US Politics – The Middle Class is Still Up For Grabs

On Tuesday, the Democrats face a major shellacking. Looking at online betting site Intrade, the GOP has a greater than 90% chance of taking control of the House of Representatives where it is favored to pick up 55-60 seats. The Republicans also look likely to pick up 8-10 Senate seats (it needs 10 to take control of the Senate). The GOP appears to be a lock to pick up currently democratic seats in Arkansas, Colorado, Illinois, Indiana, Nevada, North Dakota, Pennsylvania, and Wisconsin. Washington and West Virginia are within reach for the GOP, but are favored to remain in Democratic hands. The GOP appears to also have a lock on open GOP-held Senate seats in Alaska, Kentucky, Florida, Missouri, New Hampshire and Ohio. Considering that the Senate seats up for election this year were last elected in the strong Republican year of 2004, gaining this many seats would be quite a feat. In the next two cycles, the Democrats will be defending the wave of seats they won in 2006 and 2008, many of which are in conservative states.

Such an outcome would pretty much bury my theory, posited here and here, that the 2008 election was a "realigning election", ushering in a new era of Democratic dominance. It seemed like a good theory at the time. Obama had a robust agenda and Congressional majorities to back him up while the GOP was generally befuddled, with weak leadership and unclear agenda. The turnaround in the GOP's fortunes has been remarkable, but is explainable. The problem is that neither party has a platform that truly appeals to the middle class. Middle class voters are seeing that the Obama administration has ramped up spending on programs that haven't benefitted them in any way outside of the most abstract sense. In addition, the Tea Party has allowed the GOP to rebrand themselves as fiscal conservatives after years of fiscal laxity under the Bush administration. Obama's problem isn't his inability to promote his platform or irrational rage on the part of the pesky electorate. Obama is suffering from the same structural flaw that has hindered Democratic politics for the past thirty years: failing to present a positive agenda for the middle class.

How to build a successful political coalition

The American electorate can be divided into four groups, two elite groups and two populist (Jacksonian) groups. Right-leaning elites, known as Hamiltonians, tend to vote on fiscal or business issues. Left-leaning elites, known as Jeffersonians, tend to vote on social issues. Jacksonians tend to be economically populist and socially conservative. Right-leaning Jacksonians tend to be suspicious of big government and big business, and are fiercely independent. The Tea Party voters are examples of right-leaning Jacksonians, many of whom were likely Ross Perot voters in the early 1990s. Left-leaning Jacksonians tend to be more communitarian than their right-leaning counterparts, and are often the classic union or machine-politics voters from the urban ethnic North.

Lasting political coalitions tend to marry one of the elite groups with one of the Jacksonian groups and then use wedge issues to peel off a chunk of the opposite elite and Jacksonian group. The wedge issues have to pit subsets of the opposition coalition against one another. Obama the (Jeffersonian) candidate did a good job of winning over a good chunk of Hamiltonians, particularly those in the technology and manufacturing industries and those that would benefit from his clean energy agenda. Obama and the Democrats courted the financial industry, even though it was clear that they were going to implement strong financial regulations. He co-opted many elements of the normally Republican-leaning health care industry into supporting his health reform. In other instances, he has used regulations to hobble Republican industries like for-profit education and energy extraction. His stimulus was geared toward supporting his base in public-sector unions, as well as by spending on clean energy and health care technology. If the electorate consisted of no one but elites and public sector employees, it was a pretty clever strategy. Unfortunately for president Obama, the Democrats have done virtually nothing to fire up the Jacksonian base.

The Democrats' political misfire

One of the great conceits of the Democratic Party is that middle class voters that vote Republican are voting against their own economic interest. The basic subtext is that middle class voters are so dumb, or racist, or homophobic, or jingoistic, or angry or afraid that they are repeatedly tricked by the billionaires that back the "Republican attack machine" from embracing the party that has their best interests at heart. (Obama himself continues to blame the voters for their own ignorance.) There never seems to be the introspection that calling the voters stupid may not be politically astute. Or that maybe there is something wrong with the Democratic agenda in the first place.

