Why Everyone Punted on the Sequester

Deal
In a rare moment of bipartisanship, Rep. Paul Ryan (R-WI) and Sen. Patty Murray (D-WA) this past week reached a budget compromise that is actually quite moderate in nature.

Conservatives got the two things that were most critical to them - no tax increases (although there were some fee increases, which I feel are defacto tax increases - more on that later) and restoration of some of the sequester budget cuts.

Liberals got two more years without entitlement cuts as the agreement leaves Social Security, Medicare and Medicaid untouched.  They also got higher overall spending caps (by $63 billion) over the next two years than the sequester allowed, although part of that increase will go to defense.

In theory, the package is deficit reducing, but probably not in reality.  The package allowed $63 billion in additional spending over the next two years, offset by $85 billion in cuts (primarily from federal workers and military pension contribution changes) and fee increases (most notably an increase in the fee on airline tickets) over the next 10 years.  So if the world stays utterly static over the next ten years, the deficit will go down, but the reality is that the package increases the deficit by $45 billion over the next two years versus the sequester agreement and it is a near 100% certainty that budgeting over the following 8 years will change.

This is a small-ball bargain that largely preserves the status quo.  It does not touch in any meaningful way the three biggest drivers of the deficit, which are entitlement spending, defense spending and revenues.  But that might actually be okay - the federal budget last year was $680 billion, way down from the recession heights of $1.4 trillion+ and clocks in at only 4.0% of GDP, close to a reasonable level.  In order to keep the debt to GDP ratio constant, the deficit can be as high as the inflation rate plus the rate of economic growth.  If one assumes modest 2% inflation and 2% GDP growth, then a 4% deficit will essentially keep debt flat in real terms.

Unfortunately, the math above only works if you never have a recession.  Recessions cause huge spikes in spending and decreases in revenues that shock the system.  In order to pay for these approximately once per decade shocks, in the good years, governments need to be running deficits of a lot less than 4%, ideally budgets would be balanced or even slightly in surplus.

The brief modern history here is that the US exited World War 2 with major debt from war obligations, with debt to GDP running as high as 120%.  We steadily "paid down" this debt, no so much through absolute reduction but though inflation and economic growth and by the end of the Carter administration, debt had fallen to 35% of GDP.  The next 12 years of Reagan and Bush (although H.W. did eventually agree to tax increases) saw major increases in defense spending, no cuts to social spending and large tax decreases, all of which, combined with the 90-91 recession, spiked debt to almost 70% of GDP.  The Clinton administration saw tax increases (his idea) and large cuts in defense (his idea) and social spending (Newt Gingrich's idea) which combined for budget surpluses and took debt down to 55% of GDP.

Then W. Bush took over as President and immediately slashed taxes, instituted prescription drug benefits for Medicare and ramped up defense spending in the build-up to wars in Afgahnistan and Iraq.  Debt was already up to over 70% of GDP before the recession hit and spiked to over 80% of GDP by the time Bush left office as massive outlays for bank bailouts and social benefits hit the federal coffers as the recession hit.

The first year of the Obama administration saw continued large outlays for the bailouts coupled with a large stimulus bill that spiked the debt by almost 10% in a single year.  Now the debt has stabilized right around 100% of GDP.

We really need to get back to about 50% of GDP to be able to absorb comfortably the next recession, since debt levels over 100% of GDP are reaching towards the saturation point where credit downgrades and loss of investor interest cause a spike in interest rates.  And a 1% interest rate increase on a 100% of GDP debt increases the deficit by 1% of GDP, meaning that we are very susceptible to interest rate risk if rates rise off of their current historic lows.

This deal won't accomplish any of that - it doesn't deal with tax reform, entitlement reform or defense spending reform.  But it does give the markets certainty, prevents another government shutdown in the near term and at least maintains debts and deficit at a stable level.

It is also significant in that conservatives agreed to new sources of revenue.  An increase in the airline ticketing fee is effectively a tax, since it is a direct charge to you as a consumer when you purchase an airline ticket.  Calling it a fee and not a tax is politically expedient, but the effect is the same - airline consumers pay more to the government.

