The Presidential Race Jude Wanniski July 19, 2004

A year ago, when I first began looking ahead to the presidential race, I observed that contrary to conventional wisdom the economy would help President Bush’s re-election prospects and the war in Iraq would cut against it. I also had noted as far back as last summer that the Democratic contenders who were promising to tax the rich would have to tone down their Robin Hood rhetoric as the economy improved. I had counted on the tax cuts on capital to expand the economy and bolster employment gradually. On the war, I had guessed correctly the people of Iraq did not wish to be liberated by an occupying force that had killed between 50,000 and 100,000 of their number in the process, and there would be serious retribution until U.S. forces were driven out. Unlike U.S. occupations in all other wars, where we have been treated as liberators, our troops in Iraq will be shot at and killed as long as they are there. My guess a year ago was that President Bush would be forced to show more respect for the United Nations and multilateralism as conditions on the ground in Iraq worsened.

How do things stand now? I am still not sure how I will vote in November, but if I had to bet money today, it would be that Senator Kerry would win rather easily in the popular and electoral balloting, that the Senate would turn over to the Democrats, and that the Republicans would increase their current 208-to-205 hold on the House. My reasoning is that while the economy will continue to expand, it will not be as robust as I expected it to be going into November, and Senator Kerry will continue to inch his way to a less-threatening economic platform. Iraq also will play against the President’s re-election chances because not only American troops would continue to suffer casualties, but also that it seems unlikely there will be an end to the revelations about how Mr. Bush took the nation into a totally unnecessary war. 

I had never believed Iraq was connected to al-Qaeda and 9/11 or that it possessed weapons of mass destruction. I believed these rationales for the war would evaporate over time, as questions would be raised in Congress and in the press in parallel with the deterioration of the occupation in Iraq. As bad as it seemed things would get on the ground, I never anticipated the revelations of torture by the American military in their attempt to find and stamp out the roots of the insurgency. From what I hear, the revelations will continue and get worse, with unconfirmed reports that the handpicked interim government is ordering summary executions of suspected militants, to make a point. All President Bush has left for his moral justification of the war is that Iraqis are better off without the brutal dictatorship of Saddam Hussein, but all the polls show much broader support in Iraq for Saddam’s dictatorship than for U.S. occupation.

The Human Rights Rationale

In the months ahead, as the trials unfold of Saddam and his ministers for their crimes against humanity, the American people will find there is no evidence of genocide yet in hand. Lots of bodies are being unearthed, but lots of people have died in Iraq during the civil wars that began with the revolution against the monarchy in 1958. While Sen. Pat Roberts [R-KS] continues to cite “500,000” Iraqis killed by Saddam, nobody has yet turned up one body with forensic evidence that genocide was involved, and the numbers of dead unearthed at gravesites and cemeteries so far is in the thousands, not even tens of thousands, let alone hundreds of thousands, and these are all related to battlefield actions. Over the weekend, Downing Street acknowledged that Prime Minister Tony Blair’s repeated assertions that Saddam Hussein had murdered 400,000 Iraqis was incorrect, as only as estimated 5,000 bodies have as yet been unearthed. The interim Prime Minister, Iyad Allawi, most recently cited “one million.”

Writing in the Wall Street Journal two weeks ago, attorney Alan Dershowitz recommended that the tribunal stay away from trying Saddam on charges that he could defend against by saying he was simply acting as head of state in defense of national security. Dershowitz said the prosecutors should instead indict him for the genocidal acts everyone knows he committed! Frankly, I would be happy to hear conclusive evidence that Saddam was a maniacal, genocidal killer. It would make me feel better about the war and all its incredible costs. However, it would not persuade me that the war was necessary or “legal” given what we know about the actions taken by the President a month after the UN inspectors investigated the sites CIA Director George Tenet in December 2002 said would prove Saddam had WMD. By early March, Tenet acknowledged that there was no “slam dunk,” as he had given all his “high-value material” to the UN inspectors and they had found nothing. If all this is true, the case could be made the U.S. violated the UN Charter and committed an “act of aggression.” The White House hopes the buck will stop with Tenet, who is now gone, but the Democrats will have the better arguments on the WMD issue. The President did formally certify to Congress that diplomacy had failed to rid Iraq of WMD after Tenet said his best prospects had turned up nothing.

