesses in this country that they're going to have their tax rates go up."
But while Republicans were pounding the Democrats' weak and defensive positions, Obama was becoming increasingly bearish and pessimistic about the economy's long-term future, and seemed to be losing confidence in his own failed policies to bring the jobless rate down and spur faster growth.
"I do get discouraged," he told "60 Minutes," and for the first time he expressed fears that the economy was entering a long era of slow growth and high unemployment that he called the "new normal."
"I thought the economy would have gotten better by now ... But you don't always have control of everything."
The Democrats' increasing division and disarray and Obama's weakness on economic policy opens the door for the Republicans to extend all of the Bush tax cuts, even if only for a year or two.
They will be in charge of the House next year and have de facto control of the Senate, and will certainly be cutting spending and promoting new tax-cut incentives to unleash the power of the U.S. economy that now lies dormant under Obama's "new normal" lethargy.
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