The deal passed overwhelmingly in the conservative-dominated House, by a roll call vote of 332-94 with 73% of Republicans and 84% of Democrats backing passage.  It seems likely to pass the Senate, although, oddly, Republican opposition in the Senate seems a lot stronger than in the House and the vote next week may be much closer than the House vote.

For Republicans, this deal provides political cover to focus the debate on Obamacare, where they perceive themselves to have a big advantage given the struggles with the website and anger over policy cancellations.  For Democrats, they get a higher spending level and clear the legislative agenda to discuss other items that are non-budgetary, such as immigration reform, where they perceive they have a public opinion advantage.

This deal was expedient bipartisanship, but welcome bipartisanship nonetheless.

Obamacare Enrollment Improves Some
Obamacare enrollment increased dramatically in November, with the total now enrolled nationally reaching 365,000 by the end of the month, up from under 30,000 in October.

The basic benchmark of success is 7 million enrollments by the time open enrollment ends on April 1st.  Clearly, enrollment will not happen evenly across the months and will ramp up as the deadline gets closer.  Even so, October was clearly a dramatic failure.  The November numbers are less clear.  On a straightline basis, if every other month (December, January, February, March) only saw the same level of enrollment as November, enrollment would reach less than 2 million.  But, as I said, that is not the likely scenario.  It is still TBD to me if the administration comes close to its goal.

An additional 803,000 people have qualified for expansions in Medicaid and SCHIP, another key element of the law's expanded access.

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The Big 2012 Elecotral Map - A Stable Picture of a Changed Race, Should Obama Abandon North Carolina and Florida?, Veep Candidates Clash, The Battle for Congress

Days Until the Election: 23
Projected Popular Vote Total: Romney +1.0% (down 0.2% from last week)
Projected Electoral Vote Total: Obama 294, Romney, 244 (Obama up 13 from last week)
Current Betting Odds: Obama 61%, Romney 39% (Romney up 1% since last week)

As the aftermath of the first Presidential debate settles down in the polls, we see the "new normal" for the race beginning to stabilize.  Romney actually lost a little ground this week, with his national polling falling back fractionally and Virginia flipping back to Obama.  But the basic picture is still the same - a pick 'em race nationally with a slight structurally electoral advantage to Obama.

Romney needs to add a minimum of 26 electoral votes from here to win the Presidency.  If he picks up the 3 closest states (New Hampshire, Nevada and Virginia), it leaves him just short at 267.  This means that Romney still needs one of the larger states - either Ohio, Wisconsin or Pennsylvania, or to pick up those 3 plus Iowa.

The betting odds continue to tighten a little but still show an Obama advantage, largely, I believe, because of this structural electoral advantage that we have been discussing for some time.

Should Obama Bail on North Carolina and Florida?
The Democratic National Convention was held in Charlotte and North Carolina holds a special place on the map for Barack Obama as a state he'd like to have.  Florida obviously holds special significance for Democrats as the site of the epic recounts 12 years ago.

But, as a matter of strategy, if I were advising President Obama, I would urge him to abandon his campaign in North Carolina and Florida in the waning days of the campaign.

Sure, winning one of those two states would seal the deal for a second term.  But they seem to be slipping out of reach and he doesn't need them.

Certainly, I would contest Colorado, which is basically just one media market and still seems very winnable.  Other than that, I'd focus on holding the states with leads.  As I described above, Romney, if he takes Florida and North Carolina, still needs New Hampshire, Nevada, Virginia, Colorado and 1 other state.  Firewall Ohio, Wisconsin, Iowa, Pennsylvania and you win the Presidency.  Make Romney feel heat by rallying Hispanic voters in Colorado and Nevada.  Make the fight take place on your turf and focus resources.

Likewise, if I were advising Romney, I'd be telling him to pour everything into Ohio and Wisconsin.  Those are two big states that appear "gettable".  Michigan looks like too far a reach.  I think Pennsylvania is a long shot.  Nail Ohio and Wisconsin and your paths to the Presidency are many.  Miss them both and it is an almost impossible map.

VP Candidate Debate to an Essential Draw
The VP debate is typically the least significant of the four national debates in terms of moving the polls and that certainly appears to be the case this year - in part because almost everyone is voting based on the top of the ticket and in part because, in my opinion, Joe Biden and Paul Ryan essentially fought to a draw.

