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Week of December 27, 2006

December 27, 2006
Washington, DC
Vol. 41, No. 27a

Outlook

  1. The debate inside the Republican Party is whether the mid-term election defeat was solely the result of unhappiness over Iraq or constituted deeper concern with the drift of the GOP, under both presidential and Congressional leadership. Defeated Republicans who put all of the blame on Iraq are infuriated by White House denials of this argument. In any event, we find widespread agreement among Republicans that U.S. troops must be leaving Iraq at the end of 2007 to avoid catastrophe in 2008.

  2. The decline in the polls of Sen. John McCain (R-Ariz.), as measured against Sen. Hillary Clinton (D-N.Y.), reflects more than declining Republican popularity nationally in the weeks after the election. It connotes public disenchantment with McCain’s aggressive advocacy of a "surge" of up to 30,000 additional U.S. troops to Iraq. Unless the additional troops show immediate benefits, President George W. Bush‘s determination to put more boots on the ground is feared by Republicans as another political burden to bear.

  3. Statements by the two new Congressional Budget Committee chairmen — Sen. Kent Conrad (D-N.D.) and Rep. John Spratt (D-S.C.) — that it will not be fiscally possible to promote Democratic domestic spending goals will not sit well with the rank-and-file in Congress. For all the talk of new conservatives being elected in ’06, the Democratic caucuses in both houses remain very liberal. It is inconceivable that liberal Democrats in the majority will not pursue the same grandiose domestic spending programs that they sponsored unsuccessfully when in the minority. How will Democratic leaders vote on these proposals?

  4. The Democratic push for ethics reform (see below) begs the question of what the party leadership will do about Rep. Alan Mollohan (D-W.Va.), who, records show, grew rich on earmarks. Will he be permitted to chair the Appropriations subcommittee handling funds for the FBI, which is investigating him? Also, ethical problems may be looming for another Appropriations subcommittee chairman (and ally and mentor of Mollohan), Rep. John Murtha (D-Pa.).

  5. A Social Security reform that raises the tax share on upper income Americans hovers like a cloud over the GOP. Not only is President Bush refusing to rule out such a tax increase but Treasury Secretary Henry Paulson has been actively considering such a politically volatile provision. On top of all his other troubles, President Bush could finally lose his base on this issue and split the party.

State of the Parties

GOP Recriminations: The amazing six-seat Senate loss Republicans suffered on Election Day — something not even incoming Senate Majority Leader Harry Reid (D-Nev.) could imagine before the election — has Republicans pointing fingers. Many of them are pointing at the National Republican Senatorial Committee, according to a recent piece by the Associated Press.

Although she certainly cannot be blamed for everything — who could have foreseen the self-destruction of Sen. George Allen (R-Va.), for example? — we were receiving numerous complaints about Sen. Elizabeth Dole (R-N.C.) from the beginning of her tenure as NRSC chair, which we reported more than once. At the very least, Republicans spent far too much time, energy and money trying to save a weak incumbent in Rhode Island (who ended up losing) considering the close losses they suffered in Virginia, Missouri and Montana. There are new complaints that she did not borrow enough money at the very end.

But Dole cannot be made the scapegoat for what was really a bad year for all Republicans, even though she was clearly not up to the job. Still, Virginia Republican Sen. Bill Frist‘s insistence on a shakeup in the campaign of Sen.-elect Bob Corker (R-Tenn.) may have been the only thing that prevented the loss of a seventh Senate seat. Frist was NRSC chairman in 2002.

Democrats were far more aggressive and successful with their recruiting efforts, but they also had a favorable environment on their side. Recruiting almost did itself: Who wouldn’t want a shot at a Senate seat in a year that looks to be excellent for one’s party?

Party Committees: As they did in 2000, Democrats showed that they don’t need to match Republican funds in order to win elections. A sufficient amount of discontent with Republican rule was enough to propel them across the finish line this time with major gains. They also took the step of borrowing money at the end to give themselves a short-term advantage in several races. Republicans may have had enough money to defend several seats, but the fact that they were on defense the whole time gave Democrats the opportunity to contest more races until Republican funds would have had to be spread too thin.

Money cannot buy voters’ love — nor is there any 72-hour program that can make up for two years of poor governance. The performance of the Democratic Congress in the next two years will mean much.

Republicans begin an uncertain 2008 cycle with relatively little debt, compared to the Democrats’ larger debt.

