On the eve of the Iowa caucus in late 2007, Mark Schmitt, editor of The American Prospect, wrote an influential essay titled, “The ‘Theory of Change’ Primary”.  The thesis of the piece was that Barack Obama’s frequent paeans to bipartisanship were not to be understood as the naivety of a political Pollyanna who would be rudely awakened upon taking the reins of power.  Rather, Schmitt argued, appeals to bipartisanship were a tactic that President Obama would use to make Republicans an offer they couldn’t refuse: join with your colleagues across the aisle to enact the progressive policies the country demands, or reject bipartisanship and bear the wrath of voters in 2010.

Obama’s theory of change—as interpreted by Schmitt—has not worked out so well.  Half the country supports repealing the healthcare reform bill, half say Democrats are too liberal, and half think that “the government is trying to do too many things that should be left to individuals and businesses”. While the lackluster economy clearly played a major role in ushering in the sweeping gains made by the GOP on Tuesday, progressives need to recognize that Democratic losses were not simply due to bad luck.  Progressives overreached, which may or may not have been worth yesterday’s shellacking but which certainly calls for a change in strategy over the next two years.  By taking seriously the theory-of-change strategy and recognizing that the 50-50 Nation continues to govern national politics, progressives can come back in 2012.

There are limits to blaming the economy for Democratic losses.  Most strikingly, the exit polls last night revealed that Republicans won a majority of the national House vote even among the one in three voters who said something other than the economy was the most important issue facing the country.  No, the theory-of-change strategy failed because the priorities Democrats pursued and the specific solutions they offered were not popular enough that Republicans felt any pressure to go along.

Nowhere was this truer than for health care reform, where controversies over government intervention into medical decisions, deficits, Medicare cuts, illegal immigration, and abortion gradually eroded the fragile support for reform among moderates.  Democrats, oversimplifying polling that showed support for “health care reform”, convinced themselves that the time, budgetary resources, and energy spent on pushing through their particular vision of reform would trump the anemic jobs picture in the midterm elections.  (And simmer down, public option advocates—there is absolutely no evidence that the purer original reform proposals would have produced a better outcome politically.)

Abandoning the “it’s-the-economy-stupid dodge” will be crucial for progressives moving forward, because in the most important respect the Administration finds itself right where it was in January of 2009.  The country is mired in an economic downturn, with few positive signs on the horizon.  Progressives can passively wait and see and allow the 2012 election to depend on what happens to the economy between now and then.  Alternatively, by taking seriously the theory-of-change strategy, the President and Congressional Democrats can improve their chances of success next time and minimize the damage should the economy remain lousy.

Taking the theory-of-change strategy seriously means discarding the naively hopeful view that the 2008 election was a mandate for progressivism.  As I wrote the night of that election, that view profoundly ignored the evidence from 2008 and political history since the Clinton years.  The 50-50 Nation lives, and the Administration will have to stake out positions that are both popular and on which Republican-led gridlock will be met with disapproval from moderate voters.  Such positions will often be met with howls of protest from the left, but if Democrats are smart, they will look to President Clinton’s success after 1994 as a model for how to get another bite at the apple in two years.

For instance, the easiest way to continue providing some stimulus to the economy is going to be via tax cuts.  Rather than continuing to push for the expiration of the Bush tax cuts for upper-income taxpayers, Democrats should instead advocate for ex-budget director Peter Orszag’s proposed two-year extension of tax cuts for everyone.  Such a stance would be both pro-stimulus and anti-deficit.  Both positions are important, for while the economy is the overwhelming priority of voters, the broad question of the size, scope, and effectiveness of government is second, and this is where Democrats’ weakness really lies.

Democrats could also take a moderate position on foreclosures and the barrier to growth that underwater mortgages present.  Rather than bailing out distressed homeowners—which polls show commands only weak support, due to perceptions of irresponsibility on the part of homeowners who took out mortgages they could not afford—Democrats could propose incentives for lenders and loan servicers to refinance the mortgages of distressed borrowers.  For instance, Ben Bernanke has suggested allowing the Federal Housing Administration (FHA) to insure “shared equity” mortgages, whereby lenders would offer lower interest rates in return for an agreed-upon stake in the home’s equity upon purchase or refinancing.  Democrats could also offer tax breaks or loans to make up the difference between the selling price of a home and a (bigger) mortgage payoff.  This would help homeowners seeking to move for better economic opportunities who are not in danger of foreclosure or delinquency.

Welfare reform is up for reauthorization, and President Obama is in a strong position to preemptively lay out proposals that promote individual responsibility but that also fund the block grant more generously in response to data showing that the program’s growth has not nearly kept pace with the rise in joblessness.  Furthermore, he could advocate responsible fatherhood provisions and other family-oriented policies, consistent with his past championing of such initiatives.

On immigration, Democrats should abandon their proposals advocating a general pathway to citizenship—a hopeless cause that will always be seen as rewarding law-breaking—and embrace the DREAM Act, coupled with tougher enforcement.  The DREAM Act gives undocumented immigrants who arrived in the U.S. as minors the chance to earn residency if they serve in the military or complete some college.  It addresses a fairly sympathetic group—the sons and daughters brought over the border by their parents, who never chose to break the law but who now face severe restrictions on their ability to get ahead through higher education because of their lack of documentation.

Finally, on deficit reduction, Democrats should use the housing crisis as an opportunity to begin a conversation around the distortions introduced into the economy by tax subsidies (such as the mortgage interest deduction’s complicity in the mortgage and financial crisis).  Larry Summers has suggested that a global cap could be placed on the amount of itemized deductions a taxpayer could take, which would be progressive while avoiding fights over this tax provision or that one.  The President can ask whether the federal government should really be subsidizing the purchase of second homes and vacation homes.

Democrats used the first two years of Obama’s first term to take advantage of a once-in-a-lifetime opportunity to make big changes in domestic policy.  Progressives may differ in their evaluation of whether the cost has been and will be worth it, but what is clear is that if 2012 is to turn out differently than 2010, they will have to scale back their ambitions in the next two years.