Biden was very good on substance - he was quick on his feet, aggressive in countering Ryan's attacks and came across likable, as he virtually always does.  He has received some criticism for smirking and laughing during Ryan's responses, but I don't think in context that those responses will hurt him.

Ryan appeared capable, cool and collected.  He was also aggressive on the attack and showed credibility and understanding on foreign policy. 

In short, I don't expect that the VP debate will do much to change the race.

Tune in next week for the second Presidential debate, where it is essential for Obama's chances that he significantly outperform his first debate performance.  Look for Romney to be aggressive to maintain / support his positive momentum.

The State of the Congressional Races
It's been a while since I've looked at the state of the races.  It appears more likely than not that the Democrats will retain control of the Senate at this point and that Republicans will retain the House.  Here are the latest numbers:

In the Senate, there are 30 Democratic and 37 Republican seats that are not up for election.  Of the balance, here are where things stand:

Safe or Likely Independent Seats - 2
(both likely to caucus with Democrats)
Vermont, Maine

Safe or Likely Democratic Seats - 12
California, Maryland, New York, Delaware, Minnesota, Rhode Island, Hawaii, Michigan, New Jersey, Washington, West Virginia, New Mexico

Safe or Likely Republican Seats - 6
Mississippi, Tennessee, Texas, Utah, Wyoming, Nebraska

Close Races - Projected 10 Democrats, 3 Republicans
Florida - Nelson (D) +7.6%
Ohio - Brown (D) +5.6%
Missouri - McCaskill (D) +5.2%
Pennsylvania - Case (D) +5.0%
Connecticut - Murphy (D) +4.2%
Wisconsin - Baldwin (D) +3.0%
Indiana - Donnoley (D) +2.0%
Massachusetts - Warren (D) +1.8%
Arizona - Carmona (D) +1.5%
Virginia - Kaine (D) +1.0%
North Dakota - Berg (R) +0.1%
Montana - Rehberg (R) +0.5%
Nevada - Heller (R) +3.0%

Projected: 52 Democrats, 46 Republicans, 2 Independents
(effective control 54-46 Democratic)

So, Democrats have the lead, but also have more close races to defend that they are currently leading.  Republican control of the Senate is not impossible, but looks to have become increasingly unlikely as the races have played out.

On Intrade, the odds of Republicans winning at least 50 Senate seats is currently pegged at 34%, and keep in mind that 50 seats only gives them the majority if they also win the Vice-Presidency, otherwise they would need 51 to get control.

In the House,
Current generic polling has the Democrats at +1.3%.

Based on this, projecting based on the newly redistricted House (which structurally favors the GOP) would give us:
Republicans 220 Seats, Democrats 215 Seats

I don't generally do seat-by-seat analysis of the House, but other sites do, so here is there perspective:
realclearpolitics.com (splitting the toss-ups evenly): GOP 239, DEM 196
electionprojection.com: GOP 240, DEM 195

Republicans have a 90% chance of retaining the House, based on the latest Intrade odds.

Obviously, the seat-by-seat analysis yields a broader spread than the generic polling data would indicate.  This may well be the case because of the candidates in the close races.  But I'm inclined to believe the truth is somewhere in between.  Either way, the GOP appears well-poised to retain the House.

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The Good, The Bad and The Ugly of the RNC

The slickly-produced 3-day Republican National Convention is now done, culminating with Mitt Romney's unexpectedly passionate acceptance speech.  Before action moves to the Democratic National Convention on Monday, I thought I'd reflect on what worked well, what worked poorly and what was just plain ugly at the convention.

The Good (and Very Good)
(1) Condoleezza Rice
Rice gave far and away my favorite speech of the convention.  First, she has a grace and a presence that is seldom seen in political circles.  She spoke from the heart and even declined to use a teleprompter, choosing instead to speak from memory.  Her personal story is compelling and her views on national security, while all (including myself) may not agree, are always stated with intellectual force and thoughtful logic.  She hit the rare duo of giving an intellectual and honest speech and arousing the passion and love of the crowd.

(2) Chris Christie
The night that Christie spoke was also the night of Ann Romney's personal speech about her husband.  Most pundits concluded that Ann Romney's speech was highly effective and that Christie's was mediocre.  Let me go on record and say that I think most pundits are nuts.

