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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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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Wisconsin - Latest Front in the Public Worker Battle, A Budget Compromise of Sorts?, What Are Our Spending Values?

Of Public Pensions and Unions
This battle has been brewing for a long time. It started in Washington DC, where former School Superintendent Michelle Rhee battled the teacher's unions over merit pay and tenure. It moved to New Jersey, where rising star Governor Chris Christie demanded that public workers contribute to their benefits. It moved to San Diego, where the township abandoned traditional pensions in favor of 401K matches, And it spilled over into the streets in Wisconsin, where public worker angrily protested a plan by the Republican majority to force public unions to decertify, essentially stripping public workers of the ability to unionize.

The battles is over public unions and the cost of public benefits. First, let's examine a brief history lesson. The strength of the union movement in this country, which began in the manufacturing sector, reached its height in the 1950s and 1960s, as steel workers, auto workers and other manufacturing workers, who numbered in the millions, joined up to demand better pay and benefits, shorter work hours and improved safety. Since that time, unions in the private sector have been on a steady decline. Manufacturing jobs have left for overseas or been lost to automation. And what workers remain in manufacturing have abandoned unionization more and more as federal regulators have largely dealt with the extreme safety and environmental violations of years past and manufacturers have wised up and offered better pay and benefits to non-union employees to discourage organization. In fact, union membership in the US is at an all-time low, with a mere 8% of workers now members of a union local.

The last vestige of union power in this country is among public workers. Teachers, police officer, fire fighters, garbage collectors, you name it, most government employees are unionized. And those unions have been effective. While the private sector is almost completely through a 20 year migration away from defined benefit pensions, free health care and other plush benefits of years past, they are still in full force in the public sector. And state and local governments, while they have been quick to agree to generous pensions, have been very slow to fund them, with up to $15 trillion in unfunded pension liabilities saddled on the backs of state governments by some estimates.

Now, as the recession and the housing collapse have sapped state coffers, the battle over those generous benefits is in full force. And it is on display in Wisconsin, which has taken the most radical step to date, of moving to legally prohibit state workers from joining a union.

A few thoughts. First of all, I'm no great fan of modern unions, especially public employees unions. Opposing merit pay for teachers and opposing the dismissal of corrupt police officers and incompetent DMV employees isn't a great way to earn my love. Neither is failing to recognize the economic reality of the times or the obligations that public employees have to the taxpayers.

Having said that, I think the whole Wisconsin thing is an overreach. I have a radical idea. Rather than forcing the Wisconsin unions to decertify, couldn't the GOP just simply not agree to their demands? No pay or benefits package can or will exist that is not agreed to by the government. Unions or no unions, the government holds all the cards, they simply have to play them.

Full on display have been the worst of both parties. Union members comparing themselves to Egyptian protestors (as if!) and their democratically-elected Republican officials to Hitler (aren't we all a little tired of those intellect-insulting comparisons?). On display by the right? A naked attempt to sap the Democratic union power base and debasement of the protestors first amendment rights.

Can't we all grow up a little?

Boehner: No Shutdown Looming
John Boehner is no fool. Unlike Newt Gingrich, the Speaker of the House realizes the damage that was done to the GOP when it went toe-to-toe with then President Clinton over the budget in 1995, a battle that led to a government shutdown that helped to lead to a resounding re-election victory for Clinton in 1996. Boehner was explicit today that he would do everything possible to prevent a government shutdown, when the current continuing resolution expires next Friday and showed an openness to agree to a short-term measure to keep the government operating while Republicans negotiate a compromise with Senate Democrats and the President, although he was clear that any such measure would be at a reduced rate of spending.

Boehner is also now on record that the Republican budget proposal will address entitlement reform. This is progress. Entitlement reform (along with defense spending reform, which Boehner was notably silent on) will be the key to solving the deficit, not the nickels currently being argued over around discretionary spending. Let's just hope the GOP plan doesn't include a privatization of Social Security, an idea which makes the funding gap worse and subjects the federal safety net to the risks of the market. Stick to retirement age, tax ceilings and the tax rate, Mr. Boehner, and don't look to gamble with poor seniors primary source of income.

