James Pethokoukis

Politics and policy from inside Washington

Why the Democrats will lose the House in 2010

Dec 30, 2009 02:40 UTC

The trend is not the Democrats’ friend. At least not in 2010. The party of the sitting president almost always suffers losses in midterm congressional elections. To that time-tested dynamic now add voter angst about high unemployment, big deficits and controversial legislation. Expect Senate majority leader Harry Reid to lose his effective 60-seat supermajority and Nancy Pelosi to hand the House back to the Republicans. Here’s why 2010 is looking like 1994 all over again:

1. Virginia and New Jersey. Big GOP wins in the gubernatorial races not only highlighted discontent with incumbents by recession-weary voters, they also greatly helped Republicans with candidate recruiting for 2010.

2. History. More big political change isn’t predicated on America rekindling its love for the Grand Old Party. A recent poll had the Republicans finishing a distant third in popularity behind a fictional Tea Party and the actual Democratic Party. Yet American politics has a regular ebb and flow. In 13 of the past 15 midterm elections going back to 1950, the party in control of the White House has lost an average of 22 seats in the House. In 10 of the past 15 midterms the party running the Senate has lost an average of three seats.

3. Mean Reversion. Democrats have a wide field to defend after huge victories in 2006 and 2008. Particularly in the House, there are lots of Democrats in places with a proven willingness to vote Republican. Currently 47 of them are in districts won by both John McCain in 2008 and George W. Bush in 2004. And voters in those districts may be especially unhappy with a Democratic legislative agenda that causes many Americans mixed feelings.

4. Obama-Reid-Pelosi Agenda. A RealClearPolitics aggregation of polling data shows Americans disapprove of healthcare reform by a 51-38 margin. And only a little more than a third think the $787 billion stimulus plan has done much good, according to pollster Rasmussen. There’s also plenty of worry among the electorate that Washington spending is creating a dangerous level of government debt.

5. Rep. Parker Griffith. Griffith, elected in 2008, could be an electoral harbinger. His district, Alabama’s 5th, gave 60 percent of its votes to Bush in 2004, and 61 percent to McCain. He just switched from Democrat to Republican, saying he couldn’t belong to a party that favors healthcare reform that massively expands the role of government. Even though Griffith voted against the stimulus, cap-and-trade and healthcare plans, he clearly felt that guilt-by-party-association threatened his re-election.

6. Unemployment. Underlying voter unease with Capitol Hill is deep concern about unemployment. And that leads to a simple equation: Joblessness drives presidential approval ratings, and it’s those ratings that drive midterm congressional results. Despite a landslide win in 1980, for instance, unemployment approaching 11 percent drove Ronald Reagan’s approval ratings down to the low 40s in November 1982 when Republicans lost 26 House seats. (And only five narrow GOP victories by fewer than 50,000 votes kept the Senate even.)

As unemployment has risen this year, Obama’s approval has steadily eroded to around 50 percent currently. The White House says it doesn’t expect employment growth until the spring. And if even the economy begins to create jobs, the actual unemployment rate could still rise as the long-term unemployed begin to actively seek jobs again and thus start being counted by the Labor Department. It would take a year of 4 percent growth generating 200,000 to 250,000 jobs a month to bring the rate down to 9 percent. And even that would be twice as high as what Americans have been used to during the past two decades.

7. Discontent with Democrats. At the same time, the generic congressional ballot has shifted from a high single-digit Democratic lead to a low single-digit Republican lead as independents veer back to the GOP. What’s more, a recent poll by the liberal Daily Kos blog found just 56 percent of Democrats definitely or probably voting in 2010 vs. 81 percent of Republicans. Note that a new Rasmussen poll has Sen. Ben “60th Vote” Nelson, who won reelection in 2006 with 64 percent of the vote, down 61-30 in a hypothetical 2012 matchup vs. Nebraska Gov. Dave Heineman. Dems in both chambers will surely take note of those numbers. Indeed, the prospect of a terrible 2010 environment has already pushed some veteran Democratic legislators in competitive districts into retirement such as John Tanner of Tennessee and Brian Baird of Washington.

8.  Economic Damage. Even if the unemployment rate falls a full percentage point next year,  it may not help Democrats much. Americans only slowly regain their economic confidence after a deep recession. When Democrats lost the House and Senate in 1994, the economy had been growing steadily since the nasty 1990-91 downturn and unemployment had fallen sharply, though not fully to its pre-recession levels. Yet 72 percent of Americans at the time still thought the economy was “fair” or “poor,” according to Gallup.