Ann Romney's speech may have done something to personalize the sometimes-wooden GOP nominee, but it was largely generic platitudes.  No disrespect to the Romneys, who seem to have a truly loving marriage, but the fact that Ann Romney loves Mitt is hardly a surprise or a differentiating factor, and certainly not something anyone should vote based on.

Christie's speech was pointed and passionate without being caustic (as he has often been accused) or deceiving.  His story of effective governance in New Jersey is almost all true.  His line that "real leaders don't listen to polls, real leaders change polls" will probably be the one line from the 3-day convention that I will remember for a long time and I thought struck a chord with an increasingly cynical electorate.  He represented the future of the GOP well.

(3) The Personal Narratives of Mitt Romney's Life
The stories, told by others, of the personally generous things that Mitt Romney has done to help children with cancer, a single mother with a leaky roof and many others personalized Romney for me in a way that Ann Romney's speech failed to do.  I write a lot about politics and am not particularly prone to being emotionally swayed by politics, much less so by a heavily produced political convention, but I honestly walked away from those speeches believing Mitt to be a good person.

(4) The First Half of Mitt's Acceptance Speech
Mitt was fired up, patriotic and optimistic, possibly the three most important elements a candidate has to possess to be a winner on the national stage.  He was believable and while he took President Obama head on, he did it in a reasonable way, steering clear of ridiculous allegations.  His singular question "If you felt that excitement when you voted for Barack Obama, shouldn't you feel that way now that he's President Obama?" I thought was a simple and fairly damning indictment of the Obama Administration - those who voted for President Obama (myself included) are certainly a heck of a lot less excited about the President now than when he was a candidate.

Poor
(1) The Second Half of Mitt Romney's Speech
When he began to talk policy, Mitt utterly lost me, and I would wager, many independent voters.  When he says a top priority of his will be to "repeal and replace Obamacare", I am still struck with two thoughts.  #1 - Why are you so passionate about repealing a bill that is based on the one you created in your home state and that you wrote in early 2009 in a USA Today editorial should be anational model?  And #2 (and more importantly, once I get past his big flip-flop) - replace it with what?  What is the Romney healthcare plan?

Secondly, lowering taxes, increasing defense spending, protecting existing entitlement benefits for those retired and those slated to retire in the next 10 years and balancing the budget is a mathematical impossibility.  Let me put it more simply - it is a lie.  Mitt Romney is right to call President Obama on the carpet for not halving the deficit as he had promised to do in the 2008 campaign.  But Mitt's plan is far more dishonest.

Finally, his foreign policy indictment of the President was, to me, bizarre.  Lack of support for Israel is a legitimate issue.  But Romney will be more free trade and yet impose sanctions on China?  Does any credible economist or foreign policy expert think these two promises are reasonable?  He would have done more with Iran?  What exactly?  Go to war?  Romney would be wise to steer clear of foreign policy, as I think it is possibly Obama's strongest story.

One small but subtle final point - how can Romney simultaneously claim that we need to shrink the federal payroll but oppose defense cuts, in part, because they would "cost jobs" (his words in his convention speech)?  Does it get any more hypocritical than that?

(2) Paul Ryan
The big idea, serious policy guy told a dishonest set of hackish talking points.  I had some hope when Ryan became the VP pick that we were going to have a serious discussion about the size of government and the best way to reduce the deficit.  After his speech, I think I can kiss that goodbye and officially label him an opportunist, not a serious thinker.

His indictment of Obama for a shuttered GM plant has been ravaged by the fact-checking organizations.  Blaming the President for a factory whose closure was announced during the Bush administration is a joke.

His attack on Obama for reducing Medicare spending is absurd when his own budget contained identical cuts, as well as much deeper ones in Medicaid.  Claiming now that he and Romney are going to be the protector of entitlements is a funny thing to say for someone who has hardly been an advocate for our entitlement programs in the past.

All the points above about Romney's speech apply just as much to Ryan's as well.

The Ugly
 (1) Clint Eastwood
Might have been better to have him record a video or at least get him to agree to stick to a script.  The rambling, off-message rant from Eastwood the night of Romney's big speech was an ugly distraction.  I'm not sure exactly what Eastwood was advocating, but I think he said Romney would have brought troops home from Afghanistan faster?  I almost felt sorry for the guy, he was so lost and incoherent.

