Sunday, March 20, 2011

Catching Up with the President's Numbers, Budget Malaise Continues, The Stimulus Winds Down, A US War in Libya?

The President's Numbers and the 2012 Race
As I've often said, the single most determining factor in a Presidential re-election is the incumbent President's approval. Therefore, while it's fun to watch the slow-motion race to the Republican nomination, it's probably far more relevant to look and see how the American public is judging President Obama's term in office.

Of course, that good old American public is fickle. Famously, President George Herbert-Walker Bush had a 91% approval (that was actually just in one poll, his average was something close to 80%, but you get the point) a year before one of the worst re-election showings in history, receiving a mere 38% of the popular vote. The thing that turns these numbers on a dime is the economy, and more specifically the 1.5% income growth rule...that is that President's that have the good fortune to see 1.5% income growth in the election year are generally re-elected, while those that see less are not.

Still, you have to know where you are before you can project where you are going.

So, let's look at the last 2 months of poll data. There is some noise along the way, but here is how I would generally explain the trend:
(1) The President CLEARLY got a real bump from his end of year legislative victories, including the ratification of the START treaty, the passage of the 9/11 first responders bill and the repeal of Don't Ask, Don't Tell (a policy change still mired in the pentagon maze, but that's another story for another day.) At the beginning of January (before the range on the chart), the President was average around -4%. By the end of January he was at around +7%, an 11% upswing - huge in the world of electoral politics.

(2) The bounce didn't last at those levels. As is often the case with big bumps like that, memories fade as time goes by. By the end of February, the President's averages were down to about +2.5%, still 6.5% better than where he was at the end of the year, but a 4.5% downgrade from his end of January numbers.

(3) He settled in at this higher level so far in March. So while the President has not maintained all of his bounce, he has certainly maintained at a higher level than he ended last year. This, in my opinion, is in large measure due to improving economic conditions.

Looking at his monthly numbers over his Presidency, we can February was the President's best numbers month since the first year of his Presidency, when there was a halo effect over his historic victory. The last 3 months have marked 3 months in a row in the black, following 6 straight months in the red.

So, what does all this mean for 2012? The President is back at an approval level where he could win, but it is far from a slam dunk. At number of +2.5%, he's right in the range where we could be in for a very competitive 2012 race. Of course, this could all change in either direction in a hurry.

Is This the Last CR?
It's amazing that the new Congress has been in session for nearly 3 months and with the exception of a few symbolic votes (the House voting to repeal Obamacare, for instance) and some non-controversial business, basically all it has done is to pass short-term extensions to the budget - 2 of them so far, but the 5th and 6th ones of a budget year that began October 1st and is almost half over. The latest, which extends government funding for 3 weeks, with $6B in domestic discretionary cuts, passed fairly easily with bi-partisan support, with opposition mostly coming from liberals who felt it went too far with the cuts and conservatives who felt it didn't go far enough with the cuts.

Both sides are saying this is the last one and the bi-partisan "gang of 6" is working towards a compromise, but it is very unclear still how exactly what the compromise they are driving towards will look like. Basically, with the 2 continuing resolutions passed so far, $10B of the $64B that the GOP sought to cut from the discretionary budget has already been passed. So the debate comes down to how much of the remaining $54B will be agreed to. I imagine that the final figure will be somewhere in the $30B range of additional cuts, but again, we are dealing with chump change, relative to the other aspects of the budget.

I continue to hold out hope that congress and the President will dispose of the domestic discretionary question relatively soon and have a real adult debate about entitlement spending, taxes and defense spending, the three levers that really matter when it comes to deficit reduction.

The Winding Down of the American Recovery and Reinvestment Act
Remember the stimulus? That $787B package of tax cuts, infrastructure investments and short-term entitlement enhancements that was more or less the first order of business when the President took office?

As I said at the time, it was really more a 3-year package of economic policy than a short-term shot in the arm to the economy. And, after over 2 years, it is reaching the end of its implementation. And while the GOP has talked tough about repealing its elements, it has more or less run according to its original plan. The latest numbers show the following dispersement of stimulus funds:

Tax Cuts: $260B out of $288B spent (90% spent)
Spending: $368B out of $499B spent (74% spent)
Overall: $628B out of $787B spent (80% spent)

The stimulus was really one of several pieces of key economic policy over the past 2+ years. Let's review all of them and their effectiveness:
(1) The Troubled Asset Relief Program
The $700B package of funding that was used to recapitalize banks, fund the transformation and bankruptcy of GM and Chrysler, bail out AIG and manage the massive losses at Fannie Mae and Freddie Mac was originally passed in the final days of the George W. Bush administration, but largely implemented during the Obama administration. Despite lots of, frankly very fair, criticism at the time, about the lack of limits on executive pay and the lack of help for the borrowers while lenders were being bailed out, the program has, in essence, been a pretty unqualified success.

The bank bailouts will turn a healthy profit and the auto bailout will likely yield only a small loss. With more substantial losses surrounding AIG and Fannie and Freddie, the total net tab for TARP is now estimated at $25B...a pittance to save our financial system.