As political forecaster Charlie Cook has noted, what happens in the House depends a lot on there being more Democrat retirements in competitive seats. The GOP needs a 40-seat pickup. The more Dem members that stick, the less likely a changeover. If the numbers start going north of 12-15, a warning signal should sound for Democrats. (In 1994, Democrat departures created 31 open seats, 22 of which were won by the GOP.)  For now, Cook sees a possible 20-30 seat pickup in the House for the GOP and four to six in the Senate. (Harry Reid, Blanche Lincoln and Chris Dodd look especially vulnerable). But Cook may be underestimating how the dreadful New Normal in the economy will create a New Normal in politics in 2010.

COMMENT

Some of this makes sense and some is the same ignorant, bipartisan ranting we need to get away from. O-BAM-I-GOTCHA and his bunch will lose…but I voted for them because Bush was a radical, war-mongering neo-con – clueless, asleep at the helm…I won’t make the mistake of voting for the dems again, but please, please, please, put someone up there who understands we need to get back to the simplistic beauty of the constitution, abolish the fed and IRS, and stop empire-building.

Posted by jay h. | Report as abusive

Why this may still be the American Century

Dec 29, 2009 18:31 UTC

The always fantastic Joel Kotkin lays out the argument:

Demographics

By 2030, all our major rivals, save India, will be declining, with ever-larger numbers of retirees and a shrinking labor force.  … By then, the U.S. will have 400 million people, which may be more than the entire EU and three times the population of our former archrival Russia.

Energy

In terms of energy resources, the U.S., combined with Canada, is the second richest region in the world after the Middle East. The country possesses vast resources of natural gas, about 90 years’ worth, as well as strong areas for wind power.

Food

America remains the world’s agricultural superpower, with the most arable land on the planet. With another 3 billion people expected on the planet by 2050, the U.S. should enjoy a continuing boom in food exports.

Military

The U.S. leads in military technology and, yes, our martial spirit remains a positive factor … Europe and Japan have taken themselves out of the military game, and it will be decades before China will be ready for a head-to-head challenge.

Innovation

There is no large country that comes close to the U.S. as an entrepreneurial hotbed (Taiwan, Israel and Hong Kong come close but are far smaller). The recent Legatum Prosperity Index showed the U.S. remains by far the largest generator of new ideas and companies on the planet.

Diversity

Over the past decade America has produced two African-American Secretaries of State and one President. America remains unique in its ability to absorb different races, religions and cultures, an increasingly critical factor in maintaining global preeminence.

COMMENT

The mantra that ethnic “diversity” is a factor in US global predominance has no basis in reality.

By 2050 at the latest, America will be majority non-white. Can anyone imagine Brazil as a superpower? Enough said.

Posted by Mega | Report as abusive

More 2010 forecasts

Dec 29, 2009 18:12 UTC

Here is an interesting one from MF Global fully adopting the New Normal mantra:

On debt:

The IMF predicts that in 2010 the average government gross debt as a percentage GDP for the 7 major advanced economies will be 109% and 113% in 2011. It was only 84% in 2007 and 77% in 2000. Following the global down turn in the 1990s, average gross debt as a percentage of GDP increased from 58% in 1990 to 80% by 1996. History suggests that post recession, the reduction in government spending is rarely equivalent to the increase catalyzed by the retrenchment in the private sector. Given the breadth and depth of this past recession and lingering risks in the system, the pull-back in government spending will be even less. Moreover, the initiatives of the US government are costly and the passage of the healthcare bill will only increase the financing needs. As the global recovery takes hold it will be increasingly difficult for governments to attract interest in their securities as their yield reside at historic lows. Outside of valuation, fears over defaults will also keep the market wary of government debt. Widening sovereign CDS spreads underscore the market’s already elevated concern. While a widespread tidal wave of defaults is unlikely, poor auction demand in the wake of the recovery and in the face of heavy financing needs will increase trepidation about its possibility.

On unemployment:

2010 will be characterized by a jobless recovery. MFGR sees the unemployment rate peaking in 2010 at 10.5% and closing the year between 9.5% and 10%.  … On the US front, the outlook for taxes is murky and the healthcare initiative which will likely force all employers to provide care or pay a penalty will discourage the expansion of the labour force. Though the Obama administration is extending the capital gains holiday for small businesses, employers need to feel confident that their profit margin will not erode in the future due to tax increases in order to genuinely contribute to job growth. Moreover, budget shortfalls at the state and local government level will cap government hiring. Globally speaking, there has been a significant increase in structural employment that is now part of the new normal. The collapse of the financial markets has led to a permanent shrinkage of the financial industry and the impendingregulation will make financial innovation, a factor that does lead to job growth, very difficult. The manufacturing industry faces the same problem. Globalization will lead to the removal of manufacturing jobs in advance economies and cause a shortage of skilled labour forcing many to look to build other skill sets.