Overall, it was a solid convention.  It is too early to have a good poll read on the impact, although the last 2 cycles, convention impacts have been a lot more muted, thanks to the early exposure of 24 hour news networks.  If Romney can get a 2-3% bump out of this, I think his team would consider it to be a success.  Even that will be hard to measure with the DNC happening so close behind.  I will try to get a read on the polls early in the week, before the DNC begins in earnest, to measure the Romney bounce.

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Who is Rep. Paul Ryan and What Does His Selection Mean?

Vice Presidential candidates generally don't decide general elections.  Some of the most widely panned Vice Presidential selections have still resulted in candidates being elected, Spiro Agnew and Dan Quayle being obvious examples.  Many great Vice Presidential picks have failed to life tickets, including the original compassionate conservative, Jack Kemp in 1996 being an obvious example.

Vice Presidential candidates who don't win become forgotten in history.  Does anyone remember who Adali Stevenson's running mates were in 1952 and 1956?  Let's try an easier one - do you remember who Gerald Ford ran with in 1976?  The answers, for the curious, are John Sparkman, Estes Kafauver and Bob Dole, two names you probably don't even know and one that you know only because he was a Presidential candidate 20 years later.

So, to reinforce what I've often said, I find it highly unlikely that the selection of Rep. Paul Ryan (WI) as Mitt Romney's running mate will make or break the election either way.  He is unlikely to torpedo and otherwise winning ticket and he is unlikely to bolster an otherwise faltering ticket in a meaningful way.

But Vice Presidential picks do reveal a lot about the Presidential candidates, as they are the first governing choice that they will make.

In 1980, we learned that Ronald Reagan, in spite of lofty rhetoric, was at heart a pragmatist, understanding that he needed to surround himself with smart people who knew more about areas like foreign policy, than he did.  George Herbert Walker Bush had been a bitter primary rival and was very much at odds with Reagan's economic policy, but Reagan knew a good executor when he saw one.

In 1988, we learned that George Herbert Walker Bush wanted nothing so much as to appease the right wing of the party.  Everyone realized Dan Quayle wasn't the best qualified candidate for the job, but Bush had fences to mend with conservatives.

In 1992, we learned that Bill Clinton prized an intellectual equal and wanted to be surrounded by very bright people.  It was also an indication that Clinton, a classic Center-Left Democrat, might have a little more left in him than center.

In 2000, we learned that George W. Bush prized loyalty immensely and wanted to be around people he was comfortable with, a theme we saw throughout his administration, where he frequently surrounded himself with people who had been with him his whole career.

In 2008, we learned that Barack Obama wanted to "first do no harm", picking a clearly qualified Veep who was uncontroversial and unlikely to get him trouble (frequent gaffes aside.)  We also learned that Obama didn't like being told what to do, roundly rejecting the easy choice of Hillary Clinton to forge his own path.

So what do we learn about Mitt Romney in 2012?

First, we learn that he is first and foremost, going to run an economic and budgetary campaign.  This comes as no surprise as economics are front and center in the national concern and Romney has always showed something between disdain and discomfort discussing social policy.  Secondly, we learn that Romney behaves in his hiring decisions like a CEO - he needs an economic and budgetary plan, so he hires the smartest young economic thinker in the GOP.  We also learn from a political standpoint that Romney is far more interested in running a base turnout election than a swing-voter election - Ryan energizes economic conservatives and tea party-types but does little with moderate voters and opens Romney up to all kinds of attacks about Ryan's plans for Medicare and Medicaid.

Paul Ryan would not have been my first choice if I were a political adviser to Romney.  Bobby Jindal would have been a solid conservative (appease the base), experienced governor (buttresses Romney's executive experience argument) and a non-overshadowing force in the campaign.  Paul Ryan does not bring governing experience - how can Romney argue business and governing experience is so critical when his 2nd choice for President doesn't have any?  Ryan may overshadow Romney as he is a much more respected thinker in the party.

