James Pethokoukis

Politics and policy from inside Washington

Will GOP midterm win help reelect Obama in 2012? Maybe not

Oct 21, 2010 18:07 UTC

The Washington consensus is that if the GOP takes at least the House, it will give Obama a political foil and give his 2012 election hopes a big boost. And, the media tell us, the GOP presidential field is weak:

Sniping from the sidelines will be potential Republican challengers to Obama in 2012. The road to the presidential proving grounds of Iowa and New Hampshire is already well-trod by more than a dozen possible Republican candidates. The group ranges from Tea Party champion Sarah Palin to former Massachusetts Governor Mitt Romney and Minnesota Governor Tim Pawlenty. Experts believe Obama would match up well against any in this group — if the economy is on the mend and the jobless rate is trending downward from its current 9.6 percent.

But political analyst John Ellis paints a different potential scenario:

What might be an alternative story line? One answer would be: increased volatility. A darker answer might be: political instability and unrest.

As a nation, we are struggling with overwhelming debt at every level of governance and across a vast swath of the electorate. There are at least (at the very least) 15 states and countless municipalities that are functionally bankrupt. The states that are bankrupt, by any real accounting, include New York, New Jersey, Massachusetts, Connecticut, Illinois, California, Nevada, Arizona, Colorado, Ohio, Wisconsin, Louisiana, Missouri, Oregon, Washington and Michigan. They can’t (literally can not) meet their pension obligations. They won’t be able to pay for their ever-rising health care costs. Education costs are eating up too much money (although this will abate somewhat as the echo boom generation matriculates) and virtually every state (and municipality) has huge bond obligations, the proceeds from which papered over previous shortfalls. Oh, and one other thing, the economies in all of those states are stagnant, at best.

Once the last infusions of stimulus money run dry, what remains is a vast desert of debt. The idea that an over-leveraged electorate can be called upon to make up the shortfall is a non-starter. They can’t pay down their own debt and municipal debt and state debt and federal debt. The math simply doesn’t work. They end up with no take home pay.

This is the real avalanche that is about to hit American democracy. The avalanche in two weeks results in Nancy Pelosi no longer being the Speaker of the House. The avalanche of debt that hits beginning in 2011 and keeps on coming will shake our political system to its foundation. That’s the avalanche that matters.

President Obama can either get ahead of this avalanche by proposing a vast restructuring of government debt and obligations while aggressively promoting a venture-based economic growth agenda or he can be consumed by the rubble. The same holds true for the next Republican presidential nominee. He or she needs to be ahead of the avalanche to survive its inevitable onslaught.

Me: Austerity won’t sell. Growth and prosperity will. Whoever gaffs that, wins.


The reason that state budgets are completely decimated? Because the lion’s share of their booty was from property taxes! The states that are listed above are the one’s where the housing market was hit hardest, upwards of 40-50% declines. Show me ANY place (govt or business) in the world where a 40-50% drop in the biggest source of revenue doesn’t lead to big trouble. But, of course, it’s Obama’s fault. You… just… don’t… get it! AT THE STATE LEVEL no less! Sigh…

If people are disenfranchised with the current president it’s not because the MSM has given him a free pass, it’s because they don’t know their asses from a hole in the ground and continually misinform the public (both sides of the MSM.) They completely obfuscate the real issues and turn it into something completely different. Then the public gets mad because they think that the President is either lying or oblivious because the media presents everything incorrectly. Political spin is what’s helping destroy America because the public is never properly informed – one has to look outside the America media sphere to find informed journalism that weighs facts.

And let’s also be frank in saying that the old normal of the last 25 years has been fueled almost exclusively by debt. Complaining that growth that is not supercharged by increasing the debt load is poor or bad and Obama’s fault is so ridiculous as to be laughable and should be ignored outright. I find it so deplorable that people can be so duplicitous as to say that we can achieve growth in the short term by cutting debt – NO! that is NOT true as the 70s proved. We’re in for a long ugly period of adjusting our balance sheets, govt, business and consumers.

I’m sure you’d blame the 70s on Carter, but Nixon/Ford set up the conditions that were met by Carter. And while Carter had his share of missteps, none were quite as badly received as the economy being in a low growth, high inflation environment. So he inherited a shite economy and didn’t improve it fast enough because he wasn’t willing to open the pandora’s box of rampant debt accumumlation and deregulation. Now, if you want to stand for cutting debt/deficits – sure, I’ll be on board, but you can’t expect that growth will suddenly double by spending less. It’s really simple math.

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Making sense of Sarah Palin’s third-party threat

Oct 19, 2010 19:53 UTC

For Sarah Palin, it’s Tea Party first, Republican Party second:

Some in the GOP, it’s their last shot, it’s their last chance. We will lose faith, and we will be disappointed and disenchanted from them if they start straying from the bedrock principles. … If they start straying, then why not a 3rd party?

