The Democratic Party meltdown of 2010

I want to talk about the drubbing the Democrats are going to take in this year’s elections and what it means, if anything.  As a sort of pre-amble, I will lead into this with some thoughts on tax cut propaganda and today’s piece by the conservative Reuters columnist James Pethoukoukis called The campaign against Larry Summers.

The socialism propaganda

Jimmy P. was on Larry Kudlow’s show last week as an innocent bystander in the ugly free-for-all between Kudlow and Arianna Huffington over her call for a boycott of the too big to fail banks Wells Fargo, Bank of America, JPMorgan Chase, and Citigroup. (Goldman Sachs and Morgan Stanley weren’t factored into this debate because they aren’t really banks to begin with). The issue he came to talk about was the mid-term elections – and both he and fellow guest Huffington agreed that the Democrats would lose this year in a very substantial way.

Pethoukoukis is my favorite main-line conservative commentator. If you want a cogent analysis from the conservative bent, look no further. But, judging from his article on Larry Summers, he has the reasons for the Democrats’ demise all wrong. Pethoukoukis’ argument goes something like this: Larry Summers and the policy gurus in the Obama White House have turned on the deficit spending tap to throw some stimulus money at our economic problems and see if it sticks. However, left-wing liberals like Paul Krugman are incensed that Summers even thinks about deficits in doing this. The liberals say that Obama needs to spend more money, not less money. But, they are crazy as they haven’t even noticed that debt to GDP is skyrocketing.

Obviously, I’m paraphrasing here. I imagine Pethoukoukis could go further and say: Barack Obama may have been pushed by fiscal realities to the center-left. But, the Democrats are going to lose the 2010 mid-terms anyway, because Obama and the Democrats in Congress are tax and spend liberals whose socialist agenda is antithetical to American values. What we really need are tax cuts and lots of them.

I hope that sounds about right because that’s what most Republicans are saying these days.

Well, this is pure propaganda. Tax cuts are the new mantra of the Republican Party. According to them, tax cuts are the ‘anti-socialism’ way of doing things because more government spending just leads to serfdom, right? But, tax cuts add to the deficit too, if you haven’t noticed. So, let’s look at this ‘socialism’ thing that gets thrown around (Pethoukoukis didn’t use this term; I am just using his piece as a jumping off station. I anticipate he will understand).

If you asked your 80-year old mother whether she wanted the government to cut her taxes, what would she say?  Yes?  in a heartbeat; who doesn’t want a tax cut?  Now, if you asked her the follow-up question as to whether she wanted fewer libraries and swimming pools or fewer garbage pickups and snow and leaf removal, she would ask you what you’re talking about. If you explained to her that these were ‘socialist’ services and they would be cut so as to not increase the deficit, her enthusiasm would dwindle. And I haven’t even gotten to teachers, firefighters and police officers.  The fact is people like the services that government provides for them. That’s why it is provided. And while everyone wants a tax cut, most people don’t think socialism when they think of the local bus service or community park.  The fact that so many people are yelling socialism these days has more to do with partisan politics, demagoguery and a bad economy than with reality.

Now, you might object that all of the government services I mentioned are local services.  The Federal Government is not providing any of these services.  Fair enough.  Where do we start the Federal cuts? How about discretionary spending?  The largest piece of the pie is military and defense spending – $663.7 billion in 2010.  Don’t want to cut defense spending? Well, the next item down the list is only $78.7 billion for the Health and Human Services Department. That’s not going to be a very big cut if you’re looking to reduce the deficit and cut taxes. 

How about mandatory spending? Social Security is #1: $695 billion and Medicare and Medicaid come next at $453 billion and $290 billion respectively. The break down is on the right (click to expand the image). If you want to rumble with a retiree, tell them you’re cutting back on Social Security or Medicare.  Your 80-year old mother would throw you out.

You get nowhere fast, politically speaking, by combating ‘socialism’ and trying to cut deficits because these are services and programs people want. That is the reality.  So the cry of socialism is propaganda as it relates to deficits and taxes.

Bailout nation

On the other hand, I agree with parts of what Pethoukoukis has to say about the deficit spending.  Liberals really are trying to have their cake and eat it too. They are trying to boost spending with a bunch of new programs that are not paid for, thinking that somehow, if we can just jump-start the economy, we can go back to the way things used to be – but better because we have all these new programs.  That is definitely misguided.