Replacing Cheney

Here in mid-July, with three and a half months to go, the polls continue to indicate that it will be a tight race. However, the electorate already is indicating displeasure with Mr. Bush when it comes down to actually casting ballots as opposed to simply offering opinions. In the two recent special congressional elections in Kentucky and North Dakota where Republicans should have won easily, the seats were lost to Democrats. Voters use these off-year elections for lesser offices to signal pleasure or displeasure with the country’s direction, as they understand it is being made in the Oval Office. This is why I have written on my public website that if the President hopes to pull it off, given the intensity of feeling against him over Iraq, he should seriously consider replacing Vice President Cheney, not with anyone, but with Homeland Security Director Tom Ridge. Ridge is a dove, who the President wanted to be his running mate in 2000, having known him as a fellow governor. Ridge never would have permitted the neo-cons to manipulate the President as Dick Cheney has, which is the real reason they did everything they could to block him and push Cheney for the post.

Would Ridge be enough to influence the electorate on Iraq? For one thing, the President has already indicated zero chance that he will replace Cheney, even with Cheney’s “positive ratings” in the national polls now at 21%. Yet we also see the neo-cons hedging their bets by promoting Arizona Sen. John McCain as Vice President, if Cheney’s new doctor tells him that his heart would not stand up to another fierce campaign and second term. However, the electorate would see a Bush-McCain ticket as a hawk-hawk ticket, as there is not an ounce of diplomacy in McCain’s makeup. During the past five years, he has consistently wanted to bomb Iraq without any rationale, on his mindless assertion that Saddam needs to be taken out no matter what. How is that going to help President Bush? The argument against Ridge is that he was “pro-choice” on abortion when he was governor of Pennsylvania and that fundamentalist Christians would stay home rather than vote for Bush-Ridge. This is hooey, I think. The social issues are not really in play this year, relative to Iraq and the economy. However, Karl Rove, the President’s political counselor, has bought into the importance of the Religious Right, which leads me to believe that if Mr. Bush replaced Cheney with McCain, he would be going from the frying pan into the fire.

The Iraq issue still seems as if it is about the past: Who said what, when? Who is to blame? However, it is really all about the future, and how the U.S. will conduct itself as a leader in the management of the world political economy. The current discussion about pre-emptive war has Senator Kerry stating he would reserve the right to strike first if he was confident in the intelligence supporting the threat. In other words, he will not ask for a “permission slip” from the United Nations before going to war against a perceived threat. Kerry, though, has become increasingly sharper in addressing this issue, welcoming the advice of the UN if not its permission slip. The team around the President, from Cheney on down through Defense Secretary Don Rumsfeld and his deputy, Paul Wolfowitz, have continued to denigrate the UN’s advice and counsel, especially the work of those UN agencies involved in overseeing weapons of mass destruction: UNMOVIC on chemical and biological weapons and the IAEA on nuclear weapons. Here, Kerry is clearly on the side of the UN, as are most Americans.

What about Secretary of State Colin Powell as the President’s running mate should Cheney take himself off the ticket for health reasons? My non-scientific polling of friends and relatives who voted for Mr. Bush in 2000 tells me that might work, but only if it is clear that Donald Rumsfeld, Condi Rice and Paul Wolfowitz will be gone in a second term. This fits with the report in Pat Buchanan’s American Conservative that cites polls showing a Bush-Powell ticket would be an election winner: “Powell reportedly indicated that he would be willing to consider the offer but only if all the neo-conservatives responsible for the disaster that is Iraq were to go.” That sounds right, which tells me the President will cling to his present team, amid reports that he already is planning action against Iran if he is given a second term. Notice that National Review’s William F. Buckley Jr., who was an ardent supporter of the Iraq war based on the information he was getting from the neo-cons, now says he would not have supported the war if he knew how flimsy that information was. He has also said that if President Bush loses, that would be the end of the neo-conservatives as a political force.

