James Pethokoukis

Politics and policy from inside Washington

Midterm beating could help Obama shift to center

Nov 3, 2010 03:31 UTC

American presidents usually win second terms, even if their parties suffer midterm blowouts. But President Barack Obama better not rely on history for a 2012 victory. To lift his political fortunes after Tuesday’s shellacking—and those of the U.S. economy—he needs to work with incoming Republicans to help create jobs and cut spending.

Ronald Reagan and Bill Clinton both sailed to re-election despite suffering midterm setbacks, thanks to good growth and popular policies. When it’s one-and-done, as was the case with Jimmy Carter in 1980 and George Bush senior in 1992, it’s often the economy that sent them packing. And that’s just the scary scenario emerging for Team Obama.

The White House’s own forecasts don’t predict unemployment dipping below an average of 8 percent until 2013. Even worse, some of the hardest hit states—Florida, Michigan and Ohio—are big ones in the Electoral College that Obama needs to win again if he’s going to score another four years in the job. And all three just may be about to elect Republican governors.

Obama could stay the course. He could battle the newcomers including their sizable Tea Party contingent, pray for a boom and continue to push his agenda, such as capping carbon emissions through regulatory agencies. Between that, his fundraising prowess and a so-so Republican presidential field, he might edge out a victory.

But voters say they want compromise. And there are deals Obama could potentially reach with Republicans that might generate jobs and reassure markets about America’s fiscal seriousness. Obama has already proposed letting businesses immediately deduct new capital investments. He could add cuts in corporate and payroll taxes and temporarily extend some or all of the expiring Bush tax cuts. In return, Obama could bargain for more infrastructure spending, especially if he agreed to suspend federal pay rules that raise the cost of government-funded construction projects.

But there might be even more opportunity on the spending side. In a bit of fiscal jujitsu, Obama could challenge the Tea Party folks to cut billions in corporate tax breaks and vote for any social insurance cuts recommended by his own deficit panel. And Obama must surely know that when advanced economies have reordered their fiscal houses by cutting spending, it’s often been under center-left governments able to pull a “Nixon to China” moment with interest groups.

It may not feel like it right now to the shell-shocked White House, but the Democratic election throttling might just help the president pivot to a second term.

Obama’s Great Miscalculation and the midterms

Nov 2, 2010 18:51 UTC

Republican pollster Steve Lombardo nails it with this piece of analysis (via The Daily Caller):

1)     Democrats are in this situation mainly because of voter dissatisfaction with President Obama. This election is a referendum on Obama and his policies. While the economy is an enormous part of this equation (we will get to that next), people — and by that we mean swing voters: independents and “soft” Republicans and Democrats — voted for Obama because they thought he was a “different” kind of politician who would bring about “change.” As it turns out, he’s pretty much a conventional, big government, left-of-center politician. And he’s governed accordingly. There’s nothing wrong with that, but that’s not what people thought they were getting. According to the latest NBC/WSJ poll, only 32% of self-identified independents approve of the job Obama is doing, and his job approval among moderates is at 49% (this is lower than in past NBC/WSJ polls). A recent New York Times/CBS poll also makes clear the depth of this disillusionment. Among the voting segments that are currently “disappointed” with the Obama presidency: older voters (63% disappointed), college grads (60%), and those earning $30,000 to $50,000 (57%). Even 52% of voters aged 18-29 are disappointed with Obama.

2)     Our sense is that the administration and the president dramatically misread the economic downturn and its effect on the electorate. It is not just that the economy is bad, it is that Obama and his team gave little impression that they were trying to fix it. Look, we know they faced a huge challenge and were trying to cushion the downturn, but the focus on health care reform —combined with the poor reaction to the Gulf oil spill and other ambitious policy initiatives (the stimulus package, cap and trade, etc.) — created a muddled narrative. While the economy is what it is, perception is reality, and by focusing on other things the president looked out of touch and arrogant. At this point, “hope and change” is to Obama what “Mission Accomplished” was to George W. Bush. If you promise “hope and change” — the implication being that things will get better — and things, in fact, get worse, you get punished, and that is what will happen today.  The problem for the president is that the economic situation is abysmal and no amount of saying that things are “improving” can change that.

Me: I would also add that it is not just the perception of Obama’s policies that is hurting Democrats, but the policies themselves: a) the stimulus was poorly designed; b) healthcare, FinReg and the fate of the Bush tax cuts created vast uncertainty; and c) all the badmouthing of business created a bad vibe about where Obama’s head was at.