There’s nothing wrong with trying to maintain aggregate demand if you realize why it so low to begin with. It’s not like the U.S. economy was firing on all cylinders before the financial meltdown. Wages have been stagnant for over 35-years and people in the middle class have only increased incomes through working more and through the entry of women into the workforce. Wealth has only increased as a result of illusory gains in house prices and stocks before it. All the while, this imaginary income and wealth was financed by huge increases in debt. We need to eliminate the debt.

So, on fiscal stimulus, I would agree with Krugman. Obama needed to have a larger stimulus package but he also needed to eliminate the private sector debt and liquidate bankrupt companies.  Instead, his administration fudged it by trying to stimulate the economy while bailing out bankrupt too-big-to-fail institutions like GM, Chrysler, GMAC, Citi and and on down the line. This merely takes what was a private debt and socializes it into a public sector debt that can be only reduced by higher taxes, inflation, or default. I see this as the real socialism.

Trying to maintain this status quo is crazy. Not only does it not stimulate the economy enough, it retards growth by littering the economy with overcapacity and zombie financial institutions who either don’t want to lend or can’t. This cake-and-eat-it-too mentality also transfers debt burdens from individuals and corporations to the taxpayer writ large.  Taxpayers are on to this – and it certainly helps that the beneficiaries of all of this largesse at financial institutions in particular have made a vulgar display of their government-acquired wealth.

The Democratic Party meltdown

This is why the Democratic Party is going to take an absolute beating in this year’s mid-term national elections in the United States.  And the question is not so much whether they will lose seats, but rather how many and whether it costs them one or both houses of Congress.  For Washington, this will mean gridlock. Obama will have no filibuster proof majority. This is pretty much guaranteed. So Obama is done on the policy side. No controversial or even partisan agendas are going to get through after 2010. Come 2012, this will reflect poorly on him and cost him in voter turnout.

You can point the finger at many individuals for why this is so, Nancy Pelosi as Speaker of the House or Harry Reid as Majority Leader. You could blame the sluggish economy.  But, ultimately, you have to put the lion’s share of the blame on Barack Obama himself and the bailouts.  Mind you, Pethoukoukis says liberals are alienated from Obama because he is running center-left, and that this is what his problem is about.  This contention is false. Obama is losing support across the political spectrum as many polls have demonstrated. It’s not about liberals. It’s about the economy and the bailouts.

On the economy for example, Gallup released a poll today saying:

President Obama has been walking the public opinion tightrope represented by the 50% job approval line since about mid-November, with his rating wavering between 47% and 53%. However, even when 47% of Americans approved of Obama’s overall job performance (in early December), slightly fewer Americans (46%) disapproved. Obama has yet to see his job approval rating descend to the point that more Americans disapprove than approve.

Still, Obama’s initial approval rating in his second year as president is among the lowest for elected presidents since Dwight Eisenhower. Only Ronald Reagan — who, like Obama, took office during challenging economic times — began his second year in office with a lower approval score (49%). However, Obama’s disapproval rating is slightly higher than Reagan’s was (44% vs. 40%).

If you notice, there is a direct correlation between the economy and the economic fortunes of the incumbent – George W. Bush being the notable exception as he benefitted from his image post-9/11.  Obviously, the economic factor is why Byron Wien of the V-shaped 5% growth recovery is predicting that Democrats will do better than expected in mid-term elections.

The problem with Wien’s analysis has to do with the bailouts. Americans, while still complacent, are finally showing some “throw the bums out” hostility to the status quo.  I marvel at how much anger there is on the bailout issue. Everyone I talk to has an (negative) opinion about it. If Tim Geithner wanted to do “deeply unpopular, deeply hard to understand” things, then he has succeeded.

Right now, channeling this anger has proved difficult. But, incumbent politicians are an easy target. This is why both Byron Dorgan and Chris Dodd are not running for re-election. And come November it will be much the same populist rage I suspect.

So, the bailouts, the health care reform, the stimulus, and the deficit are all connected in most people’s minds as one set of policies. Conservatives look at this mess and think ‘socialism.’ Liberals look at the same mess and think ‘sellout.’  And the figure supposedly presiding over this mess is none other than Barack Obama. Fairly or unfairly, he will take much of the blame.  I believe he deserves this blame.

What this says to me is that the Democrats are going to get clobbered regardless of what happens between now and November. Even if the economy recovers, people will have soured on government and the knives will be out. Incumbents beware. That spells trouble for the Democrats.

Update 2010-03-11: Let me give Pethokoukis some credit for his contention that Democrats are alienated by Obama’s new center-left positioning. More recent polls do show there is merit to this argument and greater erosion among Democrats. See Gallup: Can’t Get No Satisfaction

Source

2010 United States federal budget – Wikipedia (for budget data and image)