But are all the broad smiles justified? Though the power shift in Congress is truly historic, the transition won’t be easy or smooth. The Republicans’ margins are not huge: 53 to 47 in the Senate; 232 to 202, plus one independent, in the House. Moreover, both parties are more polarized, with the Democratic caucus moving to the left, Republicans to the right.

As Speaker, Newt Gingrich will push a boldly conservative agenda that Bob Dole and other Senate Republicans may balk at. Liberals surely will, raising the likelihood of Senate filibusters and presidential vetoes. Warns conservative William Kristol, chairman of the Project for the Republican Future: “This election is clearly a watershed ideologically, but how much translates into major public policy changes remains to be seen.”

Indeed. The uncertainty is likely to keep financial markets unsettled for a while. Republican talk of tax cuts has already fueled fears of simultaneously rising deficits, inflation, and interest rates, preventing any big rally in the stock and bond markets. Meanwhile, the specter of a weakened President—likely to be intensified by a new and rougher round of Whitewater hearings—could keep the dollar down, increasing pressure on the Fed to tighten further. Says Gregory Valliere, director of the Washington Research Group, an organization that gives advice to institutional investors: “We’re in for a very rocky stretch.”

Big business should also brace for a less than cozy relationship with the new Republican majority. Most of the newcomers owe their victories to support from the Christian right, small businessmen, and entrepreneurs. The GOP leadership doesn’t even try to conceal its bias. Said Republican Party Chairman Haley Barbour in his victory speech: “Ours is the party of small business, not big business; of Main Street, not Wall Street.” Say goodbye to the kind of Democratic industrial policy that often benefits big business, and hello again to free-market economics—this time with a pro-family twist.

When the new Congress convenes, the initial focus will be on internal reforms, the kind of “clean out the barn” stuff that turns on followers of Ross Perot. Expect quick passage of the so-called Shays Bill, which would for the first time make all federal laws and regulations applicable to Congress. In addition, Gingrich will move swiftly to cut the size of House staffs by one-third, consolidate committees, and rationalize jurisdictions. “Every major manufacturer in America has downsized, reengineered, and increased quality,” says Jasinowski. “Finally Congress will begin to restructure, and we’ll see some steam let out of that never-ending program-generating, regulation-spewing machine. This is a very big change.”

The new Congress is also likely to pass constitutional amendments giving the President a line-item veto and requiring a balanced budget by the year 2002, except in times of war or recession. Clinton has welcomed a line-item veto but opposed a balanced-budget amendment on the grounds that it would limit his fiscal flexibility. Still, this year the Democratic Senate fell only four votes short of the two-thirds required for enactment, the House 12.

Of course, constitutional amendments must be ratified by three-fourths of the states, a process that at best would take years to complete. In the meantime, a Republican Congress could bust the budget with popular middle-class tax cuts and more defense spending. After all, House Republicans, in their “Contract With America,” have promised a stronger defense, and some $148 billion in net tax cuts over five years, including a $500-per-child tax credit, a 50% cut in capital gains rates, and expanded individual retirement accounts.

Add to that the Democrats’ desire to win back turned-off voters, and you get business’s nightmare: a tax-cut bidding war reminiscent of 1981, which sends the deficit and interest rates soaring. But this time leading business lobbyists are fairly sanguine that it won’t happen. They point out that most newly elected Republicans believe voters sent them to Washington to reduce federal spending and cut the deficit. Concludes a top Gingrich aide: “This election was not a tax revolt but a spending revolt.”

So how do Republicans deliver on promises of tax cuts, stronger defense spending, and deficit reduction? Most likely scenario: smaller than promised tax cuts, a flat defense budget, and bigger than expected cuts in domestic spending. On the tax front, expect a scaled-back middle-class tax cut, plus some breaks for savings and investment. Most likely: some expansion of tax-favored individual retirement accounts, and reduction in capital gains taxes.

Treasury Secretary Lloyd Bentsen and the two new tax committee chairmen, Bill Archer of House Ways and Means and Bob Packwood of Senate Finance, are all IRA fans. And with Senate Majority Leader George Mitchell heading back to Maine, the single biggest roadblock to capital gains cuts will finally go. Says Mark Bloomfield, president of the American Council for Capital Formation: “It’s no longer a question of whether capital gains taxes will be cut, but how much.”