COMMENT

High expectations, thats the killer that will take Obama, all he had was communication skills, his charm and charisma, when it comes to economics, its not easy even though you know sociology, political science and if you can make econometric models, how robust is your soultion, where are your spends? where are you injecting stimulus money.
it was easy to punish republicans by not voting for them for loosing your job, does that mean someone can create jobs? the choice is between the devil and the dead sea now.

Why is American government responsible for all oil spills in the whole world, cleaning up is international responsibility, why is’nt China spending enough money on its spills then? why can’t the international community question China?

thx
Arvind Pereira
http://www.ArvindLeoPereira.co.nr

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Obama deficit panel may surprise on tax reform

Nov 2, 2010 15:12 UTC

President Barack Obama’s bipartisan deficit commission has a mandate to cut the U.S. budget gap. But the White House panel may surprise in another area: tax reform. Democrats and Republicans are taking a hard look at a plan that would simplify the code and cut corporate taxes. Although not perfect, it would be a big improvement.

Much of the public focus on the commission, which is expected to vote on any recommendations it makes next month, has been on its efforts to slash spending. Two areas that could suffer the knife are tax breaks and Social Security. But panelists are also assessing ways to reform America’s labyrinthine tax code to promote economic growth, and thereby more tax revenue to help pay down the debt.

Smartly, members won’t recommend a total scrapping of the current system in favor of some ideal tax code concocted by academics. No politically unfeasible value-added or flat taxes here. Instead, they’re examining a plan devised by politicians—Senator Ron Wyden, a Democrat from Oregon, and Senator Judd Gregg, a Republican from New Hampshire—that uses the current system as a baseline and then tweaks it.

The Wyden-Gregg idea mostly succeeds. For individuals, it would reduce the number of tax rates from six to three and dump the alternative minimum tax. It would also combine several existing government savings plans into one. For business, Wyden-Gregg would combine multiple rates, including a 35 percent top rate, into a flat, 24 percent corporate rate. Small businesses could immediately write off capital investments. And companies could only deduct part of their interest payments, making equity financing more competitive.

There are some downsides, which is to be expected of a plan meant to win votes on both sides of the aisle. It would raise the top capital gains tax rate to 23 percent from 15 percent. It would also subject the foreign income of U.S. multinationals to immediate taxation. Most advanced economies tax only income earned domestically.

But taken as a package, Wyden-Gregg would create a more pro-growth tax system without, says the Congressional Budget Office, adding to the national debt. Corporate taxes, for instance, are the most harmful tax that nations levy, according to the OECD. If Congress and the White House want to shock cynics with a big compromise in 2011, tax reform would a great place to start.

10 reasons the GOP might do even better than expected

Nov 2, 2010 14:21 UTC

My call is 64 and 9. But Super-smart, super-plugged-in Washington political analyst Dan Clifton of Strategas lays out his reasoning for a mega-tsunami:

1. The House Has Never Flipped Parties Without The Senate Also Flipping. In the seven cases where the House and Senate flipped together, the Senate was not expected to change parties in six of those elections, similar to consensus expectations for today’s election.

2. The Reliable Gallup Generic Ballot Is Indicating The Dems Will Lose 80+ Seats. If the GOP wins even 60-65 seats, the Senate will also likely flip.

3.  Roughly 70 Pct Of Competitive Districts Go To The Challenging Party In A Wave Election. With 100 competitive seats in the House and 15 competitive Senate seats, the formula suggests the GOP will win 70 House seats and 10 Senate seats.

4.  GOP Enthusiasm Advantage Is 63-37, Up From 44-35 In 1994.

5. Obama’s Approval Rating Is 44 Pct, 2 Pct Lower Than Clinton’s Mid-Term Approval.

6. Congressional Approval Rating Is At Its Lowest Level Ever.

7. Only 33 Pct Of Voters Believe Members Of Congress Deserve Reelection, Down From 38 Pct In 1994. (33-56 2010, 38-45 1994)

8.  The Ratio Of GOP To DEM Voters In This Election Is 55 To 40 Pct, Up From 49 To 44 Pct In 1994.

9. Just 32 Pct Of Voters Believe The Dems Will Keep The House, Leading To Lower Voter

Turnout Among The Dems.