Of course, neither TARP nor the Dodd-Frank financial reform bill that followed truly addressed the problem of banks getting too big to fail so the systematic risk still exists, but as a stabilization program, TARP worked exactly excellently.

(2) The American Recovery and Reinvestment Act
As discussed above, the stimulus dealt both a series of tax breaks and credits (think Cash for Clunkers and Energy Efficient Home Tax Credits), short-term expansions to unemployment and social welfare programs and infrastructure investments.

The success of the program is obviously the subject of a lot of debate and it is very hard to parse apart the impact of this program relative to other things happening in the macro-economy.

What I will say is that aspects of the program definitely contributed to the recovery. Cash for Clunkers provided a spike in auto sales that stabilized the auto industry and made the non-bankruptcy survival of Ford and the successful emergence from bankruptcy of GM possible. The energy efficient home tax credits have led to a boom in investments in windows, doors and insulation -- if you don't believe me, ask a contractor.

The bill was sold as preventing unemployment from exceeding 8%. It clearly did not do that. But, on balance, the country is better off with it than without it, in my opinion.

(3) The Obama Tax Cuts
Lost in all the debate over extending the Bush Tax Cuts (which I think we can now safely drop the Bush moniker from) was the fact that it's cost, over the next two years, actually exceeds the cost of the stimulus. The economic impact of extending the rate reductions passed during the Bush administration, along with the newly minted short-term reductions in Social Security taxes is yet to be determined. The deficit impact is obvious.

(4) The Federal Reserve
The role of the Federal Reserve in fiscal policy cannot be understated. In many ways, it's policy decisions have more significant impacts on the economy than any stimulus or tax package passed by our elected officials. The fed's policy over the past several years has been to maintain short-term interest rates near zero, indeed the short-term rate has been in the range of 0 to 0.25% since December of 2008.

The Federal Reserve has also embarked upon two rounds of what it has termed "Quantitative Easing". The program works pretty simply, the Federal Reserve buys US Treasuries, effectively printing money and using Treasuries as a mechanism to inject liquidity into the monetary system. The effect of these buys is to artificially suppress interest rates on treasuries and put more money into the system.

Both moves are basically designed with the same purpose...increase economic activity by making money cheap. It also has the side-effect of amping up inflation and reducing the relative value of the US Dollar.

Up to this point, overall inflation has been very tame during the recession, with the economy showing tons of available capacity in the labor market that might help to avert big inflation. But the dollar has been dropping and core commodities such as oil and grains have been spiking, yielding a concern that inflation may soon rise. The short-term impact of the Fed's actions have been positive to the economy - the long-term is a lot more questionable. I would hope the Fed will back off any further QE and consider raising rates in the not-to-distant future.

Airstrikes in Libya
Backed by French support and a UN resolution, the US is participating in Tomahawk launches and air patrols to enforce a no fly zone over Libya and offer support to rebel fighters. This action is in stark contrast to our actions in Iraq, where we went in alone and sent ground forces. This intervention is more akin to our actions in the former Yugoslavia during the 1990s, where we were able to support political and human rights interests with no American casualties by using our superior technology and air strength.

This is exactly the sort of military intervention that we should be leading - one where the free world is united and where our involvement can yield a large reward at a relatively lower cost.

Meanwhile, we are still trying to wind down Iraq and Afghanistan remains a massive cost both in financial and human terms, with no clear long term strategy in the region.

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Sunday, March 13, 2011

The Wide Open and Empty 2012 GOP Field, Budgeting a Week at a Time

2012 - No GOP Favorite, No Candidates Yet
The 2012 Presidential race should prove to be fascinating and the next 12 months will be all about deciding the GOP nomination. In the past 30+ years, I can't recall a GOP nomination fight that is as open as this one. Let's recall the history:
In 1980, Ronald Reagan was the clear front-runner after his previous attempt to unseat Gerald Ford in 1976 fell short and Ford ultimately lost to the unknown Jimmy Carter. He fairly easily disposed of George Herbert-Walker Bush by running to his right.

In 1984, Reagan ran for re-election unopposed.

In 1988, then-Vice-President George Herbert-Walker Bush was an easy front-runner and quickly disposed of a motley field that consisted of no-hopers such as Pat Robertson and uninspiring candidates such as Bob Dole.

In 1992, while then-President George Herbert-Walker Bush faced a primary challenge from Pat Buchanan, who made some headway, fueled by conservative anger at Bush's agreement with congressional Democrats to raise taxes, but ultimately failed to win any contests.

In 1996, GOP iron horse Bob Dole, the next man in line, was offered up as the sacrificial lamb to high popular incumbent Bill Clinton.

In 2000, probably the most open race up until now, name-brand candidate then Texas Governor George Walker Bush disposed of a mostly easy field (remember Alan Keyes and Orrin Hatch?), fending off the only serious challenge from upstart John McCain by running to his right.

In 2004, then-President George Walker Bush faced no serious opposition.

In 2008, next-in-line John McCain overcame early stumbles and lingering conservative anger over the 2000 race and McCain's subsequent vote against the Bush Tax Cuts to sweep through a large field that consisted of Mitt Romney, Rudy Guliani and Mike Huckabee, who all showed strength in some contests, but ultimately fell short.

