Executive Summary: The Cuomo victory over Koch in the New York gubernatorial primary is yet another sign that the political winds are blowing against "conservatives." But will it make any difference to the economy and the financial markets if the GOP loses big or gains seats? Two competing theories among the political pros suggest either could happen on November 2. But without a competing economic plan, the Democrats could only alter zero-sum White House/Congressional economic policies to a trivial degree. Only the Lehrman/Cuomo duel for New York's statehouse may pack the wallop necessary to get Washington off its consensus strategy of "restrained recovery."
The November Elections
The stunning upset victory of Lt. Gov. Mario Cuomo over New York City Mayor Ed Koch in the state's Democratic gubernatorial primary was another straw in the wind. Throughout the summer as the economic recession deepened, the breezes have been blowing against the "conservative" wings of the two political parties. Jeff Bell's loss to Millicent Fenwick in early June, in New Jersey's GOP Senate primary, was an early sign. Massachusetts Governor King's loss to Mike Dukakis in the Democratic gubernatorial primary was another prominent setback to a candidate who had the cast of a Reagan conservative. There have been many others, but the Koch loss to Cuomo was the most spectacular.
No matter that Ed Koch did not run as a "Reagan Democrat." He had played footsie with Reagan in 1980, earning him the affection of Reagan and the GOP eastern establishment. William Simon, the archtypical Austerity Advocate, inspired the idea of a "fusion ticket" in New York that gave Koch the backing of the GOP in last year's mayoral race. President Reagan early on signaled his support for Koch (leaving the chief Republican gubernatorial contender, Lewis Lehrman, slackjawed). The President did so on the grounds that Koch had made the tough, hard decisions to get the city's fiscal house in order (cutting spending and raising taxes). If King in Massachusetts was known as Reagan's favorite Democratic governor, Koch was easily Reagan's favorite Democratic mayor.
Cuomo simply came out of left field, identifying with organized labor and the various minority groups, reviving the old New Deal coalition. It no doubt helped that he did so with style; Cuomo's intellect and demeanor evoke vague memories of Adlai Stevenson, albeit a more intense Stevenson.
The reason for the surprise Cuomo victory was the voter turnout. The polls that had predicted Koch the easy winner did so after sampling "likely voters," those that had voted in recent primaries and general elections. The one pollster who gave Cuomo a chance sampled registered voters at random, a technique that can only work when for some reason a new electorate emerges. An unexpected 350,000 so-called "mystery voters" showed up heavily for Cuomo. The liberal coalition's organization offset Koch's heavy media buys.
There are two theories on what's going to happen on November 2 that will effect the fortunes of the Reagan White House and GOP on Capitol Hill, and of course economic policy and the financial markets. One theory suggests that conservatives in general and Republicans in particular will be big losers. Here, the evidence is the national polling, which predicts the loss of Republican seats in the House of Representatives will be as low as 20-to-25 (Harris) or as many as 40 (New York Times/CBS). The analysts who hold to this theory of a shift back to the Democratic coalition find support for it in the Cuomo win over Koch because national polling tends to reflect the tastes of registered voters more than likely voters. An unexpectedly big national turnout for a congressional-election year would produce major GOP losses, reflecting distress with Reagan and national economic policy.
The second theory suggests that the Republicans will have a good year and perhaps gain a few seats in the House of Representatives while adding three or more seats to their majority in the Senate. The evidence is to be found in hard seat-by-seat analysis that ignores national polling sentiment. That is, the national mood could easily suggest disenchantment with Reagan/GOP policies, but that the mood need not be intense enough to offset the other ingredients that go into local congressional campaigns. The Republicans go into the last month with a 10-to-1 spending advantage over the Democrats and generally superior candidates it being easier to recruit classier candidates when there's plenty of money to spend. And the electorate still finds Reagan not unpopular as an individual, especially one who can communicate his ideas, vision and plans over the tube. There is also the lingering hope that somehow the Reagan policies will begin to show more success, justifying expectations.