On the budget, I predict the GOP will get most of what it wants. President Obama has shown little backbone on economic issues, as evidenced by the "compromise" on the Bush (now Obama) tax cuts, where the President gave ground on essentially everything. Plus, the fact remains, the President can't get a budget that doesn't pass the GOP-controlled House, so they still hold all the cards.

What Spending Tells Us About Values
This past weekend, I was at my parent's house for lunch and dinner. My father, a retired defense contractor, is a committed economic conservative. He has voted Republican most of his life, hates high taxes and detests government spending on almost everything except the military. We agree on some things economic (farm subsidies drive both of us nuts!) and disagree on others (I would like a lot less military spending, he has long been a defense hawk.) But when we talked health care, he had a pleasantly pragmatic view.

You see, he had several back surgeries about a year ago. He noted that if he had paid for them himself, the total cost would likely have been close to a hundred thousand dollars. That's untenable for any private party to manage, he conceded - people have to have access to insurance. He also isn't a fan of single payer: "in the UK, they would just write me a prescription for some narcotics and send me on my way" he said, also a solution he didn't like. "So what do we do?", I asked. "I think," he said, pausing to consider the options, "that we are all going to have to get used to spending more on health care than we are used to."

And there you have the rub. You can't have world class care for everyone and not pay a premium for it. You can't continually reduce costs and improve care. We have to decide what kind of system we want. And that involves choices. Cost versus quality. Access versus innovation. How we balance these things reflect our values and determine our economy. The problem is, we are still having a sound-bite debate. This isn't about individual mandates or Medicare reimbursement rates. It is about how we design a system we can afford that contains choices that reflect our values. And that is no easy task. Obamacare doesn't solve it. But the GOP has offered no real alternative, other than the status quo, which is even more unsustainable.

Stay tuned. This issue isn't going away.

61 Billion Things to Debate, 2012 Congressional Showdown

House GOP Passes a 2011 Budget
We are very late in the season to be talking about the budget for the year. You see, the government's fiscal 2011 budget actually began on October 1st of 2010, but as the Democratically controlled Congress of the time essentially punted on the budget, here we are.

Not that all of the Democrats reasons were bad. Don't ask, don't tell repeal, debating the Bush/Obama tax cuts (not the ending I would have liked, but an important issue nonetheless), and the START Treaty consumed the waning days of the last Congress. And not that they didn't try - an omnibus bill was on the agenda for the lame duck session of Congress, but was too expensive for the tastes of Senate Republicans, who preferred to let the incoming, more conservative congress determine the rest of the budget. In place of a budget, Congress simply put in place a couple of continuing resolutions that, in essence, kept government funded at least years levels through March 4th. Hence the showdown that we see now.

What passed the House was more or less true to the pledge that Republicans had made to cut $100B in domestic discretionary spending in year one. I say more or less, because the budget they passed cuts only $61B from the current levels of funding, but cuts $100B from the original request that President Obama had made for the year. ToMAto, Tomato.

I've written many times, but will make the point once more that this is, in large measure, a sideshow to the real budgetary choices that will have to be made. Those involve entitlement reform and military spending. You could cut 100% of domestic discretionary spending and not balance the budget. In fact, the $61B in cuts reduces this year's deficit by a whopping 4%. But I digress.

The budget cuts are brutal. Cuts to traditional conservative targets, to be sure. Planned Parenthood is axed. So is NPR and PBS. Home heating oil subsidies for poor people? Massively cut. Health care implementation funds? Forget it. Interestingly, Amtrak funding somehow survived the bevy of amendments that were debated in the House.

The final product passed the House 235-189 with all 186 Democrats who were present voting against the bill, joined by 3 Republicans, with the balance of the GOP members of the House voting in favor.

The bill has been essentially labeled a non-starter by Senate Democrats, who, in spite of a weakened majority in the Senate, are still strong enough to block bills they don't like.

