to HomeElection 2010 -- And What it Doesn't Mean
(The following is an excerpt from an expanded October, 2010 issue of The National Investor. For subscription information--including our LIMITED TIME OFFER whereby you can receive up to one year free--go HERE now!)
...Not since 1994--when then-President Clinton endured a savage beating in his first midterm election--has the electorate seemed as hungry for "change." The emergence of the Tea Party movement, among other things, has revealed that a decent number of Americans retain at least a general disdain for large and out-of-control government. While not all of their candidates will win this next week, enough of them will that--for a time, anyway--there will be some serious talk and maybe even policy enacted that will appear to move the country away from what some describe as the road to a "European-style socialism."
What everybody involved here must keep in mind, however, is that the comeuppance that President Obama and the Democrat party will be subjected to is less an endorsement of either the G.O.P. or the Tea Party than a repudiation of what has occurred over these last two years. A party (and its leader in the White House) that spent way too much time on pet liberal projects such as healthcare "reform" rather than on more fundamental concerns like jobs and taxes deserves what it will be getting. The trick now will be for a bolstered Republican Party and conservative movement to demonstrate that it has the ability to effectively co-govern with a wounded president.
In our opinion, one of the hurdles for the new little band of idealists that will be sworn in come January (together with a far larger number of establishment hacks of both parties) is that the present environment is far more similar to 1994 than it is to 1980. Back in 1980, Ronald Reagan was elected president by a country that was pining and ready for a secular change in the approach to government. That was ratified later when the G.O.P. was able to retake Congress. Today, though--as in 1994--the G.O.P. victories that are coming owe much more to a dissatisfaction with the present regime. In 1980, a decent percentage of a better-informed electorate could actually articulate the case against high tax rates and burgeoning deficits. This time around, very few--apart from the most involved Tea Party adherents--can articulate much of anything beyond their general fears about their job prospects and future retirement.
This is not to say that a Republican Party bolstered by the Tea Party movement has neither the opportunity nor the willingness to actually do something constructive. But we remember very well the mid-1990s. Back then, your Editor (as some of our older subscribers and friends will recall) was very involved in a variety of activities in Washington, as well as in G.O.P. politics, among other things working on several state and national campaigns. We had the opportunity on numerous occasions to work with and get to know many of the "Class of 1994"; some 30 or so new members of Congress back then who legitimately could wear the limited government label.
The passage of time revealed that those (including Yours Truly, to some extent) who had high hopes that the kind of change we believed necessary was really coming were kidding ourselves. Yes, to a great extent the Republican Party's big win in 1994 neutralized the more liberal leanings of the Clintons, and caused the president to govern more as a centrist for the remainder of his term. The same may now happen with Barack Obama; after all--even though he is much more ideologically liberal than was Bill Clinton--he still has enough of a desire to be adored (and now some greater concern over his re-election prospects) that he may now be cooperative as well.
But those of you who truly feel that some revolutionary change is coming to your federal government need to ask yourself a sober question: What of any real, lasting substance was achieved in those last six years of the Clinton administration? Or for that matter, during eight years of the George W. Bush Administration!? Did the national debt decline? Did the size of the federal government shrink? And if you are a particularly starry-eyed G.O.P./Tea Party adherent (as we used to be), ask yourself a question similar to the famous one posed by The Gipper: Are you today better or worse off as a result of, effectively, 14 years of Republican rule from 1994 through 2008?
We truly do hate to be a party pooper here. But the numbers are against us. The 30 or so stalwarts elected in 1994 did not comprise a majority in a body of 435 House members. Neither will the new members elected this week comprise a majority in the House. They will make a lot of noise. A few of them will stay true to themselves and to their country; much as long-time Texas Congressman Ron Paul, they will be able use their positions to inform (and, at times, inflame) the country. But they will be almost powerless to effect any real changes.
And that is something that investors particularly will be learning.
THIS KIND OF GRIDLOCK WILL BE BAD...
Primum non nocere ("First, do no harm.")
The first, and quite understandable, expectation that those who will be happy over the election outcome have is that it will be far more difficult now for "socialism" to make much more progress. If nothing else, a heavier Republican presence in Congress will negate the ability of the president and the Democrats to continue growing both the size of government and that of the national debt (as if both of these shrank from 1994 through 2008!)
Sure--some of this kind of an agenda will indeed be thwarted. But in the end, will a heavier G.O.P./conservative presence in Washington translate into net reductions in taxes? In federal spending? In the size of government itself?
Can it?
Unless you have been on another planet, it has probably not escaped your notice that both what remains of the economy on the one hand and the health of the markets (primarily, stocks) on the other owe their lives more than ever to historic government (and Federal Reserve) intervention. You know; the kind of intervention and government involvement that some now naïvely think will be reversed following the election.
In a perfect world--one that is not in hock to an overstretched fractional reserve monetary system and its various banks and appurtenances--there really would be the ability, economically and politically, to shrink government. That is not the case. Don't believe for a minute that, come the next financial crisis of some sort, the Republican Party led by House Speaker-to-be John Boehner will fight tooth and nail against the Obama Administration and Wall Street as those parties seek to throw yet more government money at the new problems. Unfortunately, "job one" for the federal government will continue to be the protection of both itself and of the banking and other institutions that control it. Those new members of Congress who truly abhor such a state of affairs are in no position to change those priorities.
In the end, it is our sad and reluctant--but realistic--prediction that the next two years will be marked with unprecedented acrimony in Washington. Despite their coming gains, the Republicans will nevertheless be without any ability to override a presidential veto; something they may try to force anyhow from time to time to score political points. If the G.O.P. does not take the Senate along with the House, though, those opportunities will be few and far between; the weak but remaining Democrat control of the Senate won't be too eager to "second" Republican legislation emanating from the House.
Those efforts that are legitimately made by the G.O.P. and the Tea Partiers to reverse prior stimulus measures, reduce taxes and rein in government will often be viewed badly by financial markets that have become so dependent on regular injections of those "drugs." The steadily-growing numbers of Americans also dependent to at least some extent on the welfare state also won't take too kindly to it if Speaker Boehner, when the time again comes to extend or increase unemployment benefits, replies "Let them eat cake."
In summation--and though we would like nothing more than to believe that the imminent G.O.P. and Tea party gains will end up translating into good, lasting policy-- we won't hold our breath. Frankly, given the state of our financial system and economy, nothing short of a wholesale abolition of our fractional reserve system--which is the driver pretty much of everything--will "save" us from further economic and national decline.