Executive Summary: On the threshold of the November 4 elections, the markets continue to forecast a Reagan victory. Failure to sustain advances above the 950 DJI level reflects continued doubts of such a victory as well as creeping doubts of a Reagan Presidency, his Cabinet and legislative agenda. Conventional wisdom now suggests a post-election selloff if either Reagan or Carter wins. But continued advances are possible, hinging upon the outcome of the congressional elections, action in a lame-duck session, decisions on a Reagan Cabinet, and preparations for the legislative agenda for 1981. GOP Senate and House contenders are running more effectively than Reagan and should score major gains over the visceral liberals, extending the trend of 1978. A fast Reagan finish could bring GOP Senate control. Old Guard Republican economists, bankers and businessmen continue to exert dominant influence on Reagan, though, which could signal a low-risk, conventional administration pulled by Congress instead of leading it.
With a week to go to Election Day, the most astonishing fact in the presidential campaign is Ronald Reagan's failure to maintain his lead in the public-opinion polls. Astonishing, because President Carter's performance ratings remain at abysmal levels, and it is rare to find a prospective voter who endorses Carter with any enthusiasm. Indeed, the electorate seems to cringe at the idea of four more years of Jimmy Carter, but has not been persuaded that life would be much different under Ronald Reagan, and the unknowns about Reagan could make matters worse. The central failure can be laid to the ineptness of Reagan's jerry-rigged high command, which since the GOP convention in July has been dominated by the old war horses of the Nixon-Ford years and Richard Wirthlin's polling data. Strategic vision has been absent as the committee of tacticians react on a daily basis to Wirthlin's samplings. And the electorate, which yearns for change, has been offered only retrospective appeals. Instead of speaking to the future, advancing the agenda for economic change embodied in the Republican platform and in Reagan's own mind, the high command has directed the campaign to the past: Carter's record of failure, well known to the electorate, and Reagan's record as governor of California, ancient history. The electorate gets its basic information on prime-time television, in 30-second bursts, and the Reagan media campaign has been wholly retrospective.
These conditions make for unusual volatility, with a vast undecided vote and vast uncertainty about voter turnout. Except for gaining release of the hostages without paying a humiliating ransom, there is little the President can do to improve his own standing with the voters. He is stuck with his record. But Reagan could finish fast simply because there is so much he has not done on his own behalf that could make a difference at the close. During Reagan's long slide in the polls since August, the only upward surge followed his debate with John Anderson, when he spoke his mind and penetrated the protective cloak of his advisers. But Carter quickly recouped by maneuvering Reagan into concentrating on his, Reagan1s, two weakest areas: war-and-peace and "competency." Surely Carter's competency is established relative to Reagan's; it is his policies that are bankrupt, yet these have not made a focal point in the campaign.
The question cannot be avoided: If Reagan is to bear responsibility for the mismanagement of his campaign, as he must, will a Reagan administration be any better? Having submitted strategic leadership to his pollster during the campaign, would he be any different as President?
The answer may come down to the fact that he did, at last, accept a face-to-face debate with Carter over the recommendations of Wirthlin. And after the debate was scheduled, he asked that the briefings be managed by Rep. David Stockman of Michigan, the smartest young Republican in Congress and one of the most devoted supply-siders. The outcome of the election will, finally, hinge on this Superbowl debate. The face-off comes at precisely the right moment. The undecided voters force themselves to a decision in the six days preceding an election. In addition, Reagan tapped Peter Hannaford, who he had tapped to write his acceptance speech in Detroit, to write his Election Eve televised address to the nation. Hannaford, tied down to his own business in Los Angeles, had not been part of the fall campaign. This reach for the best available talent was a further clue to Reagan's post-election potential under pressure.
The stock market, dominated by the election possibilities, has hung on gamely, forecasting a Reagan victory in the face of his autumn erosion in the polls. Its stickiness at about the 950 level of the Dow Jones Industrials reflects continued apprehension about the election outcome (at this writing) as well as the post-election scenario. The Nixon-Ford economists were never good for the stock market when they were in power and the crowding of Alan Greenspan, Arthur Burns, George Shultz, et al, around the campaign can have only a dampening effect on the market's evaluation of a Reagan administration. As an offset, we can observe that Reagan has stubbornly clung to the keystone of his economic agenda — the Kemp-Roth bill — over the persistent objections of the Old Guard, suggesting that he would be just as stubborn in seeing it through Congress in 1981. BusinessWeek, which has sided with the conservative Keynesians throughout Kemp-Roth1s long pilgrimage, conceded as much in its November 3 issue:
....the promise of rapid, noninflationary economic growth remains the central premise of the philosophy that would guide a Reagan administration. Reagan is clearly prepared to take large chances to push the economy out of the trap of stagflation. If he convinces the voters that his program is sound, he will have the opportunity to alter the policy course of the past decade. The payoff of success would be huge, but the risk of failure would be great.