Congress is in recess this week, which means it won't reconvene until February 28th. The current continuing resolution expires on March 4th, which means that Congress has one week to work out some sort of deal. I see three possibilities:
(1) Democrats and Republicans come to a fast deal
This seems unlikely and would almost certainly have to involve Democrats giving most of the ground on proposed GOP cuts. The GOP isn't in the mood to give too many concessions, given the strength of their showing in the past election and their belief that their charter is to cut spending. Democrats might give a lot of ground in order to prevent a government shutdown (look how fast they caved on extending the Bush tax cuts) but this scenario seems unlikely.
(2) Agree to pass another temporary measure
Fund the government for another month while they work something out. This seems like the most likely scenario and one that the GOP appears somewhat open to, although they are unlikely to agree to an extension at current levels of spending unless they had firm commitments on what the final budget might look like.
(3) Shutdown the government
While some on the far right seem to be itching for a government shutdown, they would be wise to remember the battles the GOP lost with President Clinton over government shutdowns. This scenario seems more likely than a fast deal for the whole year but less likely than a temporary funding measure.

Also looming is the need in late April to raise the debt ceiling. Some of the tea party loyalists want the debt ceiling hike to be voted down. But they have offered no credible plan for how the government could continue operating without continuing to accrue debt, at least in the short-term (are you going to cancel Social Security for current recipients tomorrow? Lay off all of the military? No good short-term options), so in all likelihood, the debt ceiling hike will pass fairly easily, assuming a deal is struck on the budget -- hard not to vote for the debt ceiling if you voted for the budget that caused it to need to be raised.

At least we are finally having a debate about deficits and spending. That was my hope with the divided Congress.

2012 - A Tough Senate Map for the Democrats
Every Senate election cycle is an echo to the cycle 6 years earlier -- that is, each party has to defend the seats it gained 6 years prior. 2006 was a great year for the Democrats, which makes 2012 a tough year on the map. Here is a preview of the key races.

Likely Democratic Holds (10)
California - Diane Finestein is up for re-election and even in a cycle as strong as 2010, Republicans have shown no capability to win at the statewide level in Cali.
Delaware - Tom Carper is up for re-election in another state the Dems held in 2010. Maybe if they nominate a Mike Castle, they could have a shot, but if you are Mike Castle, do you want anything to do with a state GOP that bumped Christine O'Donnell ahead of you in 2010?
Hawaii - Daniel Akaka is an institution in the Senate and in the liberal state of Hawaii. His seat should be safe.
Maryland - Ben Cardin has not yet announced his intentions, but either way, Maryland is not exactly a hotbed of conservatism, with Cardin winning fairly easily last cycle and Barbara Mikulski winning in a near walk in 2010.
Michigan - While Michigan has historically been more purple than pure blue, Debbie Stabenow has the advantage of incumbency and the benefit of demographic shifts in the state that will likely make it more liberal by 2012.
Minnesota - Could be in play in a big GOP year, but more than like Amy Kloubachar is safe in the home of Walter Mondale.
New Jersey - sure we elected Chris Christie to the state house, but in the arena of national politics, New Jersey is still a reliable blue vote. Bob Menendez should win fairly handily, especially with the only state GOP star in the Governor's mansion.
New York - Kirsten Gillebrand has to run for a full term, since the election she won last November was a special election for the last 2 years of Hillary Clinton's term. She won easily in the GOP-dominated 2010, so there is no reason to think that she won't again, especially being buoyed by victory on the 9/11 first responders bill and Don't Ask, Don't Tell repeal.
Rhode Island - Sheldon Whitehouse toppled liberal Republican Lincoln Chafee 6 years ago. Rhode Island hasn't gotten any more conservative and Whitehouse is now an incumbent.
Washington - Maria Cantwell should be safe in the home of the green movement. Washington is a fairly reliable Democratic state.
Wisconsin - Herb Kohl got 67% of the vote in the last cycle. Even assuming that 2012 won't be as good a year for Democrats as 2006 was, he should win handily.