On this kind of seat-by-seat analysis, Bill Anderson of the Independent Petroleum Association of America figures that, at worst, the Republicans will lose two seats in the House and gain three in the Senate. Anderson, who was the most accurate forecaster of the political experts identified with the GOP in 1980, says he finished his seat-by-seat breakout the first time with a Republican gain of 15 seats, and he came up with the worst case scenario only by going through a second time and throwing out all conceivable losers. Anderson was held to this unorthodox view for several months, even when White House chief of staff James Baker III was worrying about losing 38 seats. Throughout, his basic argument has been that the Democrats lack not only the money and the candidates, but an alternative plan to the Reagan economic program.
The most accurate forecaster of the political experts identified with the Democrats in 1980 was Joe Rothstein, whose Washington-based consulting firm Rothstein & Buckley handles House and Senate Democratic candidates across the country. Rothstein in 1980 predicted a Reagan landslide, Republican takeover of the Senate and major House gains when such views were hard to find among Republicans. This year, he says, will also be a Republican year, at least in the House/Senate races. GOP governors, though, who have had to scramble these last few years to manage during the deflation/recession will be slaughtered. Reagan himself would lose if he were up for re-election this year, he thinks. But because the voters can't change the White House this year, and because the leaderless Democrats have not been able to come up with a saleable counter to Reagan's economic program, Rothstein says the GOP's enormous spending power will make the difference.
"The whole Republican campaign theme is 'Give him a chance,' " says Rothstein. "And there is a case that can be argued and is being argued that Reagan is having some success. Prices are at least coming down a little. All we Democrats have to work with as issues are Social Security and equity. And that's not very much. It's better than 1978 and 1980 when all we could do is stand there and confess guilt, but it's not much to campaign on. The Democrats really won't have a competitive economic plan until they have a Presidential candidate, not until 1984. This year, even if the Democrats do come up with a theme in the last few weeks, there's no money to get it across." Rothstein says that on a seat-by-seat analysis, even the party professionals can't find a pickup of more than five seats in the House. "They're tearing their hair out."
The two theories with Republicans as losers or holding their own have little to say about the impact these elections will have on national economic policy. Indeed, there is now broad, general agreement among the two political parties on what that policy should be, and this is why the electorate is frustrated. The GOP distinctive growth posture of 1980 is not in sight this year.
If the Democrats pick up twenty or thirty seats, the only mandate that will be read in Washington is on the Social Security and equity issues. The net effect will be to lean in the direction of raising Social Security taxes a bit more and cutting benefits a bit less in order to patch together the system a little while longer. And Reagan will spend more time demonstrating that he doesn't favor the rich over the poor by adjusting his rhetoric and perhaps closing a few more tax loopholes.
If there is a standoff or the Democrats lose a few more seats to the GOP, Reagan will assume he has achieved a political victory of extraordinary proportions, given the advance talk of doom and gloom. He will lean toward raising Social Security taxes a bit less and adjusting benefits a little more to get through the coming fiscal crunch. And there will be no further basic change in current policy, which is to "restrain the recovery" in order to keep from "reigniting inflation."
The electorate, in other words, no longer has a choice that has any real meaning. Both parties are solidly entrenched in zero-sum politics.
In 1980 Reagan presented a strategy for economic growth, lower tax rates across the board and stable money for everyone. Now that strategy is gone and it is business as usual: The GOP cuts taxes for the rich and the Democrats complain about equity so the GOP raises taxes for the rich; instead of stable money, first the Republicans have a big deflation, benefitting the creditor class at the expense of debtors, and on election eve there's a bit of inflation to broaden the political base, throwing debtors a bone.
The Democrats had shown some signs of life on economic policy when on August 3 they got together behind a general criticism of Federal Reserve policy and a legislative proposal that would require the Fed to target real interest rates. But rather than keep his squeeze on during the political season, Chairman Volcker flooded the system with liquidity in mid-August, drove down interest rates and boomed the financial markets. The Volcker bull market in many ways demoralized the Democrats. It seemingly pulled their interest-rate issue from under them, suggested a turn-for-the-better in the economy and Reagan's policy prescriptions, and added to the wealth and generosity of Republican campaign contributors.
The Democratic embrace of a "flat tax" also became a casualty of a pre-emptive strike. Once the White House politicos saw how much support there seemed to be for a simplified flat-tax system of the kind the Democrats were pushing, the President and GOP congressional leaders jumped on the rhetorical bandwagon. The Democrats, knowing the GOP would be in a position to take credit for it if they really did get serious about it, now realize its value as a campaign issue is negligible. The White House, knowing it has successfully neutralized the Democrats, shelved the idea. David Stockman, for one, doesn't like it.
