Two interesting pieces out there on the November elections, one using historical precedent to forecast the outcome, the other handicapping President Obama’s leadership going into them.
In “The Lessons of 1982,” Rebecca Kaplan makes an interesting case that Congressional Democrats are more likely to see an outcome like Republicans did in 1982 than the steam rolling that a Gingrich-led GOP subjected them to in 1994:
…the similarities between 2010 and 1994 are superficial. The more relevant election—the one that gives a better gauge of the magnitude of losses the Democrats may see—is the 1982 midterms. Although some political scientists were predicting that the Democrats would gain as many as 50 seats, on Election Day they took only 26 seats from the Republicans.
What happened? And could their disappointment of 28 years ago offer reasons for Democrats to hope this year? After all, they’re in the same position now—stronger, actually, since they control both houses of Congress—as the Republicans were in 1982. A quick look at three of the most important factors in any midterm election show why 2010 may be for Democrats what 1982 was for Republicans: not great, certainly, but not nearly as bad as it could have been…
…it’s certainly possible that the Democrats will lose the House this year, like they did in 1994. But from an economic standpoint, this year more closely resembles 1982. And the president—a Democrat now, a Republican then—seems similarly disciplined. All the party in power has to do is spend some money and hope that this year turns out to be less bad than everyone predicts.
Kaplan’s three factors are the economy, campaign spending, and party message. While that last one is a pretty squishy concept, she makes a compelling case:
In 1994, in contrast, Clinton lost control of the national conversation…Clinton spent a lot of time in the first two years of his term on controversial projects unrelated to the economy (a crime bill, a failed health care bill, a failed attempt to lift the ban on gays in the military). This opened avenues of failure for the Republicans to exploit. Led by Newt Gingrich and his Contract With America, they blanketed the country with their message. Not only was Gingrich successful in promoting a unified message, particularly among challengers; he also helped his party reach voters in new ways, with previously underused media like talk radio. That kind of message mastery was essential to the Republicans’ capture of 52 House seats.
This year, the Republican Party is deeply divided in its upper echelons of leadership—and people like RNC Chairman Michael Steele certainly aren’t helping the party define or stay on message. Additionally, the Republicans (far more than the Democrats) have had to contend with the distractions of the Tea Partiers, whose candidates have the potential to steal away the conservative voters on which the Republicans rely so heavily. A recent Gallup poll highlighted the steep overlap between the Tea Partiers and the Republican base. Republicans this year have to fend off charges from the right and the left instead of just being able to focus on the attack.
Jonathan Alter’s piece in Newsweek has a more partisan feel to it. In it, he argues that American voters are suffering from cognitive dissonance. While a majority favor several of the Democrats’ positions on some key issues, anxiety, mistrust, and disappointment are causing them to be “tempted to lose their spleens in the polling place without fully grasping the consequences.” And in something of a natural extension to Kaplan’s article, he argues that Obama needs to get on message:
Above all, the Obama team needs to get creative…In his speech after the vote [on financial services reform] last week, Obama once again failed to use vivid metaphors or turns of phrase to imprint the plan on the public consciousness. “But the crisis came” (an echo of “And the war came,” from Lincoln’s second inaugural) doesn’t cut it. So far, Obama has uttered only one memorable political line this year, and it was a good one: “After they [Republicans] drove the car into the ditch, now they want the keys back. No!” If he repeats it 50 times between now and Election Day, maybe the dissonance will dissipate.
As our friends and clients know, we view politics and policy making as critically important to economic and investment outcomes, and there’s empirical evidence to back us up. However, in the upcoming election, we’re not sure what immediate importance the outcome will have. This is due to the fact that most politicans, Democrats and Republicans alike, have been unwilling to step outside of their ideological comfort zones, which tend to be (roughly speaking) higher spending and higher taxes for the Dems, and lower taxes and lower spending for the GOP. Some readers might be thinking to themselves — correctly — that the President GW Bush years did not meet those criteria, and that’s an important point to come back to.