Lean Democratic Holds (3)
West Virginia - Joe Manchin has to run for a full term. West Virginia is a right-leaning state, but Manchin is a right-leaning kind of Democrat, who managed to win against a GOP tidal wave in 2010.
Ohio - Sherrod Brown will likely face a stiff challenge in this swing state, but he has the advantage of incumbency and is relatively well-liked in the state.
Pennsylvania - Bob Casey Jr.'s brand of socially and economically moderate policies and the brand name he has carried on from his father should make him a favorite in 2012.

Democratically Controlled Seats Likely to Be Competitive (7)
Florida - Bill Nelson is running for re-election and has already drawn three Republican challengers. There is chum in the water after Marco Rubio's resounding win in 2010 and Florida is a classic swing state.
Missouri - Claire McCaskill faces a similarly crowded GOP field...and Missouri is to the right of Florida in its politics.
Montana - Jon Tester eeked out a 1% win in the Democratically-dominated 2006 cycle, but he is running in libertarian conservative Montana and his politics are clearly to the left of the state. It'll be a tough fight for Tester.
Nebraska - Ben Nelson often separates himself out as the most moderate member of congress and the most conservative Democratic Senator. But he also cast the crucial vote for health care reform, which will no doubt be front and center in the campaign in this very conservative state.
New Mexico - Jeff Bingamin is retiring, leaving the race wide open in this swing state.
North Dakota - Kent Conrad is retiring, which probably makes this the single most at-risk seat for the Democrats. Given North Dakota's conservative politics, it is almost hard to imagine a scenario where the Democrats hang on to this seat.
Virginia - Jim Webb's retirement (possible to replace Robert Gates at Defense when he finally retires, although that is just speculation) opens the door to the man he ousted - former Governor and former Senator George Allen. If former Democratic Governor Tim Kaine runs, this race feels like a toss-up, if he sits it out, the dynamics seem to favor the GOP.

Likely Independent Holds (1)
Vermont - Bernie Sanders is an institution in Vermont. The only proud, avowed Socialist in congress, he'll likely go back for 6 more.

Independent Seats Likely to be Competitive (1)
Connecticut - Joe Lieberman is retiring, which will likely put this seat back in Democratic hands. Such a pick-up wouldn't shift the operating majority in the Senate.

Likely Republican Holds (5)
Indiana - Richard Lugar may face a primary challenge but either way, the seat seems unlikely to fall into Democratic hands. Sure Indiana voted for Obama, but it is still far more conservative than the country as a whole.
Mississippi - If Roger Wicker even draws Democratic opposition, it will be fairly token...this is probably the GOP's safest seat.
Tennessee - Bob Corker should be safe in heavily Republican Tennessee.
Texas - in spite of Kay Bailey Hutchinson's retirement, Texas is a reliably Republican state and the GOP field appears stronger than the Democratic field. Not likely to change hands.
Utah - This IS Orrin Hatch's seat and he is running for another term. He won 62% of the vote in heavily Democratic 2006.
Wyoming - John Barasso won 73% of the vote in 2008 in the special election for his seat. Given that 2008 was a pro-Democrat year, he should do about as well in election for a full term.

Lean Republican Hold (2)
Arizona - Jon Kyl is retiring, leaving the field wide open. But Arizona is still right of center and the Arizona GOP has one of the strongest organizations in the country.
Maine - Olympia Snowe is running as a Republican in a Democratic state. But she is also a moderate and has historically been popular back home, wining a whopping 74% of the vote in 2006. If she loses a primary challenge from the right, all bets are off.

GOP Held Seats Likely to Be Competitive (2)
Massachusetts - Scott Brown has to reprise his miracle win in a special election that rested control of Ted Kennedy's seat from the Democrats. Not an easy task in deep blue Massachusetts, where he is sure to draw a strong competitor.
Nevada - a swing state to be sure and John Ensign has had his share of scandal while in office, but he still holds the advantage of incumbency and has no announced challengers yet.

A very tough map for the Democrats. 2 to 4 competitive races for GOP seats and 7 to 10 seats to defend. If it's a strongly Democratic year, they might hold the Senate, if it's a strong GOP year, they could be down to 44 seats or less. In a middle of the road year, you'd expect them to lose around 3 seats, just enough to give the GOP control of the Senate.