On taxes:

The tax burden in the U.S. and Europe is likely to increase. The on going deterioration in public finances, at both the state and government levels, will put upward pressure on taxes in the U.S. Moreover, the Bush tax cut is expected to sunset in 2011. There is some feeling that Congress will vote to extend lower tax rates, but this is likely to come for earners making less than $250,000. Somehow, the $250,000 income level has become the definition of rich in America. Capital gain and dividend taxes are also likely to rise for high income workers and risk leading to a re-pricing downward of assets. Furthermore, the healthcare bill contains another tax hike on high income workers, and will likely lead to higher healthcare insurance fees. The healthcare mandate will act like a tax by raising the cost of healthcare for many workers. At the state level, California, Illinois, and New Jersey face massive fiscal strain and politicians are reluctant to address pension, healthcare, and wage costs in order to boost the productivity of government workers. Unions are a strong constituent and politicians do not want to upset a large voting block.

On US politics:

Passage of the Democratic healthcare plan will mark an apex in U.S. liberalism. Government policy will shift toward the center into midterm elections. Polling data highlights the falling popularity of the Democratically controlled Congress and President Obama. The NBC/Wall Street Journal poll displayed the Congressional disapproval rating at an elevated 68% in mid December. At the same time, data produced by Rasmussen has shown President Obama’s approval index falling from a peak of +30 on January 22, 2009 to a post Christmas reading of -12. The champion legislation of the Democratic Party, healthcare, is also finding limited support. The recently passed Senate healthcare bill has displayed a high level of public disapproval highlighting anger over the intervention of government into healthcare. Rasmussen’s polling numbers on healthcare show most voters oppose the healthcare plan and just 25% believe they will be better off. The likely and soon to be passed healthcare bill has been passed on a totally partisan basis in the face of growing opposition to government policy. Recent Democratic losses of governorships in New Jersey and Virginia spotlight the tilt of support by the public toward the party out of power. Furthermore, Alabama Congressman Parker Griffith recently switched to the Republican Party from the Democratic Party. The “Blue Dog” feared losing his seat in 2010. The high level of discontent with politicians is occurring in the back drop of “Tea Parties” and grass root movements to stop the reach of government given excessive spending and a high tax burden. Unemployment is still elevated, and income growth is slow. The public is angry over the impact of a stimulus plan which may have saved the financial system from melt down, but did little to improve standards of living. Democrat leaders in Congress have fought for their agenda at all costs, and will now try to reverse their tactics in order to improve their public image. Politicians, at the core, are survivalists and thus policy is likely to move toward the center to attract discontented voters. The Democratic leadership is aware that history is not on their side for mid term election victories and power loss can be expected. For example, during the 1994 mid term election, President Clinton and the Democrats lost 9 seats in the Senate and 54 in the House. In 1946, President Truman and the Democrats lost 12 Senate seats and 55 House seats. Going back further, FDR and the Democrats picked up 10 Senate seats and 9 House seats in 1934, but suffered major losses in 1938 and 1942 with 7 House seats (6 Senate seats) and 45 House seats (9 Senate seats) lost in 1938 and 1942 respectively

Healthcare vote may wound some Dems, like Ben Nelson

Dec 29, 2009 15:53 UTC

Truly shocking numbers on  Sen. Ben “60th Vote” Nelson from Rasmussen:

The good news for Senator Ben Nelson is that he doesn’t have to face Nebraska voters until 2012.

If Governor Dave Heineman challenges Nelson for the Senate job, a new Rasmussen Reports telephone survey shows the Republican would get 61% of the vote while Nelson would get just 30%. Nelson was reelected to a second Senate term in 2006 with 64% of the vote.

Nelson’s health care vote is clearly dragging his numbers down. Just 17% of Nebraska voters approve of the deal their senator made on Medicaid in exchange for his vote in support of the plan. Overall, 64% oppose the health care legislation, including 53% who are Strongly Opposed. In Nebraska, opposition is even stronger than it is nationally.

Fifty-six percent (56%) of voters in the state believe that passage of the legislation will hurt the quality of care, and 62% say it will raise costs.

