Today's Power Play: House Dems Fold on Taxes; GOP Wins Spending Fight; Gay Military Plan Alive; 2012 Field Shaping Up

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House Dems Cave on Tax Deal

"This basically concedes the argument to the supply-side Republican failed economic policies."

-- Rep. Peter DeFazio (D-OR) denouncing a tax compromise between President Obama and Republicans.

Poof.

Democratic objections and weeks of bitter complaining about a deal between President Obama and the GOP went up in a cloud of smoke late Thursday night.

The midnight vote sends the bill back to president Obama for his signature exactly as the White House and Republican leaders wrote it. It will maintain all the current tax rates for two years, continue a program to offer 99-week unemployment benefits and provide a smorgasbord of targeted tax incentives.

Presumably, the president will waste no time in signing it. He might want to get it done before 2 p.m., when Obama will receive the leaders of the nation's largest labor organizations for a meeting at the White House. The session has all the trappings of a symbolic bookend to the president's meeting earlier this week with CEOs.

But labor's equal time will be complicated today by the fact that unions hate the tax compromise.

Aside from reneging on one of his key campaign pitches - a rate hike for top earners - Obama has also endorsed a plan to allow companies to write off the whole value of new equipment purchased next year rather than over the life of the machinery. That means that the nascent recovery will likely produce fewer blue-collar jobs as companies rush toward further automation to maximize tax benefits and reduce labor costs.

Industrial unions have given way to government and service worker unions as the most important bloc of labor support for the Democratic Party, but they still provide crucial resources in states like Ohio and Pennsylvania. While government workers and hotel maids can make the difference in Nevada, Obama's reelection hopes still rest in the calloused hands of Rust Belt workers.

Expect AFL-CIO boss Richard Trumka to offer some colorful critique of the president's sudden embrace of Reganomics.

The House vote represents a big win for the President in his own party. Despite bitter opposition, House Democrats took their medicine and passed the measure with 59 votes to spare. Only 112 of 255 Democrats and 36 of 179 Republicans voted against the plan.

After several botched attempts to make minor changes to the legislation or even just lodge a symbolic protest vote, liberal Democrats threw in the towel and let the proposal roll forward. After two years of audacious success, Speaker Nancy Pelosi ends her reign in defeat.

In the end, Democrats were unwilling to trade a symbolic victory for a tangible defeat for their president. Having this deal blow up would have crippled the president's ability to negotiate with the new Republican Congress.

But, the win for Obama came at a high cost. Democrats may be orderly, but they will be sullen after such a rout. Pelosi will exact her price for acquiescence one day, and with so many moderate Democrats going down to defeat in the midterm elections, the tip of her spear will be sharper.

In order to avoid a repeat of this tax debacle in 2012, Obama will have to move swiftly to his plan of a tax overhaul that eliminates exemptions in exchange for lower rates - another Reagan idea.

Between tax cuts, indefinite terrorist detentions at Guantanamo Bay and a long-war strategy in Afghanistan, liberals who mobilized for Obama in 2008 may find lots of reasons to sit out 2012.

The battle of 2012 will be fought in the middle, which helps explain the extreme makeover currently underway at 1600 Pennsylvania Ave.

Senate Dems Ditch Huge Spending Bill

"Did we just win?"

-- An incredulous Sen. Mark Kirk (R-IL) speaking to Sen. John McCain (R-AZ) on the Senate floor after Majority Leader Harry Reid scuttled a massive Democratic spending bill.

Old Washington met New Washington in an awkward introduction on the Senate floor on Thursday.

Old Washington had wheeled out a $1.1 trillion pork-packed omnibus spending bill to fund the government for another year. It was a Frankenstein bill stitched together from the remnants of dead appropriations measures.

It included something for everyone, including billions in previously requested GOP earmarks. The earmarks were part inducement, part extortion. Republicans were expected to either like them or be abashed about opposing them for fear of being called hypocrites.

And early indications were that as many as nine Republicans would sign up for the deal, giving Majority Leader Harry Reid far more than the 60 votes he needed.

But in an impressive show of party discipline, Minority Leader Mitch McConnell kept his squad together and even gained some Democratic support to kill the bill. Threats of a government shutdown and news story after news story about Republican earmark hypocrisy did not shake his caucus, McConnell won a significant and unexpected victory.

The Senate will instead advance some form of short-term continuing resolution that will keep government funding at current levels until a new Congress can get to work.

Old Washington was clearly not prepared to do battle with New Washington and the populist anger over secrecy and spending that fuel it. If earmarks and threats of a government shutdown cannot convince lawmakers to spend money, which is their traditional vocation, what can?

Dem Defeat on Spending Clears Path For Gay Service Measure

"Because I'm worried that we're not going to have the votes next year. The START treaty can be ratified next year."

-- Sen. Joe Lieberman (I-CT) explaining on MSNBC why the Senate would move immediately to a bill that would allow gay members of the armed forces to express their sexualities.

