Pondering the political and economic significance of the midterm election results, I was tempted to conclude that things had not turned out so badly for the Republicans, at least relative to historical precedents.
About a year ago, I noted here that in all postwar midterm elections, Republican administrations had never lost fewer than 12 seats in the House and never less than nine seats in the Senate. Furthermore, the so-called six-year itch that had bedeviled every two-term President in his party's sixth year of office tended to produce especially devastating results for Republicans. For example, in 1958 and 1974, the President's party lost 47 and 48 House seats, respectively.
In that context, the Republican losses of only five House seats and eight Senate seats, coupled with their gains at the governorship level, could not be said to signal a major shift in political and economic philosophy in the land. It may also suggest that the President deserves more credit than he got for his efforts to improve the Republican results. At the same time, however, it should be noted that this was the first Republican midterm election since Harding in 1922 in which the U.S. economy was neither in nor just ending a recession. Whatever the reason, it would seem that the basic sort of hands-off, free-market approach to government economic and regulatory policy made it through the elections intact if not unbridled.
Cycles of Opinion
Because it matters a great deal in economic forecasting, I had been watching for signs that might indicate whether this latest cycle of broadly based conservatism was drawing to a close. Arthur Schlesinger Jr., in his new book, "The Cycles of American History," identifies regular cyclical swings in politico-economic sentiment that tend to peak roughly every 30 years, or about once in a generation: the 1890s, the 1920s, the 1950s (and the 1980s?). These were the peaks of what Schlesinger calls the "private interest" phase of the cycle. While it's possible that this election may have marked such a peak, it was not at all clear from the election results.
People still seemed to like what this approach had produced in terms of incomes, employment and low inflation. To be sure, there were concerns about sluggishness, import penetration and major regional discrepancies in economic well-being. And there were worries about the health of financial institutions (as many as 150 banks are likely to fail this year, the most since the 1930s) and much puzzlement, if not outright skepticism, about what had been going on in Wall Street.
Yet no one seemed to have any better ideas, and not even the Democrats were interested in getting the government reinvolved in the workings of the marketplace. The message of the body politic seemed to be that, while it would like to see the conservatism a little less doctrinaire, basically, "if it ain't broke, don't fix it."
That, of course, was before the twin mega-scandals that broke in Wall Street and Washington immediately after the elections. First, we were told that with the President's apparent knowledge and approval, one part of the Administration was dealing under the table with terrorists while another arm was loudly proclaiming, "Negotiate? Never!"--and bombing Libya to prove the point. Shortly after that, it was revealed that some major aspects of the leveraged buyout-junk bond-takeover juggernaut on Wall Street--one of the major developments of the century--were downright crooked.
It is perfectly natural for people to suspect that not all the money that is made on Wall Street is the product of sheer analytical genius. It is another thing to have it demonstrated in such spectacular fashion.
It is also natural to think that government often says one thing and does another. However, it is downright unsettling to have it proven so vividly and to see that, even on the inside, they don't deal straight with one another. Unfortunately, the credibility of the presidency once again is cast in shadow when its full powers may be required to hold back a possible tide of interventionist and protectionist sentiment.
Chances are that people now feel they have been a bit "used." There is no way to know how far-reaching the impact may be to financial markets, the presidency or economic and political conservatism from these events. Seemingly unrelated, they could very well converge into a reaction against current laissez-faire government policies and a demand for more government involvement, not just in the capital markets and corporate takeovers but of financial institutions, airlines, telephone utilities and foreign trade, among others.