Political Update

I find myself having to hit the political trail again a little sooner than I thought I would, as the budget/debt ceiling process has gone off the rails even faster than it should have, the '012 Presidential and Senate races are worthy of comment, and there is a new major issue rising: the struggles of states to deal with revenue shortfalls from above (Federal funds disappearing) and below, along with huge unfunded pension liabilities. We will start with the latter topic.

So Far, It's On Wisconsin!
The emerging debt crisis of the states is partly the product of the aging population, partly a reckoning deferred through various tricks of financial engineering, and largely a result of the Great Crater, which sharply diminished the value of the states' pension funds. There were already large, under-funded pension obligations to state workers across the nation (though concentrated in some states), but the funds set aside to help pay for them were decimated. The 2009 Federal stimulus program provided funds to the states in various forms which delayed the crisis, but now those programs are ending and, with the new Congress, it is clear they will not be renewed.

The more aggressive state fund managers have invested wisely in equities and other rising assets in the past couple of years and recovered much of the ground lost, though "getting back to even" (as CNBC's "Mad Money" host Jim Cramer calls getting out of the Crater) would still mean a loss of precious time for growth of their money. Some were probably obligated to take more conservative investment strategies, which would leave them further behind (and in position for it to get worse). Many--or most--states are in a position where they will have to make major changes to prevent insolvency--soon, or in the foreseeable future.

Give Wall Street some credit: the danger of defaults in municipal bonds has been a hot topic there for months--the consensus there is that municipalities may be allowed to fail, but states will not. If states fail to take measures to address their issues, though, the cost of borrowing will rise sharply, exacerbating their problems, and there will eventually be a specter of a new despised bailout.

The new governor of California, Jerry Brown, and 2009-elected New Jersey Governor Chris Christie have dared to speak this truth to their states' voters and have survived politically. This has emboldened the new Republican governor of Wisconsin, Scott Walker, to take a more provocative stance. He has pushed forward legislation to require larger pension and healthcare contributions from state workers. Even more, the legislation would take away the state workers' right to collective bargaining. Democrats in the legislature, unable to vote the legislation down but in sufficient numbers to deny a quorum, took to the hills.

The rallying cry has been sounded by the journals of the left and union organizations across the country to support Wisconsin's public workers, who have taken to the streets. They are right to do so, though their arguments--to the effect that "balancing the budget on the back of the workers is wrong!"--only recognize one side. Concessions will have to be made by public workers, sacrifice will need to be shared, revenues will need to be raised, and--in some cases--states will appeal to the Federal government for assistance. The statement made on the right that public workers are paid more than private ones is a canard (a bald lie), but they have enjoyed greater job security, better benefits, and their defined-benefit pension plans (usually after only 20 years' service) are a bit rich. A compromise could be found--precisely through the collective bargaining process Walker wants to eliminate (with the unions a bit hampered in the negotiations by the law's prohibition of strikes by public workers).

Taking away their right to collective bargaining is the political red meat in the battle--a measure probably exceeding states' authority under Federal labor legislation, but surely a sop to Republicans and fighting words to Democrats and their base. The public unions make up a numerous, well-funded part of that base, easily the best-organized one. President Obama has been forced to take a stand against the Wisconsin Governor, identifying the legislation as "an assault on unions" and putting his Organizing for America political machinery into action on behalf of the public employee unions.

Governor Walker is motivated by ideology and may find this issue to be a political catapult into the front ranks of his party, but his is not the solution to the larger issue--it will end up making his state even harder to govern, and it may ultimately backfire for him. If he is successful, though, there are many other states that will jump on the bandwagon, so this is a battle with implications that go beyond Wisconsin.

Frankly, I need to study the labor history and labor law more to be expert on this topic, but this has blown the political lid off the month or so of relative peace and civility which followed the Tucson murders.

The Slow-Motion Train Wreck To Beat All
The 19th-century version of Radical Republicans went to extreme lengths--several Constitutional amendments, impeachment of President Andrew Johnson--to punish the Southern states for their secession, the Civil War, and the postwar denial of rights to the freed slaves. In the 20th century, Republicans started by heading the Progresive movement, but quickly moved to the forefront of reaction and resistance to liberal ideas of political equality and broadened economic opportunity; their defeat by the New Deal eventually forced them into an uneasy cooperation with progress. Now, there is a new breed of Radical Republicans for the 21st-century, and Walker's Wisconsin and the Republican-led House of Representatives are the new battlegrounds.

