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Tuesday, November 07, 2006
Larry Kudlow :: Townhall.com Columnist
Surprise, surprise
by Larry Kudlow
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A series of late-October, early November surprises has turned the midterm elections into a real horse race. The bullish stock markets of recent months have been saying all along that a Democratic tsunami will not materialize, but now even a decent Dem wave seems a long shot.

First, we have the John Kerry blunder: The Massachusetts senator badmouthed American troops in Iraq as a bunch of uneducated losers. This was typical antiwar elitism from Kerry, but his timing was impeccable. In a scorched-earth negative response, undecided and independent voters are flocking into the Republican camp, according to late-breaking polls from Pew and Washington Post/ABC.

Just as Walter Mondale infamously became the face of the Democratic Party on the eve of the 2002 midterms when he replaced Sen. Paul Wellstone on the Minnesota ballot (Wellstone was killed in a plane crash), John Kerry has become the face of the Democrats on the eve of the 2006 vote. It's a disaster for the Democrats -- and they know it. "Kerry's Blunder, Wall Street's Gain," read one financial headline.

Then, we have the blockbuster 4.4 percent unemployment rate, the last major front-page economic statistic to appear before the election. Jobs in the United States are booming, as government revisions clearly show. Corporate payrolls are rising at nearly 150,000 a month, but the more accurate household survey -- which measures the number of people working -- rose 426,000 in October, 420,000 per month over the last three months and 226,000 monthly across the whole year. Meanwhile, wages are growing at 4 percent -- almost twice as fast as the 2 percent inflation rate, which itself has been cut in half with plunging gasoline prices.

New polls show rising public approval of the economy as a result of blockbuster job creation, low unemployment, falling gas prices and a roaring stock market. It's not a coincidence that the Dow soared over 100 points Monday on news of the Pew poll that shows the Republican comeback. Democratic House campaign manager Rahm Emanuel told a Sunday TV news host: "This is making me nervous. ... I don't know what to make of it." It's called the low-tax economic boom, stupid.

Then we have Saddam Hussein's conviction and death sentence. This reminds American voters that there has been a good deal of progress in Iraq. Saddam and his mass-murdering crimes against humanity are a thing of the past. The Iraqi people have participated -- and in large numbers -- in three democratic elections in this former dictatorship. What was back-burner material is suddenly front-burner again.

Indeed, as tough as the Iraq story has been, the Saddam conviction reminds voters that President Bush's vision of overthrowing the jihadist totalitarian order is worth the fight. In terms of American values, U.S. security, and human-rights democracy improvements in the Mideast and around the world, victory in Iraq matters.

And finally we have President Bush's indefatigable campaigning on Iraq, homeland counterterrorism, low taxes and economic growth. Bush has been written off so many times by the mainstream media, but he keeps coming back -- standing tall, resolute and with an incredibly strong backbone of character.

Without question, Bush versus Kerry in the final days of the midterm campaign is a solid plus for Republicans who are cutting their deficits in key House races and reinforcing their hold on the Senate. But even if the Democrats capture the House, they will have done so with many pro-life, pro-business, pro-national-security "Blue Dogs" -- conservative Democrats who may deliver a 2006 post-election surprise.

Just as Ronald Reagan relied on conservative House Democrats to pass his key legislation on lower taxes, reduced domestic spending and a stronger defense -- thereby overthrowing the Tip O'Neill liberal Democrats with a functional majority that included 35 to 50 "Boll Weevil" votes -- George W. Bush should be able to reach across the aisle for Blue Dog support in the next two years. These Blue Dogs are not Pelosi Democrats.

Another post-election surprise just might come from the House Republicans: Mike Pence and his allies in the conservative Republican Study Group -- John Shadegg, Paul Ryan, Jeff Flake, Marsha Blackburn and others -- could stage a leadership revolt that will get House Republicans back on the messages of limited domestic spending, earmark reform, broad-based tax reform, expanded investor tax-free savings accounts and Social Security reform.

Put simply, while the Democrats may get a Pyrrhic victory in a six-year-itch close House win, in effect they will have suffered another substantial defeat. A lost opportunity with a losing message.

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About The Author

Lawrence Kudlow is host of CNBC's Kudlow & Company

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Fletch wrote:

"Um, what was the 90's - the high-tax economic boom?"

"The story of the 90s was that the economic boom begun under Reagan and interrupted only briefly by the mildest recession in history (due directly to the invasion of Kuwait)"

Actually, the 2000-2001 recession was milder than the 1991 recession. You could look it up at nber.com and in the data contained in the Economic Report of the President if you were so inclined.

"...was strong enough that it didn't simply collapse overnight."

Of course, it didn't collapse overnight. From 1987 to 1991, the economy gradually became weaker, with large sections of the country in recession for more than the 8 months of negative national GDP growth. Unemployment gradually increased from 1989 through 1992. It's called the business cycle - you might want to learn about it.

"However, in the wake of the Clinton tax cut, the growth of the economy slowed to the weakest post-recession growth in history..."

That may or may not have been true at the time, but it's certainly not true any longer - the Bush II recovery has been worse than the Clinton recovery. For FY 94-98, the average real growth rate was 3.07%; for FY 02-06, the average real growth rate has been 2.51%. So once again, the impact of the '93 tax hike and '01 tax cuts has been...?

"...and the increase in taxes grew tax levels to above 20% of GDP...