COMMENT

Dr. Bohn,
I red somewhere that some docs, particularly ob/gyn surgeons, are working for about 1/2 year just to cover malpractice insurance, but it looks like you have it even worse – it’s 2/3. Working just for coverage from January thtough August – it’s completely ridiculous. If there’s any place for public insurance option, it’s right there – in malpractice insurance. Maybe if Uncle Sam himself becomes the target of trial lawyers, he’ll be able to keep them back, and the costs of coverage more reasonable then they are now.

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19 risks for 2010

Dec 29, 2009 15:43 UTC

Courtesy of the Naked Capitalism blog:

1. The Bulk of the Option Arm resets trigger in 2010-2011 – “The reality is that these loans were never meant to survive the reset. Unless an alternative is created, the human pain and loss will be massive.” Institutional Risk Analyst Chris Whalen
2. The Black Holes at FNM and FRE and other GSEs continue to grow
3. Bank hoarding in 2009, with no end in sight until those option arm resets trigger and all toxic assets have been brought back onto their balance sheets by 2013
4. State and local governments defaulting on financial obligations. To meet financial obligations, austerity measures will be required, social obligations will suffer, meaning more unemployment and less teachers, firemen, and policemen. This burden will be another source of drag on the U.S. economy.
5. Credibility of the Fed and U.S. Treasury and White House Administration will be on the forefront on Investors minds in 2010 and beyond. If their credibility suffers, there will be negative ramifications in the financial markets
6. Stock Market Rescue Operations like the one that got underway in March 2009 tend to last roughly two years, and are followed by bear market resumptions. My models indicate the 2009 bear market rally may end sometime in 2H 2010 followed by a resumption of the secular bear market into 2012-2013.
7. My models also indicate the 2009 bear market rally in the Dow Jones may peak at 11,750-to 12,000, near the bull market crest in 2000. That leaves maybe 12% further upside in 2010 and implies that most of the gains from this bear market rally are already in place. As David Rosenberg pointed out throughout 2009, this is a rally for investors to ‘rent.’ What reallocations can they make as and when the rally ends?
8. Advanced Economies in America and Europe all face Pension liability nightmares with shrinking workforces to support the retiring population, recent examples are GM and YRC pension nightmares. Are taxpayers going to be obligated to fund all private and public pensions of bankrupt companies and state governments?
9. Risk Aversion, saving more versus spending more will be a drag on the economy
10. U.S. government mandate requiring 30 million uninsured Americans to buy health insurance will curb consumer spending and act as a tax on the economy. It will also curb hiring plans amongst U.S. employers further prolonging Americans sidelined from employment opportunities and exacerbating the unemployment rate issues.
11. Will the kindness of foreigners continue to fund the U.S. deficit spending? Eric Sprott and David Franklin noted in their December 2009 missive titled “Is it all just a Ponzi Scheme?” that the “household sector” bought $528 billion of the $1.88 trillion of U.S. debt that was issued to them. This sector only bought $15 billion of treasuries in 2008, where would this group find the wherewithal to buy 35 times more than then bought in the previous year. Sprott concludes that makes no sense with accelerating unemployment and foreclosures, so the household sector must be a “phantom. They don’t exist. They merely serve to balance the ledger in the Federal Reserve’s Flow of Funds report.”

Global Risks and Uncertainties
12. Sovereign Risks of Default are increasing as is their fiscal credibility in countries with large debts
13. Asymmetries within the EMU could precipitate a possible breakup of the EMU. The solidification of the countries in the EMU may break-up like ice sheets in the Artic tundra as the global financial meltdown puts further stress on the EMU. Incentives to remain in the EMU, for many EU countries it might be better to leave the EMU than stick around for its constraints and austerity measures
14. The One-size fits-all monetary policy in the EMU may be derailed by this crisis
15. Germany may not want to subsidize weaker countries in the EMU if their exports to those weaker euro countries are falling off a cliff as the crisis rolls on
16. The ECB may not be able to accept sovereign collateral and assets from countries in the EMU that have a negative credit outlook and are later hit with further downgrades. That could have spillover effects into the banks-at-large, including the ones the U.S. government sought so frantically to save.
17. The PIIGS (Portugal, Ireland, Italy, Greece, and Spain) debt ratios are all expected to exceed the 3% GDP 1992 Maastricht Treaty requirement.
18. PIIGs negative 2009 GDP resulting from global export decline leaves them with little incentive to stay strapped to an expensive Euro.
19. Italy is expected to be the first country that will first kiss the EMU good riddance. Greece and Spain might not be far behind as a domino-effect takes hold.

COMMENT

Agreed. These guys are WAY too bearish. We definitely need a dose of Larry Kudlow’s optimism.