The Democrats used to be a positive force for the middle class, implementing programs like Social Security, the GI Bill, support for housing finance, and Medicare. Since the late 1960s, however, the agenda has been much more tilted to serve rich liberals and the poor.

Health care is a prime example. Most middle class voters have health insurance, but feel that it is too costly and too complicated. Obama's health reform was more focused on extending coverage to the working poor. To pay for that extension, the bill cut Medicare (a middle class benefit), reduced the tax deduction for "Cadillac" plans (often a union benefit), and raised fees and regulations on small businesses. It was wildly expensive, yet the Obama administration used blatant slight-of-hand to pretend that it paid for itself. The average voter can correctly assume that their health care costs will now accelerate and eat into their wages. In exchange they receive not-so-exciting benefits like being able to keep your kids on your insurance until they turn 26. Universal health care is to the Democrats as the white whale is to Captain Ahab. Even though the economy and housing markets faced, and continue to face, huge problems, the Democrats instead chased the ideological white whale.

The stimulus is another example. The $700 billion price tag delivered no tangible benefits to the average voter. Even though it probably did prevent things from getting worse, it was probably spent in the least politically advantageous way possible. It transferred money to irresponsible state governments to keep their bloated payrolls afloat, which felt like a political payoff for the Democrats' public union supporters. The rest was spent on behind-the-scenes technology investments like green energy projects, electronic medical records and vanity projects like high-speed rail that won't be built for years. I actually think most of these items are decent things to spend money on, but they appeal mostly to eggheads like me. The rest of the country was left scratching their heads at what exactly we spent $700 billion on. To make matters worse, even the tax cuts in the bill somehow escaped the notice of the electorate.

The TARP, of course, was the most egregious self-inflicted wound by the political class. While I can defend the TARP intellectually, the politicians absolutely should not have let it seem like a scot-free bailout for the bankers in charge. While the Bush Administration implemented the first part of the TARP program, the GOP in Congress largely voted against it. They can thus credibly take credit for rejecting TARP with the voters, who view the TARP as an un-American bailout of the politically connected. The voters are basically right about this. The Democratic Party has been courting the financial industry for decades and didn't want to cross the bankers by reining in their pay or power. In fact, the largest banks became even bigger and more powerful during the crisis, while small banks (and small business lending) were left to suffer.

So we have more than $2 trillion spent on the TARP, the stimulus and the health care bill with very little tangible benefit for the middle class. The TARP and the stimulus have undoubtedly helped the economy, but the average voter can credibly wonder if that $1.5 trillion could have been better spent. To make matters worse, the political class got sidetracked on a health care reform that has more downside than upside for middle class voters.

Voting for divided government

The voters are not necessarily looking to put the GOP back in charge. They still mostly blame the Bush Administration for the financial crisis. They just look at the Democrats' agenda and think it needs to be reined in. By taking away the Democrats' control of congress, they put an end to an unsuccessful bout of one-party rule and replace it with divided government. Divided government is better for cutting the deficit and forcing more moderate compromise. It doesn't matter what the Republicans did when they were in charge. The voters are forward-looking. Obama is still president, so we aren't returning to one-party Republican rule. The Republicans don't have a positive economic agenda for the middle-class either. The future is wide open for both parties.

The American electorate as a whole is actually very smart. They have historically made the right choices between the choices that they have had. Obama needs to be reined in, so they will vote Republican in the mid-terms. How 2012 turns out will depend on how the parties act in the next two years. 2010 isn't necessarily a Republican victory any more than it is a Democratic defeat. The middle class is still looking for its long-lost champion.

Get Rich, Slowly

Slow and steady wins the race in investing. For every successful get-rich-quick hare, there are a thousand that end up road kill. Emulate the tortoise instead. Follow these five rules for slow and steady wealth-building:

This article by Tyler Newton can be found at the site "Man of the House" HERE.

Financial Planning with Purpose

Set goals and achieve them. You have probably heard this your whole life, but when it comes to financial planning, setting goals and a vision is imperative to your success. By balancing the four pillars in your life – career, family, hobbies and community – your goals are clearer and become something to work toward. Once you set a long-term life plan, your financial goals become a lot easier to obtain.  

This article by Tyler Newton can be found at the site "Man of the House" HERE.