Conventional wisdom on Wall Street suggests expectations of a sell-off no matter who wins the election, a major plunge if it is Carter, a dip to 900 or so if it is Reagan. But this notion rests on the belief that the market is emotional, not rational. On the assumption that the market is rational, it will rise or fall after November 4 depending on new information coming to the market. In 1976, following Jimmy Carter's victory, the market rose smartly in the first several weeks after election day. The bears took over in early January, 1977, and we might hypothesize that the turn came as Carter's Cabinet and inchoate legislative program could be evaluated. The market, for example, could easily have seen Michael Blumenthal's appointment to Treasury Secretary as positive in December, but reacted adversely in observing that his entire subcabinet was peopled with income levelers in January.
We could, then expect a Reagan victory to be followed by continued market optimism if it is pleased with the flow of news in the lame-duck period prior to inauguration in January. To the degree the Cabinet and sub-cabinet is peopled with men and women who take the Republican platform seriously the market should remain buoyant. But if, in fact, Reagan can do no better than George Shultz at State, William Simon at Treasury and Alan Greenspan or Martin Feldstein at the Council of Economic Advisers, which has been the conventional morning line, resistance to change will be embedded in the administration from the outset. As in 1976, subcabinet appointments also are critical, working both ways. Even a handful of good appointments in the right places — in the White House, CEA, Treasury, State and Energy — could spark change.
Also of enormous importance in the post-election period is the movement toward organization of the Congress. There will almost certainly be Republican gains in the Senate and House. But chances of a GOP takeover of the House are extremely remote, requiring a pickup of 59 seats, and chances of Republican Senate control are only fair, requiring a gain of 8 seats. A week prior to the election, the New York Times/CBS poll implies GOP gains equivalent to those of 1978, perhaps three seats in the Senate and a dozen in the House. But a shift of four percentage points in GOP congressional preferences, to 50 percent from 46, would imply major gains. A strong Reagan finish could easily bring this shift because, for the first time in many years, the GOP has fielded strong congressional candidates who are running effective races in their own right. Perhaps the clearest, most unremarked evidence of this observation is the fact that so few of the GOP challengers are lawyers. Of the 40 most promising House candidates, only ten are lawyers, the rest are housewives, journalists, small businessmen or professionals. Of the ten leading Senate prospects, only one Arlen Specter of Pennsylvania is a lawyer. This is obvious evidence of a populist impulse in 1980 that has a former movie actor at the top of the ticket.
In 1978, the "visceral" liberals in the Senate suffered their greatest losses since they began emerging as a factor in 1958. The trend seems to be continuing. Assuming help at the top of the ticket, the GOP might easily pick up seven seats, and could organize the Senate with the help of Senator Harry Byrd of Virginia, the lone Independent. Byrd signaled his willingness when he endorsed Reagan in early October. All it would take would be promise of a committee chairmanship, which Byrd knows he would never get under the Democrats. Nor is it outlandish to consider a Senate Democrat crossing the aisle to vote with the GOP, as Oregon's Wayne Morse did in 1952 when he crossed in the opposite direction. Nebraska's Zorinksy, for example, was a lifelong Republican until he switched in order to run for mayor of Omaha. He votes Republican as it is and might be tempted to switch again to help the GOP organize the Senate.
Even without switches, there are so many close races that a straight takeover isn't impossible. Liberal senators facing defeat include McGovern of South Dakota, Culver of Iowa, Nelson of Wisconsin, Eagleton of Missouri, Bayh of Indiana, Church of Idaho, Hart of Colorado, Magnuson of Washington, and Durkin of New Hampshire. It is also well within the realm of possibility that seats can be picked up in North Carolina (Morgan), Alabama (Denton), Florida, Illinois and Alaska. If the Republicans can hold seats in Arizona, Oklahoma and Pennsylvania, perhaps losing New York's (which is still in doubt) the net gain out of this promising array easily could be eight seats.
A Republican Senate would result in the following likely committee assignments: Dole (Finance), McClure (Energy), Hatfield (Appropriations), Thurmond (Judiciary), Helms (Agriculture), Tower (Armed Services), Stafford (Labor), Domenici (Budget), Packwood (Commerce), Percy (Foreign Relations), Roth (Government Affairs).
In the House races, there is the startling possibility that several Democratic leaders will be ousted. In order of likelihood, the list includes Brademas (Indiana), Corman (California), Ullman (Oregon), Eckhardt (Texas), Udall (Arizona), Wright (Texas), and Bizz Johnson of California. They are uniformly in trouble for having supported the President's policies.
There are interesting possibilities here that could bring positive news to the market in the lame-duck session. John Brademas, the Majority Whip, is almost sure to lose his seat, and Al Ullman, the Chairman of the Ways and Means Committee is close to defeat. If he loses, Ways and Means would go to next-in-line Dan Rostenkowski of Illinois, but he probably would prefer to succeed Brademas as Whip. Sam Gibbons of Florida could wind up as Ways and Means chairman. To the supply-siders, Gibbons is the best Democrat on Ways and Means. He's far better than the ranking Republican, New York's Barber Conable. At the llth hour, Conable still is writing memos to Reagan pleading with him to abandon Kemp-Roth.
