Some Election Thoughts
November 3, 2008
Today’s Wall Street Journal editorial, “Leap of Hope,” is resigned to a likely Obama win tomorrow but expresses surprise that so many voters would be prepared to give an “untested” “man of mystery” so much benefit of the doubt. Sometimes America has picked the people with the best resume, like the first four presidents (Washington, Adams, Jefferson, and Madison). Other times, a less experienced choice has performed superbly, like Lincoln or Truman. Sometimes, the choice has had a great resume but left many voters disappointed, like Bush the elder. Their are qualities that transcend experience, and it’s always a crap shoot to some extent. As for being surprised that McCain is not leading, the reason is a simple one. To call the Bush record not good is to understate the facts: Since the day before George Bush was elected, the DOW is off some 15%, and the Nasdaq has tumbled 49%. Oil prices have climbed over 90%, and gold has soared 175%. The dollar has lost over 30% against the euro, 7.5% against the yen, and 29% on a trade-weighted basis. It looks like real GDP will have expanded 2.0% per annum over his 8-year presidency, compared to 3.6% per annum and 3.5% p.a. during the 8-year watches of Clinton and Reagan. Growth in jobs has underperformed historical norms by an even greater margin. In a democracy, leaders are held accountable for how the economy is functioning. When the electoral process repeatedly fails to replace a party from power that has not done a good job, such as the LDP in Japan, or when an ineffectual and self-serving leader like Berlusconi in Italy is elected for a third time as Prime Minister, it is natural to question the brand of democracy they practice. The fact that the American people are prepared to look to the party out of power after the Bush record is a sign of a healthy democracy.
An early sign of a long election eve will be if McCain takes Virginia, a usually safe Republican state that is leaning toward Obama this year. Polls close at 19:00 EST in the Virginia Commonwealth (00:00 GMT). Just about all configurations that give McCain any chance should he lose Virginia require that he pull off an upset win in Pennsylvania, where polls close at 20:00 EST. Without those 21 electoral votes, or Virginia’s 13, McCain’s chances are virtually nil. Obama’s margin in the electoral college or popular vote will be less important to his ability to govern than the outcome in the senatorial races. With a tiny 271-266 electoral margin of victory in 2000, Bush managed to get his full agenda approved in the first term, and he was prepared to get his way in the second term as well with a margin of 286-252 electoral votes in 2004. Mandates have more to do with the Congress with which the president co-governs than with the size of the president’s own win. If the Democrats secure 60 senatorial seats, which I doubt will happen, Obama will have a filibuster-proof Congress, but if the Democrats have at least 57 seats, it will be sufficient. Obama would then likely have all the support he needs on most issues.
The market is unprepared for a McCain victory and would react sharply to such a surprise. Obama has been preferred abroad more widely than in the United States. The Economist, an enthusiastic supporter of the war in Iraq before the fact and a continuing defender of the initiative after no weapons of mass destruction were found, and the Financial Times each endorsed Obama. There were some reservations, however, related to Obama’s trade policy and his relative lack of experience. I too worry about a turn toward protectionism, but in fact that shift has already begun. Many Republican legislators are more leftist than McCain on trade, and the next Congress will have more Democrats and be more predisposed to trade barriers than the old congress. In trade policy, the rule over the last generation has been that if progress stops being made, back-sliding sets in. That is where the issue will stand under either a President Obama or President McCain. In light of big future current account and budget deficits, the lack of policy enthusiasm for free trade is a dollar negative.
I’m less sympathetic about the criticism that Obama hasn’t taken a controversial stand against leaders of his own party. Obama’s senate career is limited to the second Bush term, a period of ultra-partisan politics, where realistic opportunities to cross party lines on a vote were few and far between. In truth, we do not know exactly how Obama and a Democrat-controlled Congress will forge policy together. That’s an uncertainty to be learned next year. Stalemated government is not necessarily a better option, however. Many times, for example the Clinton years after 1994, shared power is an ideal arrangement because discipline is imposed against extreme and reckless initiatives. The middle of an economic crisis is not well suited for shared government, however, because action, not paralysis, is needed to support confidence and create needed changes. Opposed by a Democrat-controlled Congress, President Hoover vetoed numerous bills like a national employment system, and the economy deteriorated rapidly as Washington stood idle.
The 77 days between Election Day and the Inauguration of the next president and the first 100 days of that presidency tend to be critical to the success or failure of the whole first term. Cabinet selections, particularly of Treasury and State, will be keenly watched for signs of whether politics will be more leftist or centrist under a President Obama. The whole team of top economic advisors, including the bank bailout czar, will provide key information. These are crucial periods in all new presidencies, all the more so if the party in power changes and/or the transition occurs in the middle of an economic or foreign policy crisis. All the criteria for extra urgency seem to be lining up this time. New presidents do tend to be tested early in foreign policy. The Bay of Pigs failed invasion to retake Cuba and the 9/11 attacks come to mind. The dollar also tends to be volatile in the first years of a new presidency. It’s hard to imagine any more volatility than what has been experienced lately, but a continuation of near-disorderly conditions is certainly a risk.
Finally, the curse of second term presidencies continues. FDR, Nixon, Reagan, Clinton and Bush43 experienced more successful first than second terms. Part of the shortcoming of second terms is that there is always an element of being a lame duck.
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