10. State By State Polling Is More Than Likely Oversampling Dem Turnout Based On Overstated 2006 & 2008 Data.

COMMENT

James,

In my opionin the attitude of any citizen group would be of anti-incumbency, as they want results, since the ruling party is not bringing them thier order, the common attitude is to fire the non-performers. In a complex situation like this, we need to focus on policy and make projected cash flows, job flows and take decisions, my biggest issue with democratic set ups is that governments are forced to do popular moves, and the second overbearing the system takes is turn out on elections

thx
Arvind Pereira
http://www.ArvindLeoPereira.co.nr

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Is this the tax reform Obama and the new Congress can agree on?

Nov 2, 2010 12:28 UTC

From my Reuters Breakingviews column:

President Barack Obama’s bipartisan deficit commission has a mandate to cut the U.S. budget gap. But the White House panel may surprise in another area: tax reform. Democrats and Republicans are taking a hard look at a plan that would simplify the code and cut corporate taxes. Although not perfect, it would be a big improvement.

Much of the public focus on the commission, which is expected to vote on any recommendations it makes next month, has been on its efforts to slash spending. Two areas that could suffer the knife are tax breaks and Social Security, analysts say. But panelists are also assessing ways to reform America’s labyrinthine tax code to promote economic growth, and thereby more tax revenue to help pay down the debt.

Smartly, members won’t recommend a total scrapping of the current system in favor of some ideal tax code concocted by academics. No politically unfeasible value-added or flat taxes here (though a flat consumption tax would be ideal). Instead, they’re examining a plan devised by politicians — Senator Ron Wyden, a Democrat from Oregon, and Senator Judd Gregg, a Republican from New Hampshire and panel member — that uses the current system as a baseline and then tweaks it a whole lot.

The Wyden-Gregg idea mostly succeeds. For individuals, it would reduce the number of tax rates from six to three and dump the alternative minimum tax. It would also combine several existing government savings plans into one. For business, Wyden-Gregg would combine multiple rates, including a 35 percent top rate, into a flat, 24 percent corporate rate. Small businesses could immediately write off capital investments. And companies could only deduct part of their interest payments, making equity financing more competitive. All great, great stuff.

There are some downsides, which is to be expected of a plan meant to win votes on both sides of the aisle. It would raise the top capital gains tax rate to 23 percent from 15 percent (not counting what happens with the Bush tax cuts or the new Obama Medicare tax). It would also subject the foreign income of U.S. multinationals to immediate taxation. Most advanced economies tax only income earned domestically.

But taken as a total package, Wyden-Gregg would create a more pro-growth tax system without, says the Congressional Budget Office, adding to the national debt. Corporate taxes, for instance, are the most harmful tax that nations levy, according to the OECD. If Congress and the White House want to shock cynics with a big compromise in 2011, tax reform would a great place to start.

And let me add this: The Heritage Foundation ran a great dynamic scoring analysis of the plan, unlike the static, for-accountants-only version from the CBO. It found the following:

1. The federal deficit would be an average of $61 billion (nominal) lower per year;

2. The nation’s debt-to-GDP ratio would be 3.9 percentage points lower by the end of 2020, indicating a significant reduction in publicly held debt;

3. An average family of four would have about $4,095 more disposable income every year;

4. Foreign investment in the U.S. would be an average $292 billion (nominal) higher each year, and U.S. multinational corporations would repatriate and invest an average $19 billion (nominal) more in the U.S. per year;

5. 2.3 million more jobs would be created on average each year;

6. The aggregate net wealth (assets minus liabilities) of U.S. households would be $643 billion higher by the end of 2020; and

7. Real GDP would be an average $298 billion higher per year.

COMMENT

James,
The presidential term is for 4 yrs, it takes time for policies to reap benefits, there is some amount of gestation period before the yielding & maturity kicks in, these poll pressures can change policy before the policy actually shows results,

potential Mayors are filing candidature.

thx
Arvind Pereira
http://www.ArvindLeoPereira.co.nr

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Ed Yardeni doesn’t need Prop. 19

Nov 2, 2010 12:10 UTC

The investment strategist just needs the right electoral outcome today to be bullish:

I’m high on America. I expect that stock prices will move higher over the rest of the year. I’m still targeting 1250 by the end of this year and 1400 by the end of next year. I’ve been expecting a decisive regime change in Congress for over a year. Today’s election may be even more decisive than I expected. That will certainly lead to gridlock on lots of issues. However, I believe that the Democrats and Republicans will agree to extend the Bush tax cuts for two years across the board during the lame duck session of Congress. They won’t agree on much else, but that’s probably a good thing.

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