September 19, 2007
Vol. 42, No. 19b
To: Our Readers
- The failure of the Petraeus report to significantly alter the political climate on Iraq is bad news for Republicans in the 2008 campaign. The assessment by GOP insiders is that continued casualty lists in the election year will be fatal. President George W. Bush‘s statement offered little hope for relief.
- Federal Reserve Chairman Ben Bernanke passed his first big test with a 50-basis-point cut in the federal funds rate. The inflation hawks were unhappy, but equity markets and everybody else approved.
- As we go to press, Congress is completing action on the State Children’s Health Insurance Program (SCHIP) expansion in a complicated parliamentary situation. The probability is that Congress will work its way out of the difficulties and put a bill on President Bush’s desk that he has deemed unacceptable. He will almost be forced to veto a popular bill with substantial Republican support after flinching on threats against the student loan and congressional ethics votes.
- The selection of an unknown retired federal judge for attorney general instead of a prominent conservative is seen in Washington as a smart play but also another sign of weakness. It effectively gives Senate Majority Leader Harry Reid (D-Nev.) veto power.
- Backers of Sen. Barack Obama (Ill.) are worried about his slippage in Democratic primary state polls against Sen. Hillary Clinton (D-N.Y.) Her big lead in the national polls is taken for granted, but dropping in Iowa and New Hampshire is very bad news for Clinton’s big challenger.
- At press time, the Associated Press was reporting that Agriculture Secretary Mike Johanns (R) would run for the Senate seat being vacated by Sen. Chuck Hagel (R). Johanns, a former governor and mayor of Lincoln, would be the favorite in the race, unless former Sen. Bob Kerrey (D) enters, which we think he will. Absent a Kerrey candidacy, this is a strong GOP retention. Kerrey vs. Johanns would lean slightly Democratic.
- The 50-point cut in rates had been so anticipated by the markets, that anything less — such as the 25-point cut predicted by Fed watchers — would have been a downer.
- This should undercut the conventional wisdom, never correct in the first place, that Bernanke is a doctrinaire inflation hawk. The analysts who have been wrong are now attacking Bernanke as a turncoat.
- European markets and commercial paper transactions perked up in anticipation of the Fed’s action, leading to complaints in Europe that no easing by the Fed was necessary — a classic example of circular reasoning.
- On balance, Bernanke showed he was not worried about claims of "moral hazard" and more concerned about the broader economy.
- An odd sideshow to the Fed’s action was the long-awaited publication of former chairman Alan Greenspan‘s book that was publicized as an anti-Bush rant. Certain to get favorable media attention, it took attention away from Greenspan’s record at the Fed of raising interest rates for too long.
Attorney General: President Bush’s choice of federal judge Michael Mukasey combined confirmability with ideological compatibility, specifically on the issue of terrorist and enemy-combatant prosecutions, but no job qualifications for an attorney general.
- While no GOP nominee is safe before the Senate Judiciary Committee whose tone is set by combative Senators Chuck Schumer (D-N.Y.) and Ted Kennedy (D-Mass.), Mukasey benefits from having been suggested by Schumer as a good Supreme Court selection. He has no record of being conservative on abortion (and indeed, his ruling on an asylum application regarding China’s forced-abortion laws has some pro-lifers upset), so he avoids the wrath of the most influential pressure groups on the left. He was secretly interviewed and cleared by some conservatives in the legal community last weekend, before the nomination was announced.
- New York lawyers who have appeared before Mukasey are impressed with his intelligence, fairness, and conduct.
- Mukasey’s appeal to Bush’s base stems from his rulings and his extra-curricular writing and speaking on terrorism trials stretching from the 1993 World Trade Center bombings to accused "dirty bomber" Jose Padilla. His criticism of the current due process and habeas corpus rules for suspected terrorists or enemy combatants resounds with the Bush Administration and its allies. In a recent Wall Street Journal article, Mukasey proposed some reforms that would anger civil libertarians. If the administration tries to push through these changes, it could give Republicans a good chance for a high-profile legislative victory. However, Judge Mukasey did oppose Bush by saying Padilla was entitled to an attorney.
- By tapping a candidate outside of Texas circles or the White House’s inner circles — and by picking a judge and prosecutor with relevant experience — President Bush showed he may have learned a lesson from troubles he had with Harriet Miers and Alberto Gonzales — all "cronyism" selections. Looking for competence rather than loyalty has not been standard White House practice in this administration.
- Former Solicitor General Ted Olson led Bush’s initial short list. However, there was always opposition to Olson inside the White House, and Senate Majority Leader Harry Reid (D-Nev.) announced definitively that Olson could not be confirmed.
- The downside on Mukasey is a lack of any background for rehabilitating the dysfunctional Justice Department, which has deteriorated under Gonzales.
- While Senate Democrats are demanding documents about the U.S. attorneys "scandal" denied them under Gonzales as the price for confirmation, Mukasey will not be blocked.
- This week, Office of Management and Budget Director Jim Nussle responded to plans of Ways and Means Chairman Charlie Rangel (D-N.Y.) to use reform of the Alternative Minimum Tax (AMT) as a vehicle to push broad "tax reform." Nussle indicated the White House was very open to the idea of using an AMT fix to drive "tax reform." Of course, Rangel and Nussle have opposite meanings when they use the words "tax reform."