The House is another store, because it is an echo to 2010, not 2006, and, of course, the GOP already has the majority. Also, add in the layer of complexity of redistricting, which, given population trends in the census, should give a boost to the GOP, and you have a year where the Democrats may make some small inroads, given that the GOP won virtually every competitive seat in 2010, but are unlikely to gain the majority.

Obviously, a great deal more to come. Stay tuned.

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The Great Spending Showdown, The Never-Starting 2012 Presidential Race, Freedom in Egypt

Note: My apologies for lack of recent posting activity. I have been very busy with my real job and the political news has been very slow. I intend to post more frequently, hopefully at least once per week, until the Presidential campaign really picks up, at which point my posts should come fast and furious.

Mark Your Calendar for March 4th
The pending battle over government spending was preordained in the lame duck session of Congress late last year, when a temporary continuing resolution, which kept the government funded through March 4th was passed instead of a full budget. The Senate GOP wanted this battle - they wanted the coming House GOP majority and enhanced minority in the Senate to have a crack at the budget rather than simply allowing Democrats to pass one more budget before the incoming congressional class made it to town.

Couple this budgetary showdown with the looming fact that the federal government will hit its legal borrowing limit, possibly sometime in April, and will require a raising of the debt ceiling to continue operating, and you have quite a philosophical showdown on your hands.

What all of this sets up is an interesting showdown of sorts. The GOP had pledged to cut $100B from the federal budget in year one, a Herculian task if you take entitlements and defense spending out of the mix, two areas that are almost sure not to be touched in the next three weeks. After initially waffling on the pledge, the GOP has proposed bold cuts to the budget that slash deep, including major cuts in federal education funding, assistance to the poor, agriculture subsidies and a whole host of other things. President Obama, for his own part, seems surprisingly receptive to major cuts in the federal budget. My suspicion is that the House GOP will get most of what they really want. Why? The control the purse strings. President Obama can't spend a dollar that the GOP House doesn't authorize. That's what shared accountability is.

My perspective on this is that while it is encouraging to see focus on reducing the deficit beyond campaign season, the cuts being discussed now are a very small baby step. Consider this -- the tax cuts just extended by Congress and the President cost over 4 times annually the maximum amount that is being discussed as on the table for spending cuts. I don't question the opportunity to reduce domestic discretionary spending, It's just that the very painful cuts that are being proposed solve less than 1/15th of the federal budget deficit. The real money is in tax reform (read tax increases or minimally repealing the Bush/Obama tax cuts), defense spending (read reduction of foreign operations and military weaponry) and entitlements (read Medicare and Social Security.) I'm okay with this as an opening salvo, but the political community better get to the heart of the issue after this year's budget is established.

President Obama missed a big opportunity in his State of the Union speech by not embracing the proposal of the deficit reduction commission that he pushed for. They came back with substantial ideas that, while they may not be perfect, were a very good first cut at significantly reducing the deficit. But their proposal is being allowed to wither on the vine and it is likely nothing will come of it. What a shame.

When Will 2012 Start?
The nation's largest gathering of conservatives, the CPAC convention is just wrapping up and it strikes me, as straw polls are held (Ron Paul, whose energetic supporters devote a lot of energy to winning symbolic straw polls, was the winner again, followed by Mitt Romney), that this cycle's Presidential campaign is off to a VERY slow start.

In 2007 (the correlated year in last cycle to 2011), then-Senator Barack Obama declared his candidacy on February 10th. It is now February 13th and there is not a single declared GOP candidate. We don't really know...is Newt Gingrich in? Is John Huntsman's resignation as ambassador to China a precursor to a Presidential bid? And what in the world will Sarah Palin do?

It's that last question -- the intention of the former Alaska Governor, that probably accounts for a large measure of the uncertainty. Whether Palin runs or not dramatically changes the field, given her passionate group of hardcore conservative supporters. If she gets in, other right-wing candidates will likely sit it out as moderates such as Mitt Romney and TIm Pawlenty will set-up a moderate vs. conservative battle. If she stays out, other conservative candidates such as Mike Huckabee and Newt Gingrich have a much more real shot.