Conservatives won the battle over spending in the Senate, but that victory may clear the way for some smaller wins for liberals.

With a lengthy spending battle out of the way, Democrats now hope to move on to other legislative priorities: the repeal of the "Don't Ask, Don't Tell" policy governing the conduct of gay service members, the passage of the DREAM Act a limited amnesty program for illegal immigrants and ratification of President Obama's missile treaty with Russia.

If Reid can move quickly enough to pass a stopgap spending measure, there is still time left on the legislative clock for at least some of that.

The most likely candidate for passage is a bill that would allow gay members of the armed forces to openly express their sexualities. Only a Republican pledge to consider no other business until tax and spending deadlines were addressed kept Republican Sens. Scott Brown of Massachusetts, Lisa Murkowski of Alaska and Olympia Snowe of from joining colleague Susan Collins of Maine in supporting the gay service plan.

Knowing that chances of passage will dim in the new Congress, gay activists, the White House and pro-repeal Democrats all are pushing for speedy passage and putting it at the front of the legislative line.

The DREAM Act seems like a less likely measure. Support for the plan, which grants amnesty to young adults who came to the country illegally as minors and enlist in the military or enroll in some form of higher education, seems shaky. Major concerns about verification measures and possible loopholes still cloud the measure's passage, despite some sympathetic expressions from a handful of Republicans like Sen. John Ensign, facing a brutal reelection bid in 2012.

And as for START, in a strange irony, increasing Republican support for the treaty actually diminishes the chances that it will be ratified this year.

Since the only thing between President Obama and the 67 votes he needs to pass the agreement that limits U.S. and Russian strategic arms is a couple of weeks of hearings to satisfy Republican questions, it may not make sense to jam a vote now and risk defeat.

Reid will be hard pressed to call members back to Washington after Christmas to take up a low-priority missile treaty and an unlikely-to-pass immigration plan. Unlike outgoing Speaker Nancy Pelosi, Reid will still be in charge next year.

EU Bailout Fund Leaves Doubts About Union's Future

"If the euro zone pulls apart-and there are people who now say that is thinkable who two years ago said it was unthinkable-the question is what the European Union then is."

-- Timothy Garton Ash, professor of European studies at the University of Oxford, to the Wall Street Journal.

European leaders have agreed to make permanent a nearly $1 trillion bailout fund to rescue the governments of debt-crippled nations.

The news allayed some fears about the potential collapses in Portugal, Ireland, Greece and Spain (collectively known as the PIGS) that could take the continent's common currency down the tubes.

But worries remain. Ireland and Spain have just seen their credit ratings badly downgraded as bond buyers spurn Iberian austerity promises and Dublin's predictions that the Celtic Tiger will soon roar again.

The bigger problem, though, is that to pay for the short-term debt, the EU is facing a painful $2 trillion refinancing next year. In order to raise the money, the union needs to offer unified bonds similar to the U.S. Treasuries that finance American debt.

But wealthy, industrious Germany and Britain are not keen on the idea of becoming permanent co-signers to the debt of poor and unproductive neighbors to the south. But without the bonds, the already dubious euro will collapse.

The bailout fund may prevent an immediate meltdown, but has set the stage for the potential dissolution of the euro, and perhaps the union itself.

The upside for America is that as long as Europe stays out of the big bond market, there is less competition for selling our debt to Asian investors. But, a Europe in retreat also means less competition to China's efforts to dominate global trade and currency.

2012 Field Taking Shape

"Is that presidential, you and Kate Gosselin in a forest?"

-- Bill O'Reilly asking Sarah Palin about her TLC reality show, which featured a guest appearance by tabloid fixture Gosselin of "Jon and Kate Plus Eight"

Sarah Palin is on a "lamestream" media blitz, Mitch Daniels is predicting a decision on his candidacy by May, John Thune is sparring with Mitt Romney over tax policy and Mike Huckabee is in television commercials calling for the repeal of the Obama health-care law.

It's 13 months until Iowa and New Hampshire vote, and the Republican field is starting to sort itself out.

Helping along the process is the announcement of the first slate of debates. FOX News has laid claim to debates in Iowa and South Carolina next year while MSNBC is promising two in California and CNN is touting a June showdown in New Hampshire.

While a slight delay in the calendar compared to 2008 (a February start instead of a January one), means announcements may come in the spring of next year, decisions will come now.

As potential candidates head home for the holidays, they will be assessing the willingness of family and friends to endure in the most awful depredations known to political life.

And Now, A Word From Charles

"It's all making a show, allowing liberals on the floor to posture. I love the phrase ‘rekindling the flame of hope.' It sounds like a Hanukkah story. Maybe DeFazio is Jewish. Who knew?"

-- Charles Krauthammer on "Special Report with Bret Baier" commenting on a soundbite from Rep. Peter DeFazio (D-OR).