Why the Dems may implode in 2010: 4 scenarios

A Democratic meltdown next year? Washington is abuzz with speculation by prominent political handicappers such as Charlie Cook and Stuart Rothenberg. Republican hopes for a huge congressional comeback in the 2010 midterm elections rest on three pillars:

1) History. Since the start of World War Two, the president’s party has lost an average of 28 House and 4 Senate seats in the midterms. Computer-aided gerrymandering, though, has made incumbents tougher to knock off in the House.

2) Policy. Concerns about ObamaCare — too much government spending scares independents, too little spooks seniors — may help turn 2010 into a 1994 replay. What’s more, cap-and-trade makes Congress appear more interested in imposing new economic costs than creating jobs. Current congressional approval ratings hover around the high 20s, while a new Rasmussen poll shows Republicans hold a 44-37 lead on a generic midterm ballot.

3) The economy. This is the most important of the three. As long as the recession continues, the biggest Obamacrat achievement — the stimulus –- risks looking impotent and a waste of $800 billion. At the same time, healthcare, energy and financial reform almost look like distractions. What’s more, high unemployment – now at 9.7 percent vs. 7.6 percent in January — is driving down President Obama’s approval rating. It’s fallen from 61 percent to 53 percent during the past three months, according to RealClearPolitics. And a president’s approval rating may be the single most important indicator of how his party fares in a midterm election.

But lately some GOPers have been wondering whether the economy might start working against their political fortunes. Economists to whom those on the right pay close attention — Brian Wesbury of First Trust Advisors, Michael Darda of MKM Partners and Lawrence Kudlow of CNBC — have been forecasting a recovery.

And that recovery might look pretty strong initially. During the first quarter of the last 10 economic recoveries, real GDP has risen close to 6 percent on average. And both Wesbury and Darda see the economy growing at least four percent next year. The worry for Republicans is that the Obamacrats will plausibly be able to take credit for both avoiding a depression and igniting the subsequent turnaround. (Ben Bernanke and the Fed kind of get lost in the White House narrative.)

But abstract GDP figures aren’t as important as the unemployment rate. As long as that number is at the highest levels in a generation, Americans are likely to feel anxious about the broad economy and their place in it. Here are four economic scenarios and their political impact:

1) The Double Dip. The worst of all worlds for Dems. The economy slips back into recession next year, pushing the unemployment rate to at least a post-WWII high of 10.8 percent. Economist Nouriel Roubini says that weak labor markets, weak banks, weak consumers, weak profits and weak trade create a strong risk of just such a “W-shaped” scenario. If so, not only does John Boehner maybe take back the gavel from Nancy Pelosi, but Hillary Clinton and Russ Feingold start looking for reasons to visit Iowa and New Hampshire. Probability: 10 percent

2) The Big Muddle. The economy keeps growing, but only in the 2 to 3 percent range. And that wouldn’t generate many new jobs. IHS Global Insight, for instance, predicts GDP growth of 1.8 percent with unemployment averaging 10 percent next year (and 9.4 percent in 2011). This is also where the Federal Reserve lands. The Fed forecasts growth of between 2.5 and 3 percent with unemployment declining “only gradually.” In this case, expect greater-than-average Dem losses. Harry Reid might get voted out by his fellow Nevadans while Pelosi might get the boot from fellow Dems. Probability: 50 percent.

3) The Big Bounce. A combination of Fed stimulus, government spending and inventory restocking by companies produces growth of 4 percent or more. But even so, unemployment remains twice as high as what Americans have become accustomed to during the past generation. Economists at JPMorgan calculate that 4 percent growth would translate into an average of 200,000 new jobs a month next year. And if the unemployment rate ends this year at close to 10 percent, that level of job creation would only bring it down to 9.5 percent or so. Democratic losses are limited to the historical average give or take. Probability: 35 percent

4) The Obama Boom. It’s 1983-84 all over again. The economy soars as fast as it fell. Unemployment drops below 8 percent by Election Day as formerly terrified employers realize they cut too many workers during the recession. Dems have limited losses. Talk of a third party increases. Probability: 5 percent.

Bottom line: Unlike the Reagan boom, neither taxes nor interest rates look to be going lower anytime soon. And economies after financial crises tend to be slow growers. So it’s hard to envision a likely economic scenario without a jobless recovery in 2010. And as economic analyst Ed Yardeni points out, “The industries that have cut back the most (durable goods manufacturing, construction, and retail) are inherently labor intensive, and they are likely to remain in intensive care for quite a while.”

Passing a popular healthcare bill would certainly boost Democratic fortunes. But history and the economy would suggest that 2010 will be a big Republican year.