Tsk tsk tsk. You should think instead of just spouting data. Tax revenues as a percentage of GDP were 18.1% in 1994, and grew to 20.9% in 2000. Why? Obviously, because the economy was growing.

"...and was a major cause of the recession from which we have just emerged."

You mean the mildest one in history? Again, read some economics. We seem to have become much more adept at reducing the effects of the business cycle, but we haven't eliminated it.

Once more, this time with feeling - how exactly did the 1993 tax increase cause the 2001 recession?

"In fact, had capital gains taxes not been cut to stimulate the economy earlier, its a virtual certainty..."

Ahhh, that unassailable argument - the "virtual certainty." You're not an economist, are you?

"...that the recession would have begun in 1999. The leading economic indicators were on a decline toward recession since before then."

And that shows... that they were wrong! Imagine that. The indicators by themselves are not gospel, but require analysis to determine what's behind the numbers. Or can I put you down as bearish on the economy now, since the leading indicators are down almost 1% in the last six months?

"The economically ignorant frequently assume that economic actions taken by government magically occur overnight so they (foolishly) give Clinton credit for an economy that was in full collapse before he left office and (foolishly) blame Bush for a recession that was inevitable long before he took office."

So I guess by your rationale Carter should get credit for, say, half of the 1980's expansion?

Even better: the terrific economy of the 1990s, the longest expansion in American history, was caused by... Bush I, right? And his tax increase did exactly what damage?

And then there's this - the 2001 tax cuts didn't have any impact on the economy. At least, not in 2002. That recession was going to be short with or without that tax cut.

Seriously, you'd like to give Republicans all of the credit for everything good, but the facts just don't line up so conveniently. You can shoehorn it all you want - you're only going to fool yourself.

"Interesting that liberals see conspiracy whenever anything happens that might benefit Republicans."

Conspiracy? What conspiracy? I didn't say anything about a conspiracy.

"Perhaps you subscribe to the moronic notion that the president or Republicans in general can manipulate the price..."

Nope. You've now shown yourself to be paranoid and hypersensitive to any criticism of Republicans - even when there is none. Thanks for making my job easier.

"But Carter actually increased defense spending significantly as well. Between 1973 and 1977 real defense spending actually decreased; Carter turned this around."

"[T]he Democratic Congress authorized significantly more in both defense and domestic spending than Reagan asked for in his submitted budgets."

Simply not true - see below.

So the Democrats deserve some of the credit, always reserved by conservatives for Reagan, for increasing defense spending and thus bringing about the fall of the Soviet Union? Bet you won't go that far.

"And second, Carter did not increase Defense spending "significantly". He merely stopped the bleeding."

Compared to what had happened during the previous 4 years (a 7.3% real decline in military spending), Carter's 8% real increase was a significant increase.

"Because of the add on ons to Reagan's submitted budgets, you are correct that domestic spending increased significantly under Reagan. This is the chief reason why deficits ballooned even though the stimulus effect of the tax cuts significantly increased tax revenues."

Simply not true. The information you're not citing here (why?) is an apples-to-oranges comparison, which compares actual year-end spending with Reagan's proposed budgets, which were based on rosy forecasts of high economic growth and low interest rates that necessarily leads to low-ball estimates of non-discretionary spending.

An honest comparison would show that Reagan's budgets and those passed by Congress were not nearly so different; in fact, a 1994 House Appropriations Study found that following Reagan's budgets would have resulted in slightly higher debt at the end of the administration's 8 years. [House Appropriations Committee, Regular, Annual, Supplemental, and Deficiency Appropriations Bills: Comparison of Administration Budget Requests and Appropriations Enacted, Sep. 30, 1994.]

But let me make sure I understand your argument: Reagan's responsible for all of the good things that came out of the 1980's, and the Democrats are responsible for all of the bad things, right? No, wait, that's not quite it. Reagan's responsible for all of the good things that happened during the 1980s AND 1990s.

---

"This possition [sic] is contrary to objective reality as one party (it begins with a "D") has repeatedly fought measures to ensure exactly that."

Citations, please.

"'Neither [party screams disenfranchisement when ever an idea to fight voter fraud is introduced].' Again. Quite the contrary."

Really? You're willing to say that the Democrats "SCREAM disenfranchisement WHENEVER an IDEA to fight voter fraud is introduced"? [emphasis added]

"In 2004 in particular, the DNC and other Democratoc organizations expressly encouraged Dems to allege voter fraud and intimidation even in the absence of any actual activity."

And this is, naturally, not relevant. Exactly what was the fraud prevention measure this shows the Democrats were "screaming" about?

"Overwhelmingly, however, such examples of fraud and intimidation occur under the auspices of one major party (and it doesn't begin with an 'R')."

Citations, please.

"http://www.ac4vr.com/reports/072005/default.html"

ACVR is a Republican front group, whose InterNIC contact and spokesman was former RNC Communications Director Jim Dyke. [http://www.pittsburghlive.com/x/pittsburghtrib/s_360812.html] The site hypes Democrat malfeasance and downplays and omits Republican hijinks. Did you know it was a partisan Republican front group when you posted it, or were you trying to be misleading?

It's a good start, as long as you're honest about their motivations. Now try to find one that's not obviously partisan.

How about we use Virginia this year as a test case? There's plenty of time before the election is certified on November 27, and I expect all of the allegations to be voiced and investigations to be pretty far along by then.

.

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