Because the House is most unlikely to go Republican, the important question is how many seats are needed to effect a pro-growth GOP-Democratic coalition. Bill Anderson of the Independent Petroleum Association of America (IPAA) keeps track of such things, subtracting Republicans who vote against growth and adding Democrats who are pro economic growth (via private-sector solutions). He projects 50 such Democrats in the 97th Congress and 178 Republicans, "an absolute majority at least two-thirds of the time." To get to these numbers, however, Anderson has to project a net GOP gain of 38 seats on November 4, and he does so. This is among the most optimistic estimates of those who have been studying seriously the House races. But Anderson believes it is nowhere near the GOP gains that would have been possible with a strong Reagan showing.
In the IPAA newsletter, The Political Wildcatter, Anderson writes:
In the House, we project a 38-seat GOP gain. That would result in the Democrats still controlling the House 239 to 196. But.... the shift in Committee balance would be significant. The Democrats now hold a 2-1 edge on Republicans on most Committees. For example, the important House Interstate and Foreign Commerce Committee has 42 members - 27 Democrats and 15 Republicans. With the projected overall membership of the 97th House, the Committee would shift to roughly 23 Democrats and 19 Republicans. Ways and Means would be about 21 to 15 instead of 24 to 12 as it is now. Conservative coalitions could be made at the Committee level.
IPAA is unique in Washington in only endorsing challengers to incumbents, packing all its influence into changing Congress instead of the normal practice among business associations of currying favor with entrenched incumbents. The 40 House races where the IPAA this year is endorsing may be the best quick guide, when placed against the election results, to the complexion of the 97th House. Independent oilmen this year contributed $1.5 million to Senate and House challengers on the IPAA list, $1.1 million to the House. In 1978, by comparison, all political-action committees combined contributed $2.3 billion in House races. Here is the IPAA list:
Challenger State Incumbent
Huff (R) Arizona Udall (D)
Dreier (R) California Lloyd (D)
Fiedler (R) California Corman (D)
Lowery (D) California Open -- Wilson (R)
McCormack (R) Colorado Kogovsek (D)
Shaw (R) Florida Open – Stack (D)
Hatcher (D) Georgia Open – Mathis (R)
Crane (R) Indiana Evans (D)
Frazier (R) Indiana Sharp (D)
Hiler (R) Indiana Brademas (D)
Suess (R) Indiana Jacobs (D)
Carney (R) Iowa Bedell (D)
Hultman (R) Iowa Harkin (D)
Rogers (R) Kentucky Open – Carter (R)
Allen (R) Michigan Albosta (D)
Caputo (R) Michigan Open – Nedzi (D)
Berg (R) Minnesota Vento (D)
Bailey (R) Missouri Open – Ichord (D)
Turner (R) Missouri Volkmer (D)
Daub (R) Nebraska Open – Cavanaugh (D)
Muhler (R) New Jersey Howard (D)
Roukema (R) New Jersey Maguire (D)
Atanasio (R) New York Zeferetti (D)
Carman (R) New York Ambro (D)
McGrath (R) New York Open – Wydler (R)
Hendon (R) North Carolina Gudger (D)
Smykowski (R) North Dakota Open – Andrews (R)
Weber (R) Ohio Ashley (D)
Fitzgerald (R) Oregon Weaver (D)
Smith (R) Oregon Ullman (D)
Coyne (R) Pennsylvania Kostmayer (D)
DiCarlo (D) Pennsylvania Marks (R)
Schneider (R) Rhode Island Beard (D)
Hartnett (R) South Carolina Open – Davis (D)
Napier (R) South Carolina Jenrette (D)
Parris (R) Virginia Harris (D)
Wolf (R) Virginia Fisher (D)
Benedict (R) West Virginia Open – Staggers (D)
Staton (R) West Virginia Hutchinson (D)
Wright (R) Wisconsin Kastenmeier (D)
If Anderson is anywhere near right, and GOP gains are made on this order in Congress, the post-election scenario would be improved even if there is a second Carter term. Admittedly, this is not saying much, but the President would be restrained from pushing as ardently as he has in the direction of state capitalism. As the November 3 Business Week also pointed out, the President has lapsed into the framework of conservative Keynesianism as patented by the Nixon-Ford economists. The Democrats on the Senate Finance Committee already have moved past that point on the road to supply-side economics and likely would drag Carter along with them. The probably would be a chipping away at marginal tax rates in 1981. But without White House leadership, the process would be glacial. The economy would drag on with little prospect of breaking the stagnation and inflation.
A Reagan presidency would maintain its promise only if 'it opens with a team and a legislative agenda that reflects the promise of the GOP platform. If a President-elect Reagan is not to be "Thatcherized," he will have to dilute the influence of the Old Guard Republican economists, bankers, and businessmen who were brought to the fore after the platform was written. In addition, he must put forward a commitment to undertake monetary and fiscal reforms immediately following inauguration. But if a Reagan administration is going to be as low-risk and conventional as his general-election strategy, leadership will have to come from Congress, the White House pulled toward, instead of leading, an economic recovery.
* * * * *