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(Washington, D.C.) - On Friday, U.S. lawmakers hammered out an agreement to extend payroll tax cuts for just two months, only after Democrats bowed to Republican demands on a controversial oil pipeline.

The deal fell far short of President Barack Obama's push for a one-year extension of the tax relief and long-term unemployed benefits needed to bolster the country's weak economic recovery. The deal still needs the full approval of the Senate and House of Representatives.

This surprisingly modest legislation will probably do nothing to change the opinion of American voters and investors of deep dysfunction in the Washington. It also creates more uncertainty about Washington's ability to steer the nation through the global economic turbulence.

Partisan bickering has thwarted every effort to forge a deficit reduction plan, and it has brought the government to the brink of a government shutdown three times this year and it led to a downgrade by Standard & Poor's of the United States' coveted AAA credit rating last August.

Democrats did not come close to getting the legislation they initially sought, however they tried to spin the deal they agreed to, by saying that next year it gives them another opportunity to fight for a payroll tax cut for wage earners and tax hikes on the wealthy to pay for it -- two arguments that play well with Democratic voters.

Keystone XL Pipeline

It is unclear how Friday's deal will affect Obama. He has faced sharp criticism from his base for caving into Republican demands on policy issues ranging from tax hikes and spending cuts to environmental protection.

To try to break the stalemate in the payroll tax cut negotiations, President Obama's fellow Democrats dropped their proposal to pay for it with a surtax on millionaires. They also agreed on Friday to abandon opposition to the inclusion of the Keystone XL oil pipeline from Canada to Texas. Democrats had fought to keep the pipeline issue separate from the payroll tax cut issue, a position that had appeared to be non-negotiable.

The measure will require President Obama to make a decision on allowing construction of Keystone within 60 days or declare that "oil trade with Canada is not in the national interest of the United States," according to an aide to Republican Senator Richard Lugar.

President Obama recently put off a decision on the pipeline until 2013 citing that the government needs to study alternative routes. Many interpreted his decision as a way to appease his environmental base in his bid to win re-election in November 2012.

The deal immediately drew fire from environmentalists, who said it was an example of House Republicans holding the federal government hostage on behalf of the oil industry.

"We're disappointed that the president seemingly signed off on this deal, but we expect that he's going to live up to his promise ... that he will turn down the permit for the pipeline," said Daniel Kessler, spokesman for Tar Sands Action, a group that opposes the project. Kessler said he expected members from his group would voice their opposition to the project at Obama's campaign offices across the country.

In a defense of what appeared to be a major concession to Republicans, an Obama administration official said the deal would effectively mean the Keystone project would not go ahead. The official noted that the State Department has said it could not make a decision on the project within 60 days and any attempt to force its hand would likely result in a decision to deny a permit for the project.

But on Capitol Hill, Republicans were quick to tout the deal as a major coup. "I think the Keystone pipeline component is certainly a very large victory," said Republican Senator Bob Corker. Senate Republican Leader Mitch McConnell told reporters: "We extended the payroll tax holiday as far as we could get credible payfors to pay for it." He added, "We'll be back discussing the same issues in a couple of months."

That would mean another contentious battle in the midst of the 2012 primary season, which kicks off on January 3 in Iowa.

"If Republicans want to be back here in two months trying to explain why they don't want to give middle class families a tax cut yet again, that's their choice, we're happy to have that conversation," a Democratic aide said. "We feel that's a home turf game for us."

Democrats had been pushing for some tax hikes on the wealthy to help pay for the payroll tax cut -- such as ending the corporate jet tax break -- but tax hikes on the wealthy will not be included in this deal, according to one congressional aide. Instead the $30 to $40 billion in lost revenues from extending the payroll tax cuts another two months would be paid for by raising fees investors pay for mortgage transactions involving the government-sponsored agencies of Fannie Mae and Freddie Mac.

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