People complained last time around about the never-ending campaign. It is certain at this point that the 2012 campaign will be shorter than the one in 2008. How short still remains a question.

I expect many of the candidates...Pawlenty, Gingrich, Huckabee, Romney, to get in the race in either March or April, but high-profile possibles like Palin could conceivable wait longer. The debates start in June, so I expect the whole field to be filled in by then.

Personally, I can't wait for the campaign to start. I live for this sort of thing.

Freedom in Egypt
We can all root for this to end well. Grass roots protestors, risking life and limb to stand up to an authoritarian government, have succeeded in toppling it. What happens next is anyone's guess. A temporary military government could pave the path for true Democracy in Egypt or it could be a precursor to even more authoritarian and radically religious government. We all should root for the people of Egypt who seek to breathe the free air.

The Obama Surge, The Budget Reality

President Obama - Popular Once More?
The last month has been the single best month in the entire Obama administration in terms of the change in his polling data. From his low point at the beginning of the year, the President's approve minus disapprove rating has surged approximately 9 points. Nearly every non-partisan poll now shows his approval rate exceeding his disapproval rate, the first time that has been the case since June of last year.

In terms of the implication on politics, there are many. The GOP can take solace in the fact that the President's approval was near its floor when the elections occurred in November, which helped to facilitate the large gains in the House of Representatives that the GOP was able to achieve, vaulting John Boehner into the leadership of a comfortably-sized GOP majority in the House.

In terms of the look forward, the poll numbers around this time are significant relative to the 2012 field. Right now is the critical time period when GOP A-listers will make key decisions about whether to run in 2012. If the President looks weak, the A listers will get in the game, if the President looks stronger, they will sit this one out.

Of course, we will have to see if this trend continues or is simply a short-term result of some better economic views and news coverage of legislative victories at the end of the year. A +5% or +6% rating would probably not be enough to discourage the TIm Pawlentys of the world from running, but if the trend continues into the double digits, it could significantly cut down the caliber of the GOP field.

Also, bear in mind that polls this time of year are not terribly predictive of ultimate election outcomes. The poster child for how quickly things can change is George Herbert Walker Bush, who had such strong poll numbers at this stage of the game that Democratic a-listers such as Mario Cuomo sat out the Democratic nomination process, allowing a little-known Governor from Arkansas to grab the Democratic nomination. You know the rest of that story.



In the monthly numbers, the surge is just starting to show up. The President's January average has turned positive for the first time in over 6 months, but still significantly trails his current daily averages, which implies a strong likelihood that these numbers will trend up in the coming couple of weeks.



How the Federal Government Spend Its Money and Why Current GOP Proposals Fail the Laugh Test
By 2020, 92% of our federal tax revenue will be consumed by entitlements and interest on the national debt. If we maintain current revenue levels and entitlements as they exist today, we would have to cut defense spending by 75% and all other government programs by 100% in order to balance the budget. That means no FBI, no USDA, no SEC and no federal highways. A defense infrastructure that is a shadow of its former self.

Simply put, the GOP deficit reduction plan as it has been expressed is a mathematical impossibility. You CANNOT:
(A) Not raise taxes
(B) Maintain defense spending
(C) Maintain entitlements
and
(D) Balance the budget

The GOP has put forward proposals to scale back domestic discretionary spending. These proposals are meaningful debates that are worthy of discussion. But they are wholly insufficient.

Without a comprehensive discussion on tax reform, entitlement reform and defense reform, we WILL fail to balance our budget.

In fact, the only perspectives in the modern world that we have had that led to balanced budgets are very instructive:
(a) The 40s and 50s
Massive cuts to our defense budget post-World War 2, massive tax increases, including a top marginal tax rate of over 90% and unprecedented economic growth led to a balanced budget

(b) The 90s
Two rounds of major tax hikes, one signed by George Herbert Walker Bush and one signed by Bill Clinton, combined with massive defense cuts (remember "the peace dividend"?) and major reductions in discretionary spending (welfare reform, the end of the "era of big government") led to a budgetary surplus.