If we were to plot economic policy objectives against taxes and spending, it might look something like this:
It’s admittedly oversimplified — most heuristic devices are — as we’ve pushed the processes of money and credit creation into the background. But while it would be a lousy basis for economic theorizing, it should help readers map how different policy objectives are tied to different directions of taxes and spending.
Following the blue line from the lower left to the upper right quadrants, we have the extremes of classical political economy, from laissez faire (low taxes, low spending) to redistribution (high taxes, high spending). The Rush Limbaugh meme for the upper right quadrant is “tax and spend liberals” (some also refer to it as “Keynesianism,” but that’s something of a misnomer). The Paul Krugman meme for the lower left quadrant is “free market fundamentalists.”
However, policy objectives sometimes fall along the red line. During much of the twentieth century, following the Keynesian revolution, liberal policies pushed for spending beyond tax revenues, while conservative policies pushed for higher taxes and lower spending to “undo” the hangover effects. Ironically, those roles reversed during the past two administrations. The Clinton administration, especially after 1994, was in the top left corner. The last Bush administration was in the lower right quandrant for most of its eight years.
Nowadays, most Democrats inhabit all but the lower right quadrant. You have Blue Dog types on the left side of the graph, and the more archetypal “tax and spend” Dems in the upper right. Republicans, allegedly horrified by the “profligacy” of the Bush years, and perhaps enabled by their minority status, now tend to huddle in the bottom left quadrant. So we’re back to a more classical tug of war — think of the blue line as the rope — with more conservative Dems pulling in the direction of lower spending.
Unfortunately, that tug of war which is natural and appropriate under “normal” conditions should not be our primary focus at present. Under “abnormal” conditions – such as high inflation and an over exuberant credit cycle, or persistent deflation and a balance sheet recession — the policy debate should become much less cantankerous, as the solutions are fairly obvious. Today, with private sector credit transmission largely broken, the federal government needs to spend an appropriate amount of new money into existence. It’s that simple. Pols can pick up the blue rope to fight over who the recipients should be, and in exchange for what, if anything. But until they can first let it go — in other words, until Dems can stop insisting on higher taxes and the GOP can stop insisting on spending cuts (primarily in social services and entitlements) – there will be little progress towards policies that are supportive of the economy in the decade ahead.
There may be a handful of people from different areas of the political spectrum who are inching towards the lower right quadrant. The Obama Administration has struck a more dovish tone of late, and at least a few liberal types understand that a dollar of spending does not necessarily preclude a dollar of tax cuts (Christy Romer certainly, but some higher profile economists still pander to the tax hike crowd rather than clarifying the issue for voters). A few on the right may be starting to get it too — David Frum’s recent advocacy of a payroll tax holiday is a good start — but the shrill notes of campaign season are upon us, unfortunately.
Our take is that a GOP win of the House could be a negative for the economy, if it allows the deficit phobes in D.C. to have their way. But that’s not a given. There are always surprises in politics. The Dems might hold on, as Kaplan suggests, or the GOP might start crafting policies more appropriate to the times and/or accepting good ideas in compromise (assuming good ideas materialize). In fact, given that many people would accept the argument that the GOP win in 1994 was a net positive for the Clinton administration, a strong GOP showing might not turn out too badly for Obama (as long as he avoids “trouble,” of course). Then again, underlying economic conditions are starkly different from 1994-2000. I realize this is a wishy-washy assessemnt, but we’re just not sure yet how crucial the November election results will turn out to be. To us, whichever outcome pushes policy towards the lower right quadrant is the one to hope for — unless we’re wrong and the austerians are right.
* Anti-inflation is listed in the lower left quadrant because the dollar’s reserve currency status abroad throws a wrench into a simple closed economy model. For example, the thinking behind some Reagan policies (see especially Robert Mundell) was that a lighter government burden would raise domestic growth expectations, which would strengthen the domestic currency and thus lower inflationary pressures arising from import prices. Of course, the reality of Reagan era policies, as with most other eras, was more complicated.
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http://www.slate.com/id/2260630/pagenum/all/#p2
http://www.newsweek.com/2010/07/17/dodd-frank-dissonance.html
http://www.youtube.com/watch?v=U_s0IBCLkBQ
News and Views | art July 19, 2010 | 
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