A few observations:

1. She’s in, but not as a third-party spoiler. Let me reiterate that I think Palin is almost certainly running for president as a Republican. So does the Romney campaign. So does Weekly Standard reporter and Palin expert Matthew Continetti:

I do [see her running]. I see her endorsing candidates and joining them on the trail, raising money through her political action committee, establishing a national voice through her books and upcoming television series, and engaging the Obama administration through television appearances, Facebook, and Twitter. Palin sees her influence in Republican circles, sees her continued popularity among Republicans, sees the potential weaknesses in Obama, and sees the potential parallels between the 1980 election and the 2012 election. She’s getting ready.

2. She has a shot. I also think she can certainly win the GOP nomination and presidency. The media-created caricature of her has created such a low competence hurdle that she only needs to be as well-spoken/well-versed on policy as the typical member of Congress to clear it.  In fact, she may already be there. And don’t underestimate the Dancing with the Stars factor.  Bristol Palin’s time on the show is allowing America to see a whole another side of the Palin family, one that seems firmly in tune with middle-American culture.

And the bigger the GOP primary field — and it is looking like it could be quite crowded right now — the better it is for her (and Mitt Romney). As for the general, two more years of abnormally high unemployment — twice as high as the typical level for the past generation — has created  for vulnerability for Obama that is hard to measure. But the midterm results will give a big hint.

3.  She has a potent potential agenda. If I were plotting a Palin campaign, I would encourage her to run on a free-market populist agenda. That would mean pushing free trade agreements while attacking Obama for being soft on Chinese protectionism. That would mean advocating less cumbersome financial regulation while attacking Obama for not breaking up the big banks on Wall Street. That would mean advocating lower corporate taxes but reducing corporate loopholes and subsidies. In short, portray Obama as soft on banks, China and big business.  That, and him being a big spender and taxer who has failed to turn around the U.S. economy, natch.

4. She’s Ronald Reagan — at least a smidge. Palin frequently invokes the name of the 40th president. Of course, she can’t match his decades of debating public issues before winning the presidency in 1980. But like RR, Palin has been maligned and downgraded by the media and punditocracy. But when Reagan stood next to Jimmy Carter and got to make his case in his own words, opinions changed.


I never really had a problem with John McCain – a tad old, but generally a pretty reasonable guy. But I will NEVER forgive him for bringing this woman to (in her words) ‘Lame-stream media’ and giving her an agenda to push. If Neo-Cons could take off their partisan hats and instead put on thinking hats I would sleep so much better and Sarah Palin would return to obscurity – or Hollywood?

Also – though not as if Americans care – but the rest of the world thinks LESS of Sarah Palin than even her most strident haters in America. Food for thought…

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Is the Democratic comeback fizzling?

Oct 19, 2010 17:09 UTC

Numbers from Gallup seem to say it is.

Gallup’s tracking of the generic ballot for Congress finds Republicans leading Democrats by 5 percentage points among registered voters, 48% to 43%, and by 11- and 17-point margins among likely voters, depending on turnout. This is the third consecutive week the Republicans have led on the measure among registered voters, after two weeks in September when the parties were about tied.

For Republicans to lead, or even be at parity with Democrats, on the generic congressional ballot indicates they are in a good position to win a majority of House seats in the upcoming elections. This is because of Republicans’ typical advantage in voter turnout, which in recent years has given that party an average five-point boost in support on Election Day.

If the elections were held today and roughly 40% of voters turned out — a rate typical in recent years — Gallup’s Oct. 7-17 polling suggests Republicans would win 56% of the vote — 8 points greater than their support from registered voters, and 17 points ahead of Democrats, at 39%. If turnout is significantly higher, Republicans would receive 53% of the vote (a 5-point improvement over their registered-voter figure), and the Democrats, 42%.


Five depressing thoughts from Goldman Sachs

Oct 6, 2010 19:05 UTC

Via the GS econ team (as excerpted and outlined by me):

1. We see two main scenarios for the economy over the next 6-9 months—a fairly bad one in which the economy grows at a 1½%-2% rate through the middle of next year and the unemployment rate rises moderately to 10%, and a very bad one in which the economy returns to an outright recession.

2. There is not much probability of a significantly better outcome.  The reason is that “short-cycle” factors such as the inventory cycle and the impulse from fiscal policy are likely to continue deteriorating through early 2011, keeping GDP growth very sluggish.

3. However, the recession scenario also has significant probability (we still think about 25%-30%).

4. Relative to our baseline scenario of extension of the lower- and middle-income tax cuts, we estimate that full expiration would result in a further hit to GDP growth in early 2011 of nearly 2 percentage points (annualized).