In Congress, the House of Orangeman Speaker John Boehner has commenced war against the Obama Administration with its version of the continuing resolution needed by March 4 to keep the Federal government operating. The cuts they passed this week, without a single Democratic vote--$61 billion for the remaining two-thirds of the current fiscal year--are only part of the assault; more radical still are amendments included in it to prevent the EPA from enforcing the Clean Air Act against large-scale greenhouse gas emitters and to block funding for measures required by the health insurance reform bill approved last year. The Senate, backed by President Obama's certain veto, will not pass the House's resolution in any recognizable form, so it is unlikely there will be any agreement by March 4 to continue normal operations of the Federal government. The Senate Democrats have suggested the presence of a door in the form of a short-term resolution, but the RR of the House of Orange have not yet acknowledged the presence of any door nor any need for one.

President Obama's budget proposal--considered too austere by many on the left--had about half as many cuts in Federal programs, but it was not seriously considered by the House (which, constitutionally, is required to begin the budget process). Neither side has yet taken up the elephants in the room--Medicare, or Social Security, or growth in Defense spending--so the posturing on both sides is limited to a few percent of the projected $1.5 trillion deficit for the year, and neither side is proposing significant assistance to states or much in the way of job creation.

A train wreck which has been developing for years and which takes 30 days to happen is pretty slow, but the trains are clearly on the same track, going in opposite directions, and braking hasn't even started.

'012 Electoral Drumroll Begins Softly, Slowly
The importance of state political battles has been underlined by their financial problems, as it will by the coming fights over House redistricting, but the main event in 2012 will be the battle for control of the Federal government: in the House, in the Senate, and for the Presidency itself.

House: The big breaker waves have gone in both directions in recent years, and at this point the next big wave has not yet formed. If the budget/deficit train wreck happens, though, for more than a couple of days anyway, blame is likely to settle on the Radical Republicans and the House of Orange may have a very short dynasty.

Without a major breaker, the numbers would suggest a reduced Republican majority coming out of 2012. Voters in the general election are likely to lean more Democratic than in the midyear election, and there are a number of seats the Republicans won last time that will be tough to hang onto (just as there were many won by the Democrats in '08 that were successfully targeted in '010). The target increase for the Democrats is 25, which is likely to be made harder by five or so net seats that redistricting in the states will design in the Republicans' favor.

The Intrade betting currently gives the Democrats a 45% chance of regaining control, up from 25% last month and from 35% last November. I think that quote is a bit high.

Senate: Defense of the Democrats' narrow Senate majority will be a major, expensive challenge. The Democrats have to defend 23 seats (including both of the Independents allied with them), the Republicans only 10. If the incumbent party holds 80% of seats on each side, the Democrats would hold on by 51-49; if they hold 60%, the Republicans would lead 52-48. So, along with swings in popular opinion toward one side or the other, the perception of the Senate's effectiveness will be important, especially for the Democrats.

The biggest development so far has been the announcement by six of the incumbent Senators that they will not run for re-election. The latest one is very significant: five-term Senator Jeff Bingaman of New Mexico, who would have been a heavy favorite to win again. Of the other retirements, the Democrats are strong favorites to hold Joe Lieberman's seat, and the Republicans Kay Bailey Hutchinson's, while Kent Conrad's North Dakota seat is likely to go Republican, and Jon Kyl's in Arizona will favor a Republican hold (unless, of course, Gabrielle Giffords can ride her so-far miraculous recovery all the way to the upper house). Finally, Jim Webb's Virginia seat will certainly be vigorously contested, though I like the Democrats' chances if they can unite behind a candidate, such as former Governor Tim Kaine, and face "macaca" George Allen.