Where the 104th Congress looks most promising fiscally is in its apparent willingness to cut spending. Expect deep cuts in domestic discretionary spending. Republicans will likely cut education, crime-prevention, high technology, and export-promotion projects they consider of questionable value. Among their likely business targets: Export-Import Bank credits, timber and energy subsidies, and science and technology projects like the supercomputing and panel display initiatives. Says high-tech lobbyist Ken Hagerty: “Anyone who bought into the Democrats’ government-centered, pork-based technology policy will lose out.” Also expect a new drive for program elimination and privatization. Among the more likely targets: phasing out the Interstate Commerce Commission and the Commerce Department’s Advanced Technology Program and selling off the air-traffic control system. In addition, Republicans will try to consolidate social and economic development programs into bloc grants and spin them off to the states, an approach that could appeal to former governor Clinton.

But will Republicans tackle the linebacker of federal spending, those automatic spending giants known as entitlements? Forget Social Security, which even Newt-the-Fearless has taken off the table. In a poll conducted for Fortune by the American Society of Association Executives and George Washington University, respondents give cuts in this politically sacrosanct program a scant 6% chance. But brace for an all-out attack on Gingrich’s favorite target, the welfare state.

By that he does not mean simply Aid to Families With Dependent Children, the program generally referred to as welfare. Rather his target is an agglomeration of social programs aimed at the poor, which together are projected to rise from $324 billion in 1993 to more than $500 billion by 1998. “Next year’s debate will not be over AFDC,” says Heritage Foundation welfare expert Robert Rector, “but the entire War on Poverty.”

Gingrich would like to cap growth in AFDC, food stamps, public housing, and Supplemental Security Income, which goes to the aged, blind, and disabled. The GOP plan would also require AFDC beneficiaries to work after two years, and deny benefits to unwed teen mothers and most noncitizens. Even after allocating $10 billion to the states to develop and run job-training and search activities, the Republicans estimate their plan would save $40 billion over five years. Says Rector: “I don’t see bipartisan consensus even remotely possible.”

By contrast, this year’s bloody partisan battle over health care could set the stage for a more civil compromise next year on modest reforms in that area. Forget employer mandates, mandatory purchasing alliances, and price controls. Says a senior GOP aide: “The feeling among Republicans is that the private sector is doing a fairly good job of containing costs and government ought not to muck it up.” Republicans will seek to hold down costs by streamlining paperwork, limiting medical malpractice awards, facilitating the establishment of voluntary purchasing alliances, and creating IRA-like savings accounts to pay for medical care.

In addition, Republicans will work to slow the geometric growth of Medicare and Medicaid—not to fund new programs but to finance tax cuts and deficit reduction. The question is how. In the past, Congress has slashed government costs by ratcheting down reimbursement rates for doctors and hospitals. The predictable result: massive cost-shifting to the private sector. Instead, the new majority will focus on savings designed to spur cost-conscious buying. On the Medicaid front, expect a bipartisan drive to give the states new flexibility to implement managed-care programs, which have shown promise in Arizona, among other states.

On Medicare, Republicans will push some limited means-testing, probably increasing premiums on Medicare Part B, the voluntary program that finances doctors’ visits. So far, so good. But business should also beware of states urging anti-big-government Republicans to help them experiment with statewide health reforms by lifting Erisa exemptions that allow multistate employers to self-insure, thereby avoiding state mandates and fees. Says Richard Smith, health policy director for the Association of Private Pension and Welfare Plans: “For employers and managed-care providers, this will be the No. 1 risk in the new Congress.”

The biggest question for the next two years is what role Clinton will play. Initially at least, the President and congressional Republicans will want to prove they can govern, producing bipartisan victories on the General Agreement on Tariffs and Trade (GATT), congressional and budget process reform, a modest middle-class tax cut, and new spending and regulatory restraint. But as the presidential elections near, pressure will mount on both parties to define themselves in starkly partisan terms. Then the mudslinging and vetoing could begin in earnest, giving financial markets an even bigger case of jitters. Business leaders, take note: Gridlock could be just around the corner. The time to strike for pro-business, pro-growth legislation is now.

Reporter associate: Lucretia Marmon