5. Meanwhile, the slow-motion improvement in areas such as excess housing supply and bank credit quality is likely to continue.  This should add up to a gradual acceleration in growth to a trend or slightly above-trend pace by late 2011 and going into 2012.

Obama’s sinking polls

Oct 6, 2010 19:03 UTC

Presidential approval ratings are hugely influential in congressional midterms. Unfortunately for Democrats:



I am not surprised!

I sent to Mr. Obama 14 registered letters asking him to put Hydrologists in the Patenting System to judge Hydrology avoiding my ‘scientific discovery’ US pat 6,766,817 be violated by flawed patents that even do not work. So far I got no answer.

A drunken teenager sent him an email cursing him and the next day FBI knocks his door and expel the student from the country for good.

Hydrology is being neglected in the US and that well spilling oil could have been clogged in few hours if instead of using golf balls and shredded tires in the ‘junk shot’ it were used high density sinking geometry. I was an upward bubbling flow against gravity moving at 2-3 cm/s.

He also assigned Dr. Regina Benjamin as General Surgeon which is 42 lbs overweight to lead Americans to fight against obesity.

His support is simply falling because he is failing on his leadership.

How hard is for a leader to understand that Health staff need to be healthy and that Hydrology needs to be addressed by Hydrologists and the worst oil spill in the US is a consequence of neglecting a science called HYDROLOGY.

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The House GOP ‘Pledge to America’

Sep 23, 2010 18:37 UTC

Here is my Reuters Breakingviews columntorial (half column, half editorial)  on the agenda from House Republicans:

America’s so-called “party of no” has finally revealed what it will say “yes” to. Yet a new Republican manifesto offers little more than undoing President Barack Obama’s reforms to date, with vague talk of balanced budgets. Maybe that’s smart politics. But it’s a missed opportunity.

If you’re winning late in the game, it is reckless to pull the goalie and put him on the attack. So with congressional midterm elections just weeks away and polls going the Republicans’ way, the cautious nature of the ideas in the 21-page document from the party’s House leaders is perhaps unsurprising. As the saying goes, if you want to do policy, you have to first do politics. And the main objective of the GOP’s “Pledge to America” is to counter Democratic claims that Republicans are mere obstructionists.

The document does contain a smattering of worthwhile items, particularly on restraining government spending. Republicans want to cut non-defense spending, excluding mandatory social insurance spending, to where it was in 2008. That would save about $100 billion a year. Over ten years, adjusted for inflation, that would only knock off 10 percent or so from the $9.8 trillion in additional debt the United States will accumulate over that period, by Congressional Budget Office estimates. But it’s a start, as is the idea of hard caps on discretionary spending, though specifics are unfortunately lacking. And freezing the hiring of new federal workers would set a good austerity example for state and local governments.

But it’s difficult to take seriously any policy agenda that doesn’t lay out at least a broad plan for much deeper fiscal reform. Paul Ryan, the Republican who would head the House budget committee if the GOP retakes the lower chamber, has a detailed roadmap for restructuring entitlements. But party leaders chose to ignore it. And it’s odd that Republican leaders seem to want to extend all the Bush-era tax cuts even if it means keeping in place a clunky code than penalizes savings and rewards debt.

Sure, the Republicans don’t want to give Democrats fodder for negative advertising. But this manifesto could have begun making the public case for the GOP’s vision of the big budgetary changes America needs. That didn’t happen. America’s long-term economic and fiscal woes call for bolder leadership.


You are expecting too much from a leaderless congressional minority. A truly positive agenda for America will emerge in 2011-2012 as Republicans jockey for leadership in the Presidential race. Which party will take the necessary steps to get America back on track? The electorate is repudiating the Democrats. It is too soon for the Republicans to address long range issues except in a speculative and individual way. Once the Republicans have demonstrated their worthiness to lead the country through this recession, they can make a play to lead us through the impending entitlements crisis.

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The midterms and the markets, take two

Sep 21, 2010 16:31 UTC

A bit more from Ed Yardeni on one of my favorite topics:

Yesterday, I reviewed the outstanding performance of the market three months after midterm elections. I also noted that the third years of the presidential cycle tend to be very bullish. The fourth year of presidential terms, along with first and second years, tend to be much less consistently bullish than third years.

Yesterday, I asked Joe, “How well does the S&P 500 perform from the midterm elections to the end of the third year of the President’s term?” The results are spectacular. Since 1962, there have been 12 such 14-month periods, and their average increase was 20.9%! Not one of them was down. Indeed, there are only two gains that are not in the double digits: 0.4% during 1986-1987 and 6.2% during 2006-2007. …  I suppose it could be different this time. Gridlock might block appropriate policy responses to revive economic growth, if necessary. Gridlock might mean that the Bush tax cuts won’t be extended for another year to avoid depressing a depressing recovery. Gridlock could stymie any agreement on measures necessary to narrow the federal deficit. Then again, a sweeping ouster of incumbents on November 2 might be a good start toward bringing back some fiscal discipline in Washington by newly elected legislators, who really want to do what’s good for the country rather than for themselves.