Bingaman's surprise announcement creates a wide-open race here, just as Pete Domenici did in 2008. Some of the same names are likely for the Republicans: newly-restored Representative Steve Pearce from the Republican-leaning Southern part of the state, and Heather Wilson, who gave up her Albuquerque seat in a losing bid for the seat won by Tom Udall. A Republican wild card might be former Governor Gary Johnson, who might give up his quixotic Presidential campaign and has unusually high crossover appeal. The Democrats might field former Lt. Gov. Diane Denish, loser in the 2010 gubernatorial race, or current representatives Martin Heinrich (Albuquerque) or our Ben Ray Lujan, each of whom just won their second terms in the House. With New Mexico polling quite strongly in favor of President Obama, I like the Democrats' chances to hold the seat.

Apart from the seats being vacated, there will be a lot of difficult contests for incumbents whatever the political climate. Several of the Democratic seats will be relatively easy holds, but Montana's Jon Tester will surely be tested, Ben Nelson in Nebraska will be favored to lose, and three difficult holds will also be critical Presidential battlegrounds: Claire McCaskill in Missouri, Debbie Stabenow in Michigan, and Bill Nelson in Florida. The Republicans may face more Tea Party primary challenges in Tennessee (Bob Corker) and Maine (Olympia Snowe) which could either weaken the incumbent or bring forward a relatively weak insurgent. Two seats that the Republicans could easily lose are scandal-weakened John Ensign in Nevada (currently favored to lose a primary) and Scott Brown in Ted Kennedy's old Massachusetts seat. One of the more interesting initiatives I saw recently was a movement to draft Elizabeth Warren--a key Obama adviser on financial reform--to run against him.

The Intrade betting on Senate control after 2012 has been light; the current quote for the Republican side is 69%, which seems way too high. I see the contest as a 50-50 proposition, and that result itself is far from unlikely--which would put control of the Senate in the hands of the party winning the Presidential election.

The Big Ticket:
The battle for the White House will be monstrous, ugly, and expensive, so it's a welcome, small blessing that it hasn't really started yet. President Obama has been able to stake out some advantageous, high-ground positions in domestic battles--brokering the tax cut deal, proposing moderate cuts on spending--which have earned him some points with independents and improved his ratings. His foreign policy, though hardly brilliant, has dealt with the Mideast crisis well enough that his critics have been few, even among Republicans. His left flank, though grumbling, should not mutiny as long as he sticks to the plan to complete withdrawal from Iraq and begin it in Afghanistan before 2012.

So, it's perhaps not surprising that, at least until the train wreck occurs, Republicans have not been springing forward to announce their challenges to the titleholder. There are some who I consider nearly certain to run: Mitt Romney, Ron Paul, Tim Pawlenty, Newt Gingrich (and lesser contenders Herman Cain, John Bolton, Rick Santorum). It's now looking likely that Mitch Daniels will run, also (and, so far, only positive signals from Gary Johnson, Michele Bachmann, Haley Barbour, Jon Huntsman, and the ridiculous Donald Trump). But it also is starting to appear that neither of the right-wing's favorites, Sarah Palin or Mike Huckabee, will make the decision to run (and Sen. John Thune may opt to continue his current gig, as well). Equally important, the odds on any of the big-time decliners (Marco Rubio, Christie, Jeb Bush, Rick Perry) choosing to run continue to lengthen.

If Palin or Huckabee runs, he/she will be a rallying point for primary voters seeking to avoid Romney's nomination. If neither runs, it should help the viability of Ron Paul, who's a favorite among the libertarian portion of the Tea Party, and it will allow any of the other Republicans to pander to the more conventional party right-wing. Romney will certainly be among them, and he can pander more effectively than most. He is starting to look like 2012's version of 2004's John Kerry.

One interesting recent poll result showed Obama with a narrower lead over a generic Republican than for any named opponent (except Huckabee). Obviously, this reflects the perceived absence of any specific individual as a strong opponent, but I would say it is also due to Republican poll subjects imagining "their" preferred candidate as the opponent. Once it is clear that their candidate will not be the nominee, it will be up to the party winner to impress upon the rank-and-file that he/she is "close enough" to their ideal. That means, above all, gaining unity in the party.

The Democratic party's Intrade quote for winning the 2012 election is holding at about 60%, as is Obama's personal quote (though the combined percentages on the name-the-winner bet for Joe Biden and Hillary Clinton are another 4% in that market). I find that likelihood considerably too low, train wreck or no, unless there is some sort of foreign policy disaster.