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With Economy Still Weak, Big Issues To Dominate Midterms With Economy Still Weak, Big Issues To Dominate Midterms

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OFF TO THE RACES

With Economy Still Weak, Big Issues To Dominate Midterms

There's Little Room For A Cultural Fight Amid War, Unemployment And The Oil Spill

With the Supreme Court's decision Monday to restrict state and local government from tougher gun control laws, some observers assumed that it would become a major issue and have a meaningful impact come November.

My bet is that, in terms of the midterm election, this decision will be a nothing-burger and not even cause a ripple. Not that there aren't people who often care deeply about gun rights or gun restrictions. But in an election year with two wars, a 9.7 percent unemployment rate and an environmental catastrophe on the Gulf Coast, there is just no room for cultural issues this year. This year is about very big issues -- not the kind of year in which social and cultural wedge issues can dominate.

 

Early in my career I found myself looking at individual campaigns only, feeling that the macropolitical dynamics and the national economic trends were more the stuff of cocktail party conversation and didn't actually impact House and Senate races. While the Cook Political Report has two very talented analysts who focus almost exclusively on the granular elements of American politics, individual races and the collective contests for majorities in the U.S. Senate, House and governorships, I find myself reading more economic reports and looking for broad trends that will drive these races from the top down, then meshing that with our traditional bottom-up microanalysis of individual races.

The country can't afford the stimulus that the economy desperately needs. But to spend more, or even cut taxes, puts us in an even greater debt cycle.

In an economic report to clients last week, the highly respected Wall Street economic and policy consulting firm International Strategy & Investment (ISI, not to be confused with the Pakistani intelligence agency) wrote about a "Disturbing Dichotomy in Beliefs" and focused on a division among investors about whether Germany was "taking the right steps by adopting fiscal austerity, and living within her means, accepting with maturity the limits of growth for her economy" or whether Germany's fiscal restraint was "risking precipitating a global double-dip," a second economic plunge.

 

The June 25 ISI Daily Economic Report then quoted a recent speech in Germany by billionaire investor George Soros saying, "Giving a speech in Berlin, I feel obligated to speak about the euro, because the euro is in crisis and Germany is the main protagonist. Doubts about sovereign credit are forcing reduction in budget deficits at a time when the banking system and the economy may not be strong enough to do without fiscal and monetary stimulus."

Reading Soros' talk about the situation in Europe made me think about the policy dilemma Washington faces. The U.S. economy is expected to grow at a real GDP growth rate of around just 3 percent for the next year and a half, certainly better than nothing but not strong enough to generate the kind of meaningful job growth we need to fully recover from the worst economic downturn since the Great Depression.

Unemployment has been between 9.7 percent and 9.9 percent since the beginning of this year and is not expected to get appreciably better between now and the election. Indeed, it looks like it will remain over 9 percent into next year and over 8 percent well into the presidential election year of 2012.

Regardless of one's feeling toward last year's economic stimulus package, much of the spending is behind us and the economy has slowed down from its 5.6 percent growth in the fourth quarter of last year.

 

At the same time, voters who had been warned for decades that government spending had grown out of control, that mounting deficits and exploding national debt were unsustainable, have finally gotten the message.

The economic crisis of 2008 terrified Americans. They have begun paying down their debts and saving more and have hardened their attitudes toward government, and they seem to be more interested in restraining government spending than they have been in a long time.

So in Washington, policymakers find themselves with an enormous dilemma. The country can't afford the stimulus that the economy desperately needs. After a couple of generations of simultaneous overspending and undertaxing, we now find ourselves in a very tough situation. The Federal Reserve Board's key interest rate is already at 0, boxing in the Fed's ability to spur borrowing with lower interest rates.

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The solution isn't clear. To substantially cut spending and to raise taxes now would exacerbate a very weak economic situation and risk a double-dip recession.

But to spend more, or even cut taxes to goose the economy, puts us in an even greater debt cycle and makes us worry about whether there will be a painful "Grecian Formula" in our future. To be sure, Greece has more problems than we have, but the sovereign debt crisis facing European countries today could be an omen for us.

We have gotten ourselves into a very lousy situation, with intransigent positions by both the far left and far right exacerbating the situation. It's doubtful that this dilemma will dominate the campaign debates this fall, but there is still plenty that will be talked about that will ensure there's no room left for secondary, or tertiary, wedge issues.

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