Published November 5, 2010
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In the 2008 election, Independent voters supported Democrats by an 18 percent margin. In the recent midterm elections, they favored Republicans by 15 percent, and with that shift, the Democrat coalition crumbled. Democrats lost ground among women, middle-income workers, whites and seniors. Driving the shift was a broad concern over the economy and doubt about big government.
President Obama was elected in 2008 as the standard bearer for hope and change. He brought change, but not the kind that voters were looking for. He also let congressional Democrats define his agenda and determine what hope and change looked like. Those were big mistakes, and his naturally cerebral approach to problem solving also disconnected him from voters.
Obama failed to notice that the economy remained weak and that getting people back to work was his number one priority. He should have take a page from the playbook of fellow Democrat James Carville, the “Ragin Cajun” who famously said, “It’s the economy, stupid.” Unemployment remained stubbornly high at about 9.6 percent, and will likely remain around 9 percent going into the presidential election cycle, which portends the loss of the White House to the Republicans. The idea that the supremely charismatic president suddenly might be a one term president became not only thinkable, but possible. Even chastened Senate Majority Leader Harry Reid, D-Nev., promised that his number one job was to create jobs. “The only thing that is going to solve our economic problems in this country is jobs,” Reid said. Unfortunately, many Democrats arrived at this conclusion much too late.
In the end, the election became a referendum on the president and the congressional leaders, Nancy Pelosi and Reid. A plurality of voters said they voted in opposition to Obama. In an angry shout, Independent voters rejected the president’s agenda. Republicans were the beneficiaries. Even conservative Democrats, who did not support all of the president’s agenda, paid the price. Now we will find out if the Republicans have a better program.
But while Independents’ interest in smaller government aligned with Republicans’, implementation of a smaller government will not be easy. Reporters such as Wolf Blitzer on CNN delighted in baiting GOP candidates in interviews to “name one program you would cut.” None could of course, because it was a false question to which there was no answer.
One program won’t turn the tide. Cuts will have to be made across the board, and they are not going to be popular. The new health care bill is an obvious target. It became the symbol of big government that drove the Independents to anger. John Boehner, the likely new speaker of the House named it as the first target for the new Republican majority, calling for outright repeal. That seems unlikely, with the Senate still controlled by Democrats and a presidential veto at the end of the line.
Because other targets are largely mandated spending, reducing spending will be difficult. But the congressional newcomers, and those with a libertarian bent, may have stern views toward cuts. Republicans have promised a steady stream of bills that will actually cut the Federal deficit. Senate Minority Leader Mitch McConnell, R-Ky., believes that Republicans will have sufficient support from Democrats to reduce spending and the debt. The GOP should at least be able to “starve the beast” because it now controls the House
Ways and Means Committee.
The day after the watershed election, the Federal Reserve unveiled quantitative easing two, or QE2 as it has become known. The plan calls for the purchase of $600 billion in additional U.S. Treasury bonds. The purchases will be made over the next eight months. The Fed also expects to reinvest $35 billion a month to replace mortgage bonds in its portfolio that are being retired, a policy that began in August. It is expected that the bond purchases will be made from banks directly rather than in the open market, and put more cash on banks’ balance sheets with the intention of encouraging banks to lend. It is not altogether clear to me that banks will use the additional cash to lend money. They may simply buy back Treasuries, thereby thwarting the Federal Reserve.
Additionally, the Fed in its statement makes it clear that it can act as necessary to promote its goals of more economic growth and benign inflation. But it was less forceful about further action than previous statements. Financial markets see no chance of an increase in overnight bank interest rates for the next year.
The dollar dropped sharply against the euro immediately after the Fed’s statement, but settled to emerge only modestly lower against the euro after investors had a chance to digest the full Fed statement. However, expect the dollar to fall further, and commodity prices to rise across the board. Expect price increases and margin pressure from commodity price increases. Manufacturing should see material costs increase, but benefit from the ability to sell more goods internationally.
Originally posted in the Daily Journal of Commerce, Portland OR