Party Committees as of Nov. 27, 2006
Raised
Spent
Cash
Debt
DNC $137,022,474 $136,422,229 $2,267,149 $10,052,750
DCCC $129,315,826 $130,631,101 $4,736,130 $4,000,000
DSCC $118,962,557 $119,022,389 $296,673 $5,435,478
Total: $385,300,857 $386,075,719 $7,299,952 $19,488,228
RNC $238,221,669 $246,720,223 $6,168,758 $0
NRCC $175,647,095 $174,204,765 $1,357,949 $13,129,712
NRSC $88,301,827 $88,740,424 $578,384 $1,196,419
Total: $502,170,591 $509,665,412 $8,105,091 $14,326,131

Democratic Convention: Democratic National Chairman Howard Dean faces a dilemma for siting the party’s 2008 national convention. He would prefer Denver, but he may have to be content with New York.

Denver lacks sufficient hotel facilities, a suitable arena and labor union support, not to mention adequate financing. But when New York was leaked as the site, the reaction was so negative that Dean delayed a decision. Party members complained that it would be the fourth out of the last nine Democratic conventions scheduled for New York. Backers of Hillary Clinton don’t want her nominated in her place of residence. George H.W. Bush and John Kerry both lost elections when nominated in their respective hometowns of Houston and Boston.

The Democrats’ first choice for ’08 was Minneapolis, a rare city that wanted the conventions in this round. But Republicans beat them to the punch in scheduling their convention there. Democratic Party rules prohibit them from convening in the same place (as they did in Miami Beach in 1972).

Federal Reserve

Inflation vs. Weakness: With the Fed declining once again to change its short-term interest rate from 5.25 percent this month, economists argue over which is the real reason to fear for the economy: inflation or the current slowdown. Core consumer inflation remained unchanged in November, but is up 2.6 percent from the previous year.

Slumps in the housing and automobile market appear to account for most of the economic slowdown. Troubles within the subprime lending market may make these problems particularly acute, and keep housing in its current doldrums for some time. But the market appears to be successfully cordoning off the risk in these industries from the rest of the economy, preventing a massive spillover that could bring about economic catastrophe.

In that vein, the Fed appears to be somewhat hopeful for the economy, and therefore less likely to cut rates next year, even though many investors are banking on a rate cut in the spring. In a statement released this month accompanying its decision to keep interest rates at 5.25 percent, the Fed assured that “although recent indicators have been mixed, the economy seems likely to expand at a moderate pace on balance over coming quarters.”

Consumer spending rose 0.5 percent last month, and the unemployment rate remains low, at 4.5 percent, and recent reports show a 4.1 percent annual increase in wages. For workers, this all seems good, but the wage number could signal inflation. The situation returns us to that of last year, in which good economic news portended possible interest rate hikes and was therefore bad news for Wall Street.

A hike in short-term rates could also make life even harder for homebuilders and auto dealers, not to mention homebuyers and other borrowers. Those with fixed-rate mortgages are rooting for higher interest rates, but millions of adjustable rate mortgages come due in the coming year, setting the scene for a spike in foreclosures and more problems in the real estate market.

Senate 2008

Colorado: In 2002, with the re-election of Sen. Wayne Allard (R-Colo.) and Gov. Bill Owens (R), and the Republican takeover of both houses of the state legislature, we noted that the GOP had reached its high-water mark. Since then, their fortunes have waned badly. The GOP’s losses have included the senate seat of Sen. Ben Nighthorse Campbell (R) to Sen. Ken Salazar (D), the loss of both houses of the legislature, and the loss of an open Republican House seat to Rep. John Salazar (D). In 2006, Coloradans’ once-popular Republican governor was replaced with a Democrat, and the losing Republican candidate, Rep. Bob Beauprez (R), let his House seat fall into Democratic hands when he gave it up to run.

Rep. Tom Udall (D) is the Democrat universally discussed as a contender for Allard’s seat. Although he pledged to serve only two terms in the Senate, the conservative Allard is rethinking his pledge at the moment. Allard knows how to win tough races — both of his elections were hard-fought contests which he won comfortably, often against the expectations of the polls.

Other Republicans who could get into the race are former Rep. Scott McInnis (R) of the Western Slope, and former Rep. Bob Schaffer (R), who ran an insurgent primary challenge against the party’s 2004 Senate nominee, beer magnate Pete Coors (R). Although Coors was soundly defeated, many believed Schaffer could have run a better race in the general election campaign, had he not been steamrolled by national Republicans and the state party apparatus.

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