- President Bush had tried to make some sort of broad tax reform part of his second-term agenda but has failed to gain any traction. The end product of this reform would range anywhere from a flat tax or national sales tax to abolition of many deductions and cutting out a few brackets. Rangel’s idea of tax reform would include equalizing capital gains rates with income tax rates, and adding an "income tax surcharge" to higher earners—i.e., raising the top rates.
- Nussle’s comments came in an interview with Congress Daily, and they differ from statements last week from Treasury Secretary Henry Paulson, who suggested the White House wanted to avoid opening any Pandora’s box about taxes. Paulson rejected conservative calls to fight for abolition of the AMT and instead continued to call for a short-term patch. It’s unclear whether Nussle and Paulson are on different pages or whether the White House over the weekend decided it was ready for a tax-policy battle royale.
- Tied up with Rangel’s ideas about capital-gains rate increases are the multiple Democratic bills that would change the tax status on the managers of hedge funds and private equity funds. These bills would count as income — as opposed to capital gains — the "carried interest" that managers gain in their funds as they appreciate. Democrats, including Senators Hillary Clinton (N.Y.) and Barack Obama (Ill.), have used the current 15% tax rate of carried interests as a class-warfare attack point in their campaigns.
- Much of the talk about "taxing the carry" (on the Senate side, at least) can be seen more as rhetoric than a real threat. It enables Clinton and Obama to sound their populist cries while positioning Democratic Senatorial Campaign Committee Chairman Chuck Schumer (D-N.Y.) as the good cop. Schumer, after a summer of see-sawing (and raising money from these fund managers), has come out against this tax hike on private equity and hedge funds. The Senate bill, sponsored by Finance Committee Chairman Max Baucus (D-Mont.) and Ranking Member Chuck Grassley (R-Iowa), is pretty toothless, especially towards the incumbent funds. It would not raise much (if any) revenue, and would not really hurt the fund managers. It does bring the firms to the table in Washington, though, and these previously lobbying-averse and politically shy partnerships have recently dived head-first into the game.
- Paulson also is asserting that the U.S. is losing out competitively because the corporate income tax rate, once the lowest in the industrialized world, is no longer competitive. Chances of this Democratic Congress’s cutting the corporate rate, however, seem to be between slim and none.
- All of these issues could set a complex tax battlefield for the election year. Democrats would position themselves as trying to help the middle class (reforming AMT) by fairly taxing the rich (hedge funds and people who make more than $200,000). Republicans would try to position themselves as tax cutters (with broader cuts) while hurling the "tax-and-spend" label at Democrats. In the Republicans’ favor is their general advantage on the issue of taxes (people prefer lower and simpler taxes). In the Democrats’ favor is their general tactical superiority on the issue.
Kentucky Governor: Republicans may now be regretting their decision to renominate Gov. Ernie Fletcher (R), as his campaign looks to be in dire straits. Fletcher consistently trails in polls by more than 15 percent, and his job approval in a recent poll was at 37 percent.
Fletcher’s ethical problems (he was indicted for illegal hiring practices, and he pardoned nine of his indicted staffers) have demolished his public image, and he’s not getting much help from his party or his business base, either. Since coming to Lexington in the 2003 election, Fletcher has not gotten along well with Republican lawmakers or with the party’s political operatives—hence the spirited primary challenge from former Rep. Anne Northup (R). By defeating Northup handily in the primary, Fletcher showed he still is popular among the GOP electorate, but few of his erstwhile rivals have rallied behind him the general election. One Northup backer told the Kentucky media, "It would seem the election is merely a formality at this point."
This prospective gubernatorial blowout causes some concern among the commonwealth’s Republicans looking ahead to the defense of U.S. Senate seats in 2008 and 2010. Sen. Mitch McConnell (R) is on the Democrats’ hit list in 2008, and Sen. Jim Bunning (R), who barely won in 2004, would be vulnerable in 2010 if he decided to run again. Physician Daniel Mongiardo (D), Bunning’s 2004 opponent, is Beshear’s running mate and will likely be the lieutenant governor in 2010.
Kentucky is another in a long list of states for the GOP to worry about, and this governor race punctuates that point. Likely Democratic Takeover.
Louisiana Governor: As the filing date came and went for the October 20 open primary, each party got a dose of good news. Democrats were relieved that New Orleans Mayor Ray Nagin (D) decided in the end not to run for governor, after publicly pondering a bid. Republicans, meanwhile, were pleased that wealthy businessman John Georges filed as an independent, rather than a Republican. That leaves Rep. Bobby Jindal (R) as the only Republican in the 13-way multi-party primary.
Jindal, who lost his gubernatorial bid in 2003 to Kathleen Blanco (D), is scoring above 50% in polls. With Georges running as an independent, he is more likely to draw votes from the leading Democrats — State Sen. Walter Boasso and state Public Service Commissioner Foster Campbell — than from Jindal. This means that an outright win on October 20, without a runoff, is a real possibility for Jindal.
A Nagin candidacy could have helped Republicans in many ways. The mayor could not have won statewide, but he could have finished second to Jindal, thus earning a spot in a runoff. Jindal vs. Nagin would have been a GOP blowout. Alternatively, Nagin may have gone negative on other Democrats and lost, thus making it harder for a Democrat to win New Orleans votes in a runoff.
With the nearest competitors around 40 points behind him, Jindal has taken the standard tack of a front-runner: skipping debates. Unlike in his 2003 race when he tried to maintain the perfect high ground, Jindal is responding to his opponents’ attacks.
One month out, this race is Jindal’s to lose. Likely Republican Takeover.