Posted by gotthardbahn | Report as abusive

Repealing healthcare reform

Dec 29, 2009 15:28 UTC

Assuming ObamaCare passes, the GOP is already making a pledge to repeal it ASAP part of their 2010 (and beyond) electoral strategy. But Igor Volsky over at the Wonk Room makes some good points indicating the political difficulty of doing so, putting side an Obama veto of any attempts:

1) The bill immediately prohibits insurers from rescinding coverage, imposing life-time or annual limits or denying coverage to children with pre-existing conditions.

2) Applicants who are unable to find insurance in the individual market, can purchase catastrophic coverage and young adults can stay on their parents’ policies until their 27th birthday.

3) Small businesses that provide health coverage will also be eligible for tax credits beginning in 2010.

4) The bill requires health insurers to spend 80 to 85 percent of all premium dollars on medical care and reduces the size of the coverage gap in Medicare Part D “by $500 in the first year.” The bill also guarantees “50 percent price discounts on brand-name drugs and biologics purchased by low and middle-income beneficiaries in the coverage gap.”

5) These benefits could also improve as the Senate bill moves into conference. Several House progressives have pledged to push the conference committee to move up the implementation date of the exchanges in the final bill and front load more benefits into the interim period of the final legislation.

The news regs on private health insurance are likely to be quite popular. More than likely, any GOP efforts will have to work within the general framework that is created, such as healthcare exchanges.

COMMENT

So what.

If necessary, rescind the entire monstrosity and pass another with the 1% that makes sense.

Or pass a Republican version with tort reform, portability, limits on dropped coverage, and interstate competition.

It’s simply ridiculous to say we are stuck with a poison pill of 2700 pages when 20 pages might make sense.

And btw, a good bit of the 4 points listed are just plain stupid. Just because some nutter liberal likes government give-aways doesn’t mean that rational people can’t spot redistribution on a stick.

Posted by proreason | Report as abusive

Potential flashpoints for international political risk and instability

Dec 29, 2009 15:18 UTC

Emerging markets (esp. Mexico, Russia, China) that may become emergency markets due to social unrest, according to the Economist:

unrest

The new Washington Consensus: taxes, taxes and more taxes

Dec 29, 2009 15:13 UTC

This depressing WSJ article outlines some possible solutions to America’s long-term fiscal problems:

1) Don’t keep fixing the AMT

2) Let all the 2001 and 2003 tax cuts expire

3) Add a VAT overlay on top of current system

4) Tax Wall Street trading

5) Put an expiration date on business tax cuts and credits

6) Create a commission, like the Greenspan Commission on Social Security, that would cut spending and … wait for it … raise taxes.

This article perfectly encapsulates Washington thinking that fundamental change in how Washington spends America’s tax money is really impossible. So raise taxes through the roof. One more reason to believe a low-growth New Normal is here.

COMMENT

About: WSJ & VAT

It would be wrong, let alone politically impossible, to add a U.S. VAT on top of existing taxes. When Japan instituted its VAT, to assure adoption, it was done along with an overall tax reduction.

But, as a revenue-neutral substitute for the corporate income tax, the VAT in itself would have positive implications for the U.S. economy because it is border-adjustable, i.e., imports would be subject to the tax and exports would subtract the tax. Thus, U.S. corporations and workers would be in a more competitive position at home and abroad. Furthermore, eliminating the corporate income tax would do away with the double-taxation of dividends; the U.S. would become a magnet for foreign investment, and U.S. multinationals would no longer have an incentive to park funds abroad in lower-taxed countries.

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The Fed’s new term-deposit tool is politically risky

Dec 29, 2009 15:02 UTC

OK, so Ben Bernanke has cooked up a new idea to remove liquidity from the financial system,  a term-deposit program that would allow banks to park cash at the Fed. It would be like a CD of various maturities for banks. But there are some political risks here for Bernanke & Co. given the current high level of anti-Fed sentiment in Washington and in the rest of the country. First, the Fed could be accused of contributing to the freeze in small-biz lending by giving banks something else to do with their money.

Second, as analyst Jaret Seiberg of Concept Capital’s Washington research group notes,  the Fed would pay banks an interest rate that’s higher than the rate paid for simply keeping reserves at the central bank. “This is cash that could have otherwise gone to the Treasury Department. We see how some could portray this as another bailout or taxpayer subsidy for the banking industry.”

In other words, this gives the anti-Fed folks a bit more ammo when BB’s nomination comes up for a full Senate vote next month. As it is,  the Fed chairman will probably get at least 50 percent more “no” votes than any of his predecessors.

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