This time around, we have the added burden of massive coming entitlement obligations as the baby boomers retire.

We will need a full court press not just on domestic discretionary spending, but on taxes, defense spending and entitlements if we are going to get our fiscal house in order.

How about some leadership from the party of the balanced budget amendment?

A Real Discussion About the Economy, Obama the Comeback Kid?

Note: While much media attention has been paid to the aftermath of the shootings in Tucson over the past week, I do not intend to devote further digital ink to the topic unless issues of policy warrant further discussion. I do not consider the shootings or their aftermath a political issue and condemn unequivocally those on both sides of the aisle who have attempted to make it one. My thoughts are with the victims of the shooting and may Jared Loughner rot in hell.

Our Long Term Economic Future? Look to Our Infrastructure, Science and Education
In the sound-bite world of politics, serious economic discussion rarely takes place. Democrats speak of the need for government intervention to stabilize the economy and get Americans back to work. Republicans talk of the need to reduce government intrusion into private industry and let capitalism drive growth. Both sides largely miss the point most of the time.

Truth be told government intervention is neither inherently bad nor inherently good for an economy. It all depends on the nature of the investment.

Let's start by understanding what drives long-term economic growth. The size of an economy is determined by its Gross Domestic Product, the value of goods and service produced by that country. This is the all-important figure. It determines the value of goods and services that can be divided up amongst the citizens of the country. It is the measure of the wealth of a nation.

So what generates GDP? The simple way that I like to break down the equation is as follows:
GDP = Productivity * # of Workers * # of Hours Worked per Worker

Productivity is the value of what the average worker produces in one hour of work.

But GDP itself is not terribly instructive. The GDP of China exceeds the GDP of both Japan and Germany at this point. But no sane person that has visited all 3 places would call the average Chinese person more wealthy than the average person in Japan or Germany...it isn't even close. The reason China's GDP is so much larger is simply because it has so many more people, simply from the equation above, there are more workers even though the workers are less productive.

So to estimate how the average American is doing, or the average Chinese person or wherever, we usually use a term called Per Capita GDP, which is simply total GDP divided by the size of the population. This gives a good proxy for the average wealth of a citizen within each country. This changes our equation slightly:
Per Capita GDP = Productivity * Workforce Participation Rate * # of Hours Worked per Worker

So how wealthy the average person in country is can be described by three factors, how productive the workforce is, what proportion of the population works and how many hours each worker works.

So let's talk about how we "grow the pie" and increase Per Capita GDP.

In a typical recession, the last two terms of the equation shrink significantly...that is, you have a lot less people participating in the workforce and a lot less hours worked because you have a lot of unemployed and underemployed individuals. This can hurt. Workforce participation has dropped by over 5% in this recession and hours worked by at least 2%. This leaves a 7% hole in our wealth from where we started.

This is why, in times of recession, politicians spend a lot of time talking about getting people back to work. But the truth is, while this is an important short-term issue, simply employing more people will not spur long-term per capita GDP growth.

The reason is simple -- we hit the practical maximum pretty quickly. The unemployment rate in the US is presently 9.4%. Employing every single unemployed person (a feat that is not practical as unemployment rarely goes below 5% and never falls below 2%) would grow the economy only 10%.

Similarly, increasing hours hits a practical maximum pretty quickly. Hours could increase some now as people who have been forced into part-time work resume full-time work. But returning to pre-recession levels would only increase hours by 2%. Beyond that, who wants to start working 80 or 90 hour weeks routinely? That might spur economic growth, but we'd never be off work to enjoy our wealth. If anything, the social trend is in the opposite direction, with the generation presently coming of age preferring less work at lower pay rather than more work at higher pay.

So taking the last two terms of the Per Capita GDP equation to their practical maximum might yield 10% or even 12% growth if you really stretch it. That is about 2 to 3 years worth of growth in a healthy economy. Then what?

The answer lies in the first term of the equation - productivity. Unemployment and hours trend up and down with financial cycles, but productivity growth is the engine of long-term wealth generation.