But, apparently, CEO Romney is much more concerned with hiring the guy with the plan than what that guy will mean to the campaign.  And like I said, it probably won't decide the election, so Romney is probably well-advised to pick someone with whom he is comfortable.

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A Bad Week for Romney, Does He Need a Game Change?

Obama Lead Widens
Days Until the Election: 93
Projected Popular Vote Total: Obama +3.8% (+3.5% from last week)
Projected Electoral Vote Total: Obama 332, Romney 206 (unchanged from last week)

The last time that I actually flipped a state on my electoral vote projection was June 30th.  For a race that is supposed to be neck-and-neck and back-and-forth, that is pretty remarkable...5+ weeks of essentially the same map.  And the map is not so kind to Mitt Romney - it shows a pretty resounding victory for President Obama.  Not quite the 365 to 173 whacking that he gave to John McCain in 2008, but a large enough cushion that if the election were being held today, Obama advisers wouldn't be worried about a state here or there.

No states flip this week either, but the trend is decidedly for the President over the course of the past week.  He picks up 3.5% in the average of national polls and moves up the strength of several states.  For the first time in a long time, he now has 271 electoral votes in either the "safe", "strong" or "likely" category for him.  This is big because it means that the President could lose every single close state - North Carolina, Florida, Virginia, New Hampshire, Colorado, Ohio, Iowa and Nevada, and still win the electoral college 271 - 267.

The reason for this, of course, is the state of Ohio, which now sits in the Likely Obama category.  It is virtually impossible for a Republican to win without Ohio.  No Republican has ever won the Presidency without winning Ohio, going all the way back to the founding of the party in 1856.  Romney HAS to win there to open up the map to possible paths to 270 for him.  If he loses in Ohio, as the present polling would indicate, it's game over early on.

Romney's bad week has been the result of several things.  His first foreign trip was more or less a disaster as he offended the Brits by saying they might not be prepared for the election, offended Muslims across the world by saying that Palestinian poverty was the result of an inferior culture (no, that isn't taken out of context) and his campaign advisers offended the Polish by cursing at reporters during a trip to a sacred burial site.  In short, Romney looked not ready for prime-time on the world stage, and not appearing Presidential is an important defect for a challenger.

Also starting to move the polls is massive spending by the Obama campaign.  Ironically, after caving into the congressional Republicans to extend the Bush tax cuts for all incomes this year, Obama is campaigning hard on NOT extending the cuts again.  And it seems to be working.  You may call it cheap class warfare (and I have at times), but the theme of "Romney is an out-of-touch rich guy" combined with "the rich need to pay their fair share" and "Romney is a repeat of the Bush policies" are having a meaningful impact on the race.

Finally, the economic news has been relatively good.  It certainly hasn't been the V recovery that I had hoped for (and erroneously predicted) 3 years ago, but the stock market is double what it was then and we had another month of significant, although not stellar job growth.

Put it all together and Romney has some work to do after the Olympics to regain a solid footing in the race.  Things are certainly not insurmountable for him at this stage - after all a 3.8% lead can evaporate in a few days if the right events happen, but he has to be careful not to let this race get too far away from him given the strength of the coffers and strategy of the Obama campaign.

Game Changing or Safe VP Pick?
Romney's inability so far to close the gap has many among the GOP faithful calling for a bolder pick for his VP.  Rob Portman and Tim Pawlenty are the two heavy favorites for the nod and both represent very safe picks - unexciting but unoffensive soldiers who possess solid, but not radical, conservative credentials and would widely be seen as qualified to be President on day one.

The call is for a pick like Marco Rubio or Paul Ryan, Rubio for his youth and the energy of support for him from the Tea Party, Ryan for his conservative budget credibility, something which could be a big help for Romney, who has struggled to articulate any kind of cohesive economic and budget philosophy.

My bet is still on the safe picks and probably rightly so.  I've made this point before, but it bears repeating - I cannot think of a single winning Presidential Candidate who won because of his VP pick.  VP picks generally can only hurt not help, so the first principle should be to do no harm.

Pawlenty seems like the best choice of the bunch.  Outside the beltway, conservative but mainstream, has run things and therefore buttresses the Romney argument of executive experience.  And he is not at all gaffe-prone.  But it's Romney's call, obviously, and how and what he decides will be our first big reveal into how he might govern.

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