October 22, 2002

1.  A Key Mid-Term Election

2.  The Republican Strategy

3.  Democrats Need An Issue

4.  12 Key Races To Watch

5.  It Ain’t Over When It’s Over

Introduction

I must admit I am an avid political observer. While I am not a member of any political party, and never have been, I follow politics almost as closely as I track the investment markets.  Why? First of all, political trends can have a big impact on the markets and our investments. Second, the political process is both interesting and important to the future of our nation. This is why I write about political trends periodically in both my monthly newsletters and this E-Letter.

What follows is my take on the upcoming mid-term elections and the events that have led up to the current status of the polls. I will give you a summary of the key races and what to watch for on November 5. 

A Key Election

No matter where you live in America you are likely blasted by political ads from both parties on a daily and sometimes hourly basis. The stakes are very high this time around, with control of the Senate resting in the balance. Historically, the party in the White House loses seats in Congress in the mid-term elections, while the “out” party, in this case the Democrats, gains the most seats in the off-year elections.

Why? Generally, the American people are not comfortable placing all of the reins of power in the hands of a single party. It is a form of checks and balances sparked by the higher profile of the party that controls the Executive Branch. The President, as standard-bearer for his party, is the most visible political figure in the country (and the world). As such, he is often the focal point for the issues of the day, be they good or bad. The agreement or disagreement of the public with these issues is often manifested in the off-year elections, but not always. The truth is, each election cycle has its own particular circumstances that drive the agenda. However, the economy and social security are almost always key issues in every election.

The Republican Strategy

In the 2002 election cycle, President Bush has been out in front campaigning across the country for Senate, House and gubernatorial candidates. He is attempting to use his broad popularity with the public to help GOP candidates. There is a risk for Bush in this strategy, but Bush has decided to take it. The risk is making the president, and/or the president’s issue – in this case the War On Terror – “the issue” of the election. Specifically, if the Democrats gain seats in this election, it effectively becomes a referendum on the president (and not a good one).

Ronald Reagan campaigned hard for GOP candidates in 1982 and it was a disaster. Democrats gained seats in the House, and Republicans lost control of the Senate. Will it be a disaster this time? Or does Bush really have strong “coattails” as a popular wartime president? We won’t know until November 5!

In addition to campaigning aggressively for key GOP candidates, the Bush administration has employed another strategy. Stealing a page from Bill Clinton’s playbook, they began a campaign of “triangulation” in April of this year in an effort to remove some of the standard Democrat issues from the 2002 elections. To the dismay of his conservative base, Bush agreed to go along with steel tariffs and the bloated farm bill, and at the same time effected massive new federal spending on education. These were big Democrat issues that they can no longer run on.

Democrats Struggle To Find An Issue

Prior to the terrorist attacks on 911, the Democrats looked poised to take back the House and enlarge their Senate plurality, in keeping with historical expectations that favor the party out of the White House. Prior to September 11, Bush’s popularity was below 50%. Yet as we all know, Bush’s popularity soared after 911 and the momentum shifted to the Republicans. 

Momentum temporarily shifted back to the Democrats earlier this year at the height of the accounting and corporate scandals, but the Bush administration quickly placed itself on the “people’s” side of this issue. As the corporate scandal issue fell out of the spotlight, the Democrats’ momentum began to stall in late July. 

The Democrats have struggled to get traction. They tried to blast Bush for the tax cuts, which failed; they tried to run on the corporate scandal issue, which failed; they initially road-blocked the use of force against Iraq, which failed miserably; and they blame Bush for the economy, which may or may not work.

The economy has been obviously weak and some economists and talking heads are concerned that we are slipping into deflation. Unemployment numbers are significantly higher than they were a few years ago. In addition, the stock markets have been hammered and retirement plans have been ravaged. Normally, all of these things would be major bad news for the Republicans, and Democrats would be cheering and galloping to victory in November. Yet as discussed below, this will be a very tight election, and the Republicans may actually gain seats.

Why Is It Different This Time?

It is important to note that this is the first major election since the terrorist attacks on September 11. America is a different place today. We are in a War On Terror. In a void of other issues, Iraq took center stage. When president Bush asked for authority to use force against Iraq, many Democrats opposed it. That was a big mistake, at least politically. Even though Bush got his resounding resolution from Congress, many Americans feel that most Democrats who voted in favor did so only to avoid negative fallout from their constituents.

They may have a point.  The Congressional vote on the Iraq resolution was: House 296 to 133; Senate 77 to 23; total 373 to 156. In the Senate, for example, only ONE Democrat who is up for re-election this year voted against the resolution. That is Minnesota Senator Paul Wellstone, who holds a comfortable lead over his Republican challenger. In the House, most of those who voted against the resolution are running unopposed this year. Interesting. . .    

Additionally, a majority of the American people, for the first time in recent history, do not blame the president for the ailing economy. The Democrats know this. Still, they continue to hammer away at the Republicans on the issue of the economy, and they have also begun to play the Social Security card. It remains to be seen if this old strategy will work.

Handicapping The Key Races

The numbers that follow are primarily from the latest Zogby polls released today, October 22. Zogby is widely regarded as the most accurate and least biased pollster. The Republicans hold a six-seat majority in the House, and it now appears the Democrats have no chance to close that margin and retake control of the House.

