Assessing the Political Marketplace Jude Wanniski September 2, 2004

In the early 1970’s, I learned about the efficiency of the economic marketplace from Art Laffer, who in turn had learned it from other economists who were developing the theory at the time – Eugene Fama at Chicago, Burton Malkiel at Princeton and Fischer Black at Harvard. It was those insights that led me to believe the 1929 Wall Street Crash was a rational event, tied to the core idea of the Efficient Market Hypothesis that Fama put forward in 1970, that at any given time, asset prices fully reflect all available information.

Trained in political science and communications, not economics, it occurred to me that the political marketplace was just as efficient. A well-designed constitutional democracy and a free press could broadcast all the available information that the electorate needed to make the optimal decisions on Election Day. “The best man always wins,” in other words, as long as the broad electorate knows everything they can about the available choices. I elaborated on this concept in Chapter One of my 1978 book, The Way the World Works, using it to explain why, after a long history of unified government in the USA, the voters began dividing their choices among Democrats and Republicans. In a footnote on P. 18, I recalled: “In a conversation [with me] in the autumn of 1975, former Texas Governor [John Connally] suggested that the American voters in 1968 and 1972 elected a Republican President and a Democratic Congress because they did not agree with the program and platform of either party, and so purposely arranged a political stalemate in order to minimize the damage either party could do.”

While tuned to the PBS telecast of the GOP convention last night, I was pleased to hear Jim Lehrer ask his regular political analysts, David Brooks and Mark Shields, if they thought the voters this year would return to divided government because the country was so polarized on the major issues. Shields thought they might, putting Senator Kerry in the White House while keeping the GOP in control of one or both houses of Congress. Brooks, a neo-con and Bush supporter who writes a column for the NYTimes, thought not, saying the voters are now more educated than ever – implying they will in their wisdom return Mr. Bush to the Oval Office with GOP control of Congress. I have been assessing the political market so far this year by suggesting the electorate will on November 2 elect Kerry and at least keep the House in Republican hands – preferring Kerry’s views on foreign policy and the GOP’s on tax policy.

In the several weeks since I’ve commented on the race, I have watched the race develop very slowly, with the entire month of August chewed up by Senator Kerry’s problems with the Swift Boat vets. It’s generally conceded that Kerry “blew” his chance to open up an even wider lead over the President by mishandling the Swifties, with the Bush team successfully implanting the idea that Kerry may have been less than heroic in his Vietnam service and may have been less than patriotic in his post-service Vietnam activism. The question mark over his head is enough to establish the line of attack developed last night by Vice President Cheney that Kerry is not the man to fight the war on terrorism: “George W. Bush will never seek a permission slip to defend the American people,” said Cheney, thus, said the NYTimes, “drawing an explosion of applause as he mocked Mr. Kerry’s call for alliance building.” In his Tuesday night address, California Governor Arnold Schwarzenegger expressed the same idea by casting doubt on anyone who would put the interests of the United Nations before the interests of our democracy.

My guess, though, is that Kerry has the better of this argument, and it should pull swing voters to him in the closing days of the campaign – but only if he is not afraid to stick with it. I’ve spent considerable time reading through the available material on Kerry’s Vietnam experience – including his 1971 testimony before the Senate Foreign Relations Committee – and find myself more, not less impressed with his record. I also can find well-reasoned arguments from the Senator in print media profiles of him, such as the July 26 New Yorker article by Phil Gourevitch. But in his paid TV spots and stump speeches, perhaps in response to the advice he gets from his political operatives, he flunks by trying to change the subject to the economy.

The economy, while not doing as well as the President hoped it would be doing at this point, is still in an expansion mode. The electorate may conclude that it is perhaps too fragile to withstand a Kerry presidency and his call for higher taxes on capital, unless the voters give the GOP control of the House and the Senate. I’d thought by this time Kerry would be getting beyond the tax-the-rich issues that seemed plausible a year ago when he was gearing up for the primary races. The prospective voters may respond positively to these promises in public-opinion polls, which don’t count, but the efficient national electorate may provide swing voters who don’t want to chance a Kerry recession. The Bush team is exploiting this Kerry weakness with its TV spots and the President’s stump speeches.

Mr. Bush has been involved in enough presidential campaigns – his father`s and his own -- to know how big leads in the opinion polls can disappear overnight when people actually go into voting booths and cast secret ballots. In today’s NY Daily News, Tom DeFrank tells of “Longtime associates [who] say Bush never has forgotten that he was supposed to win going away in 2000. In fact, the day before that election, he confided to a close friend that aides were predicting a possible landslide of Reaganesque proportions.” I recall the dismay I felt the last weekend going into Election Day in 2000 to learn from Bob Novak that Mr. Bush had decided to spend those last days of the campaign on airplane stops with Paul Wolfowitz at his side, with Bush promising the crowds that met his plane that when elected he would build them a national missile-defense system. Novak said he froze the audiences. And of course the Sunday newspapers reported on his last hours and the radio networks every hour broadcast his promises of an ABM. His 3-to-4% lead in the polls disappeared in three days.

The political marketplace, by the way, is not so efficient that it can always tell which candidate is trustworthy and will keep campaign promises after the election is decided. But there is always the next election. In 1992, Bill Clinton promised a middle-class tax cut and once elected announced a tax increase. In 1994, the electorate gave the Congress to the Republicans. In two months, the electorate will make up its mind.