Prospects for the Economy

The national economy is doing much better at the moment than the Democrats expected when they bet their chips on defeating Mr. Bush on his management of economic policy. The President is doing as well as he is in the polls, even with a performance rating below 50%, because of concerns that a Kerry Presidency would threaten the expansion, as sluggish as it is. Much of the sluggishness is directly related to the higher levels of risk associated with doing business in the U.S. when the intelligence community warns of a large al-Qaeda terrorist attack sometime this year, probably before the elections. Coupled with the risks to world oil supplies associated with the continued high tensions in the Middle East, it is difficult to see more than sluggish growth in the months ahead.

There may be no increase in the federal funds rate at next month’s meeting of the Federal Open Market Committee, given the evidence since the rate hike three weeks ago that the economy is not as strong as the Fed believed when it then made its move. Nevertheless, the Fed has educated the business community that when economic growth appears in the numbers, interest rates will have to go up again to fight inflation. The “animal spirits” that John Maynard Keynes once said generated economic growth when there is an optimism in the land are being discouraged by a monetary policy that views growth as inflationary. In my view, a weaker economy will always tend to increase the price of gold, weaken the dollar in the forex market, and increase the rate of inflation.

The developing consensus on Wall Street seems to be that there may be no further increase in the funds rate until November or December, but that it will have to occur at sometime in order to find its way to a "natural rate" above 3½%. Add to that the worry that fiscal policy may tighten in 2005 with higher taxes under either Bush or Kerry in order to reduce the size of the deficit and/or finance the continued presence in Iraq. The political edge the economy would give to the President’s re-election chances would be diminished.

Congressional Factors

At the outset of this analysis, I indicated the likelihood that the electorate will return to choosing a divided government. In 1980, the voters gave Ronald Reagan a Republican Senate to work with, but withheld the House from GOP control. The way things are shaping up now suggest the same pattern, but with a Democratic President given a Democratic Senate and a Republican House of Representatives.

The Senate has more clout on foreign policy and national security than does the House. A Democratic Senate would help a President Kerry redirect those policies in the direction of diplomacy and multilateralism. The net effect would be favorable to the financial markets and to the animal spirits in the real economy, as the risks of terrorism would recede and so too would the premium on oil and gas prices.

The founders gave the House more clout on economic policies than they gave the Senate. It gets to initiate tax legislation and a Republican House with supply-sider Bill Thomas chairing the Ways and Means committee would provide a check against the impulses of the Democrats to play Robin Hood. I continue to hope the Democratic Party will find its way back to supply-side impulses of John F. Kennedy, a tax-cutter who was dedicated to the gold standard in the conduct of monetary policy. It may take one more election cycle, but it is bound to happen. Democrats still seem to think the Clinton administration was successful because Democrats raised taxes in 1993, when all that really accomplished was Republican control of the House and Senate in 1994.

This will be the first of several reports on the presidential race, with fresh updates when there is significant change in the political and economic forces bearing upon it. We will watch everything we can for such signs, but will look for developments in Iraq and Israel that could turn for better or worse, for signs of a change in emphasis by Fed Chairman Alan Greenspan on the conduct of monetary policy, and for indications one way or the other from the Democratic Convention next week on the policy directions being chosen by the top of the ticket. I have not mentioned Ralph Nader and the Reform Party in this paper because it still strikes me that Kerry would not have to worry about losing enough electoral votes on that account to deny him the presidency. If the flow of events begins drifting in the President’s direction, Nader will have to be taken into account.

* * * * *