So, let’s look at the Senate. There are 34 Senate seats up for grabs in 2002. Based on the polls, 22 of these races are not close. Let’s take a look at the other 12 races that will be the “difference makers.”   These are the races where both national parties have focused their attention and are pumping in large sums of money.

South Dakota

This race is drawing a lot of attention and campaign dollars from both sides since it is Tom Daschle’s home state. This is a margin-of-error race with the most recent polls showing Thune (R) in the lead. A vote fraud scandal has had a negative impact on the incumbent Johnson (D). South Dakota voted heavily for Bush in 2000 and given the general political climate and leaning of the state, Thune has a reasonable chance in this toss-up. Forecast: GOP gain.

Arkansas

Recent polls have Hutchinson (R) and Pryor (D) tied. Don’t believe it. Hutchinson is behind the curve here and will need a late boost to see him over the top. This one will remain a true toss-up until the election. Forecast: GOP hold.

Colorado

Allard (R) is in a real battle with Strickland (D). Campaign dollars are flowing from the RNC and DNC war chests as this is a nasty one. The Democrats need this seat. If Allard can hold on, it will be a margin-of-error win. Recent polls show him in that category, barely. Forecast: GOP hold.

New Hampshire

Sununu (R) has opened this race up nicely of late. All of the recent polls have him leading beyond the margin of error. Sununu would have to falter for Shaheen (D) to have a chance. Forecast: GOP hold.

Georgia

Cleland (D) has maintained an unimpressive but steady lead over Chambliss (R). There is not much action in this one. Forecast: DEM hold.

Iowa

Harkin (D) looked to be in trouble as a result of the “tape-gate” scandal, but no longer. Ganske (R) is trailing well beyond the margin of error. Forecast: DEM hold.

North Carolina

This is Jesse Helm’s old seat. Elizabeth Dole (R) has pulled ahead by double digits in the latest poll. Bowles (D) has lost the momentum with very little time left. Looks like Liddy in a walk. Forecast: GOP hold.

South Carolina

This is Strom Thurmond’s old seat. This contest is no contest at all. Graham (R) will defeat Sanders (D) easily. Forecast: GOP hold.

Tennessee

Lamar Alexander (R) is coasting to victory here. Clement (D) doesn’t have a chance. Forecast: GOP hold.

Texas

Cornyn (R) has opened up a double-digit lead over Kirk (D). The DNC abandoned Kirk weeks ago as Cornyn began to surge. Forecast: GOP hold.

New Jersey – A Bad Precedent

Well, it looks as though the old bait-and-switch worked. This is the state where incumbent Torricelli (D) dropped-out amidst a scandal and was replaced by Lautenberg (D).  The latest polls show him moving ahead by more than the margin of error. Forrester (R) is flailing and unlikely to recover. Forecast: DEM hold.

The New Jersey Supreme Court, controlled by Democrat judges, allowed the substitution of Lautenberg for Torricelli, even though the state’s election law deadline for making such a switch had already passed.  Folks, this is a very bad precedent that will be exploited by BOTH parties in the future!

Missouri – Must Win For The GOP

This is a very important race. This one is a nail-biter, but it looks to be Talent (R) over Carnahan (D) by the slimmest of margins. Forecast: GOP gain.

No matter the outcome of the other races, if Talent wins here, the Republicans will gain an instant majority in the Senate. Why? The incumbent Carnahan (D) was appointed to succeed her late husband; she was not elected. So, if victorious, Talent would take his seat immediately, as opposed to next January. If this happens, the Senate would once again be tied at 50-50, with VP Cheney as the tie-breaker. The likely result is that Republicans would approve many of Bush’s judicial appointees during this period.  

The Likely Outcome

If the election were held today, based on the Zogby numbers, the Republicans would likely gain two seats and take control of the Senate.  This would be the first time since 1953-1955 (Eisenhower) that the Republicans control the White House and both Houses of Congress.  Depending on your political persuasion, this will be really good or really bad.

Obviously, this could change but time is quickly running out. The election is only two weeks away. It is hard to change public sentiment in a short time, barring a scandal or other unexpected surprise. The GOP is holding its breath, hoping this is true.

Of all the races above, the most critical are Missouri, South Dakota and Colorado. Control of the Senate will very likely hinge on these three states.

It Ain’t Over When It’s Over

The GOP is worried that if they take control of the Senate, Republican Senator Lincoln Chafee of Rhode Island might switch to the Democrat party or become an “independent” as Jim Jeffords did in 2001. Chafee says publicly that he is not considering switching, but so did Jeffords. It is no secret that the Dems are courting Chafee aggressively.

If the GOP gains a two-seat majority, then it doesn’t matter if Chafee defects.   However, if the GOP only gains a one-seat majority, then a Chafee defection could hand control of the Senate right back to the Democrats.

Given all the above, this will be one of the most interesting and important mid-term elections in many years. Will the Republicans buck history and actually gain seats in a mid-term election? Or will the Democrats’ last-minute scare tactics work to shift the polls? We’ll know in two weeks!

Finally, as this election approaches, let us all be thankful that we live in a free country where we, the people, get to elect our leaders, and not in countries where dictators do not allow elections. Or in Iraq which recently had an “election” but only Saddam Hussein was on the ballot.

Be sure to vote on November 5!

[Special thanks to my associate, Spencer Wright, who contributed much of the election analysis in this week’s E-Letter.]

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Lieberman calls for tax cuts.

Chafee at the center of GOP post-election fears.

A dozen close House races, Dems beware.

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