So what influences productivity? A lot of things obviously influence how productive various workers in various industries are, but I believe that almost all of those factors can be distilled down to three basic categories:
Infrastructure, Education and Science

Think about what makes you productive in a job. If you are a truck driver, having efficient roads and bridges do. If you are an office worker, productivity tools such as the internet do. Your knowledge and skills, gained through education, most certainly do.

Also think about the game-changers of the past century in the economy and in society. The television. The internet. The microwave oven. Modern plastics. The GPS. You know what these things have in common? They were all technological game-changers that remade the economy and society. And they were all commercializations of basic scientific research carried out by the federal government.

Think about where the country would be without the Eisenhower Interstate System. How about without airports in major metropolitan centers? How about without a universal power grid? All infrastructure investments by the federal government (sometimes in cooperation with state governments.)

Now...think where our economy would be if there were no public schools. I imagine our workers wouldn't be the most productive in the world, as they are now.

Now, think about the major scientific, infrastructure and educational investments the government is making today and how they will spur the growth of tomorrow? NASA? Cut way back. Basic research investment? Its lowest level in decades. Infrastructure spending? Our power grid, air traffic control system and interstate were built in the 1950s. And China has better mass transit infrastructure than we do, to say nothing of Europe.

Education? Subsidies to public universities are falling across the country. Primary and secondary schools are getting squeezed as states and localities face budget shortfalls.

The real debate that we need to be having about the economy is how we can free up funds to invest in infrastructure, science and education. It isn't about the size of government, it's about WHAT it does. The federal government did a world of good in the 1940s and 1950s to set-up 6 decades of prosperity, despite facing down a massive debt following the end of World War 2. I would hope our politicians would look for ways to do the same.

Obama - On the Comeback Trail?
I will publish a full update next week, but President Obama's numbers have moved back to being solidly positive (that is, his approval minus disapproval is significantly greater than 0) for the first time in several months. The spin in the media is that this is due to the lame duck Congress and its productivity.

While I'd like to believe that the American public is rewarding bi-partisanship and is happy about the end of Don't Ask, Don't Tell and a nuclear arms treaty with Russia, as I said before, I find it hard to believe that they a. have been paying close attention and b. care much how many warheads Russia is going to reduce over the next decade.

A far more plausible scenario, in my mind, is that, as it usually is, this is all about the economy. Unemployment is finally starting to fall, the economy has been growing for some time, those who stuck with their investments through the crash are close to being back to even (those who sold at the bottom out of fear have no one to blame but themselves) and fear and panic have been replaced by some combination of hope and greed. In other words, the economy is in full recovery. An economic recoveries lead to popular Presidents.

The link below shows the study I've been promising to link to that demonstrates just how strongly economic conditions dictate results. The incumbent party does well when incomes are growing, poorly when they are not.

The Washington Post article highlighting this study is located here.

All told, if income growth in the election year is 1.5% or greater, the incumbent party generally wins, otherwise they generally lose. You can see that the predictive powers aren't perfect: an incredibly popular former General named Dwight Eisenhower caused the GOP to outperform in 1952 and seize the Presidency from Truman's Dems. The incredible unpopularity of the Vietnam War sank the Democrats in 1968, despite economic conditions at the time (it was so bad, LBJ didn't even bother running for re-election.) A charismatic Bill Clinton dramatically outperformed in 1996 against a lackluster Bob Dole. 2000, while technically correct (Gore indisputably won the popular vote), was a bit of an outlier in terms of the electoral outcome.

But most races are pretty tight to the line. Barry Goldwater's awful campaign in 1964? Turns out he finished right about where he should have, given the economic prosperity. The Reagan Democrat coalition in 1980 and 1984 that supposedly changed the political equation? Turns out he finished right about where he should have both years. John Kerry's 2004 disaster? Right on the line. Obama's Hope and Change in 2008? Right where it should be.

The point is that much as we like to think every election cycle is unique, the odds are that 2012 will play out somewhere close to the line as well. Which means that if incomes grow 1.5% or more in 2012, Barack Obama will likely win a second term. If they don't increase by that much, he will likely lose. If I'm the President, given the track of the recovery, I feel pretty good about that line.

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