Me:  Gridlock is better than another wave of tax hikes and regulation — but not as good as spending cuts and pro-growth policies like cutting taxes on companies and capital.

How will the midterms affect the stock market?

Sep 20, 2010 13:33 UTC

The always insightful and interesting Ed Yardeni gathers some numbers on elections and market returns:

So what do stocks do just before and just after midterm elections and in the third year of the Presidential Cycle? They usually go up, and by quite a lot. Let’s review:

(1) According to my friend Laszlo Birinyi and former colleague at Deutsche Bank, in the 12 midterm election years going back to 1962, the S&P 500 has on average risen 2.4% in the two months prior to the election and gained 7.5% in the three months following. The only post-election downer was during 2002, when the Republicans under George W. Bush retook the Senate and held on to their slight majority in the House. The biggest gain was 14.6% during 1998 (under Clinton) and the smallest gain was 3.3% during 1994 when the Democrats under Bill Clinton lost both the House and Senate.

(2) According to Deutsche Bank chief U.S. equities strategist Binky Chadha, the S&P 500 has produced gains in 18 out of the last 19 midterm election cycles. The S&P has returned an average of 13% in the six months after midterm elections, and 17% over the next 12 months. The indicator works regardless of which party wins control of Congress, but it’s especially strong when there is a Democratic president and Republican legislature. When that scenario is in place, stocks average 14.6% annual returns, according to Bill Stone, chief investment strategist at PNC Wealth Management. “It’s the best of all iterations,” he says.

(3) The DJIA has risen 24 times and fallen 5 times in the 29 third calendar years of the Presidential Cycle since 1891. The overall, average gain for the 29 third calendar years is 12.31%, with the 16 Republican presidencies averaging gains of 5.12% and the 13 Democratic presidencies averaging gains of 21.14%.

(4) Joe analyzed the four-year Presidential Cycle of the S&P 500 since 1952. He found that this index increased on average by 4.4% during the first year, 4.8% during the second, 18.4% during the third, and 5.7% during the fourth. Excluding second terms of reelected Presidents, he found that the first term of all of them since 1952 averaged 3.2% during the first year, 2.2% during the second year, 21.6% during the third year, and 11.5% during the fourth year. In other words, third years tend to be the best ones, and have been up years during every Presidential Cycle since 1955.

While the historical record suggests that the stock market is likely to do very well over the rest of this year, and even better next year, might it be different this time? I’ll discuss this possibility tomorrow.

Me: This also plays into the “gridlock into good” mantra. And certainly there should be less anti-market legislation in the second half of Obama’s term than the first half. But the U.S. does have real problems that need attending to — budget reform and tax reform, in particular.

The 9.6 percent unemployment rate and the 2010 midterms

Sep 3, 2010 15:26 UTC

Today’s dismal unemployment report fully locks in the autumn political narrative:

1) Democrats will a) say the job numbers show a slowly recovering economy back from the brink, b) ask for voter patience, c) blame Bush and d) charge Republicans want to kill Social Security.

2) The GOP will say the report shows Obamanomics has failed,  surely (again) highlighting the infamous Romer-Bernstein unemployment prediction.

3) President Obama also seems unlikely to propose any new ideas that would be economic gamechangers. (The WH pushed back hard on media reports that it is considering a $300 billion payroll tax cut.)

4) More likely is a smattering of smaller ideas that Democrats can use to depict Republicans as obstructionists.

5) I would also guess nothing gets done on the expiring Bush tax cuts until at least after the election.


Yes it is true that US came out of recession and unemployment rate is coming down, but the rate is still slow. Barack Obama is thinking of new ideas to work upon to come out of this disastrous situation of unemployment rate. Sooner or later it’ll be possible to come out of it. From the last 4-5 months stock market is fluctuating and the rate of interest is also low.

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And the Senate isn’t looking so hot, either …

Sep 2, 2010 19:29 UTC

The respected Cook Political Report:

The macro political landscape strongly favors Republicans and it is not likely that it will change much between now and November. As a result, a look at the 37 Senate races on the ballot shows some deterioration for Democrats in some of the 19 seats they are defending, while Republicans’ prospects have stayed the same or improved slightly in their most competitive seats. As such, it is now likely that Republicans will score a net gain of between seven and nine seats. While there is a plausible argument for how Republicans could net the 10 seats they need to win the majority, it remains an unlikely scenario today.

Right, Intrade gives a 45 percent chance of the GOP either taking the Senate (30 percent) or neither party controlling (15 percent).