By the theory of the last 30 years, Mitt Romney should be the prohibitive favorite, being the "next guy in line". This pattern of GOP loyalists getting the nomination in their second run - Reagan in 1980, HW Bush in 1988, Dole in 1996 and McCain in 2008 (George W. Bush being the only first-timer to be nominated.) However, Romney has his challenges:
(1) Romney-Care - it's pretty hard to dispute the fact that the healthcare legislation that has spawned mass anger from the tea-party and other elements of the right-wing of the GOP (just the sort of people that show up for primaries and caucuses) is more or less a carbon copy of Mitt Romney's plan in Massachusetts Romney's attempts to explain this away are downright painful to watch, where he claims that Romney-Care is okay because it's a state program and is consistent with his desire for the states to experiment versus having a federal program.

So....death panels and socialism are okay if they are done at the state level? I hardly think the tea-partiers spewing venom about the health care law are doing so simply on federalist grounds.

(2) Other philosophical inconsistencies
The thing that is particularly damning about Romney-Care, from the perspective of the right-wing, is that it is the latest in a pattern of Romney holding moderate-to-liberal positions while Governor and then attempting to distance himself from them. Abortion and gay rights are two other glaring examples where Romney held a progressive position for years, then conveniently became a born-again conservative when he wanted to run for President.

(3) Mormonism matters
Let's face it, whether it is right or not, Mormons are not part of the evangelical club. The religion is still viewed as fringe in much of the country and if Mitt is actually leading heading into Iowa, don't think for a second that it won't become a campaign issue.

So, this leaves the field wide open...

...wide open and empty. It's mid-March and still no declared candidates. Newt Gingrich is probably running - word is he is set to announce his candidacy in May. Jon Huntsman is flirting with the idea, so are Romney, Huckabee and Palin. Mitch Daniels is talking, but seems undecided. Tim Pawlenty is probably in, but not definitely. Ron Paul is running, like he always does. Rick Santorum and Haley Barbour may try, but are probably no hopers, like Paul.

It's very, very early, but here's how the average of averages of the polls look to-date (5 non-partisan polls I could locate):
Mike Huckabee - 19.8%
Mitt Romney - 18.8%
Sarah Palin - 16.7%
Newt Gingrich - 9.7%
Ron Paul - 5.5%
Tim Pawlenty - 3.3%
Mitch Daniels - 2.8%
Rick Santorum - 1.5%
Haley Barbour - 1.3%
Jon Huntsman - 1.0%
Undecided / Other - 19.7%

So, the front 3 consist of two well-known second-runners (Huckabee and Romney) that represent different wings of the party (Huckabee more the social conservatives, Romney more the corporate conservatives) and the best known member of the Republican Party, the ever present momma grizzly Sarah Palin (who clearly also represents social conservatives). The fact that Newt Gingrich polls at almost 10% even though he has been out of the public eye for basically the last 15 years and didn't necessarily leave on great terms with the party establishment is impressive and probably means that he will be a force to be reckoned with. Ron Paul always draws a sizable minority from the libertarian / anti-neo con wing of the party, but he can't build the critical mass to win. The other candidates don't register at significant levels yet.

It's early, so you expect the better-known candidates to poll better at this stage. But the polls simply punctuate the point that the lesser-known candidates don't have long to get in, if they expect to build the name recognition necessary to have a serious shot at the nomination.

Budget Logjam -- A Few Week at a Time
The Republicans are winning on domestic discretionary spending. As the Republican House and the Democratic Senate and Democratic President don't seem any closer to a deal, yet another continuing resolution is being drafted to bridge the federal government, whose latest continuing resolution (the fifth of this budget year) will expire March 18th, which would shut the government down if not extended.

The GOP got $4B in spending cuts in their first 2 week resolution (the fourth overall, but the first since they took over the House) and there will apparently be $6B in spending cuts in the new 3 week resolution. Continue down this path and they will get the $61B in cuts that they seek eventually.

But budgeting by a string of continuing resolution is a horrible practice. It is incredibly inefficient for government agencies to operate not knowing what their budget will be in 3 weeks. It leads to inefficiency and waste, all the things that both parties love to rail against in government, especially the GOP.

And let's not forget the fact that the domestic discretionary budget isn't where the money is. Domestic discretionary represents a mere 13% of federal government spending. Defense is 23%. Entitlements are 56%. The balance is interest and minor one-time expenditures.

In fact, simply allowing the Bush/Obama tax cuts to lapse, rather than extending them as Obama and the GOP agreed would have very nearly funded the ENTIRE domestic discretionary budget.

Let's talk about the 79% represented by defense and entitlements. At least the GOP is starting to talk about entitlement reform. Reforming Medicare and Medicaid (and less critically, Social Security) along with massive cuts to defense (which no one except Rand Paul, Barney Frank and Bernie Sanders seem to be discussing), are the key to solving the deficit, along with some reasonable tax increases (is it reasonable that half the population doesn't pay income taxes?)

I voted for both President Obama and the GOP House (Jon Runyan, in my case.) I call on them to work together to solve the real problem.

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