Chances that the 1982 elections will be of any positive value to the economy are thus slipping to the vanishing point. The danger is that with no new spur from the body politic, Reagan will go right back to the austerity schemes that the conservative demand-siders have gotten him to swallow. With the elections out of the way, the Fed will be free to go back into the M-1 targets and a furthering of the deflation.
Martin Feldstein, who will now chair the President's Council of Economic Advisers, is a conservative Keynesian who has almost no training or interest in international monetary economics. Feldstein was among those commercial Keynesians who argued for a tax increase to get the economy going again (by lowering the deficit, restoring confidence to bond markets, lowering interest rates, etc.). Now he, Stockman, Dole and perhaps even Donald Regan will be arguing that another tax increase is needed to "restrain the recovery" to keep it from "reigniting inflation." There is no longer a single official of senior status in the Reagan Administration who would have been uncomfortable making economic policy in the Carter Administration. George Bush, remember, prior to the Iowa caucuses in 1980, while he was seeking the opportunity to challenge Jimmy Carter as the GOP nominee, allowed as how he had no problems with Carter's economic policies. In his press conference on September 28, President Reagan said he would take a "palace coup" to get him to support more tax increases, but such a coup will probably be attempted.
Perhaps the one chance that the November elections will have a positive impact on economic policy is in the New York gubernatorial race. As the New York Times put in on September 26, "Cuomo's Win Sets the Stage For a Classic, Classy Duel." Cuomo's campaign against Koch basically an anti-Reagan campaign that "sought to reaffirm the 'soul of the Democratic party,' with its concern for the underprivileged.. . .inevitably, the Cuomo-Lehrman contest will be a classic liberal-conservative struggle that will test how much President Reagan and his philosophy have affected New York, a state Mr. Reagan carried two years ago."
It's not very likely, though, that Lehrman will accept the terms of this "inevitable" liberal-conservative struggle, which would have him defending the kind of Old Guard austerity policies that he derides. On September 28 during a joint press conference with Lehrman, White House Chief of Staff, James Baker III, volunteered to reporters that, during the transition of 1980, Lehrman had recommended a set of economic policies to the Reagan administration that were not accepted. This has cleared the way for Lehrman to run as a "friendly" critic of the President's policies. Lehrman ran his primary campaign against Paul Curran, a Rockefeller-style Republican, almost as if New York State were a nation unto itself, disengaging himself from discussion of Reagan and Reaganomics. Lehrman, of course, was the supply-side candidate for Treasury Secretary when Reaganomics was being designed. Having been shut out of the Reagan Administration so thoroughly that all he could do to press his ideas forward was to run for governor, it is now highly improbable that he would find political reasons to defend the policies that have brought on the recession. With Cuomo insisting on running against Reagan and trying to identify Lehrman with the President and the national recession, we may witness in New York the kind of contest that rivets the attention of the nation. Lehrman has already vowed that the race will be a "referendum on economic growth."
But it could be much more than that. Both Lehrman and Cuomo, notwithstanding Lehrman's millions, represent the populist wings of their respective parties. That is, neither are at home with the country-club, financial-industrial elites that gave us Rockefeller and that ensnared Ed Koch and (of late) Ronald Reagan. The contest could provide the political margin for the year, the political spark that forces Washington to move off its consensus, with the issues unfolding in a way that foreshadows the 1984 Presidential elections.
No other race or collection of races has the megatonnage to move the Reagan Administration and its newfound Democratic allies on Capitol Hill to an expansion track. If it fizzles out, we may as well get used to the idea that the Reagan Administration will stay in the doldrums along with the economy. With Lehrman in Albany firing thunderbolts at Washington, it wouldn't matter if there were more or fewer Republicans in the House and Senate. He'd make a difference to policymaking in both parties.
In a way, all President Reagan has needed in these last several months of slippage toward Old Guard policies is a recharge of his supply side battery. Rep. Jack Kemp waged a lonely battle in Washington to get the job done, but it will take an amplified message from the electorate to be effective in persuading the White House High Command that there is political merit in reviving the Kemp/Lehrman prescriptions rejected in early 1980.
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