My Amazon Review of David Levering Lewis' "The Improbable Wendell Willkie: The Businessman who Saved the Republican Party...."

Republican Rebel

NYU historian David Levering Lewis tells the story of how and why Wendell Willkie, a lifelong Democrat temporarily seized control of the Republican Party to become its presidential nominee in 1940. This often told story normally focuses around the Republican Convention where the eastern establishment finance and media elite orchestrated Willkie’s sixth ballot victory. Out of that flowed enough Republican support for conscription, the destroyers for bases deal and lend lease which enabled Roosevelt to overcome the isolationists in both parties to move our country closer to confrontation with the Axis powers.

Lewis’ book is far more than that. He takes us back to Willkie’s progressive roots in rural Indiana where is his family was enraptured by Bryan and Wilson with the latter’s influence being making Willkie a full-throated internationalist. Moreover Willkie was a serious activist as he attended the 1924 and 1932 Democratic conventions. While being an activist Willkie develops a very strong legal reputation and he rises to become president of Commonwealth & Southern (C&S), a giant utility holding company that lives on today as The Southern Company. In his position at the C&S he takes on the newly formed Tennessee Valley Authority and then most of the New Deal.

Willkie becomes nationally known as a critic of the New Deal, but with the coming of the 1937-38 recession his criticisms begin to bite. Although supportive of Social Security and collective bargaining, he attacked the growing tax and regulatory state that was stifling business and thereby inhibiting the recovery from the depression. He bests solicitor general and future Supreme Court Justice Robert Jackson in a national radio debate in 1938 and from there his presidential prospects take root.

It is here where I have my main difference with Levering because it was Willkie’s attacks on the New Deal that made him palatable to the largely isolationist Republican Party. Levering should have devoted far more effort in this regard in flushing out Willkie’s economic ideas that drove a dagger into the heart of the tax and regulatory state the New Deal was building.

I gasped when Lewis recounted Willkie’s acceptance speech to hundreds of thousands of people in Ellwood, Indiana. He attacked Nazi Germany for its “barbarous and worse than medieval persecution of the Jews” calling it “the most tragic in human history.” Roosevelt never went close to making comments like that, to his eternal discredit. Willkie was also far ahead of his time with respect to race. He was close friends with NAACP chief Walter White and he called racism a form of “domestic imperialism.”

Lewis also touches on Willkie’s affair with Irita Van Doren, book review editor of the New Yok Herald Tribune, who introduced him to New York literary society. His marriage to his wife Edith was largely loveless. He also had an affair with Madame Chiang Kai-shek, who was using him to further her husband’s political goals.

After his defeat in 1940 Willkie becomes Roosevelt’s personal emissary to Churchill and in 1942 he does a round the world tour for the Administration. Out of that came his bestselling book “One World” which outlined a new era of de-colonialism and global integration. That was too much for the Republican Party and Willkie was rejected in the 1944 primaries. He died at 52 in late 1944 just when Roosevelt was toying with the idea of forming a new liberal political party with Willkie.

Lewis as offered us a good read into an important aspect of our history where one individual really made a difference and it saddened me to see how today’s Republican Party is digging itself back into the isolationist hole of the 1930s.

For the full amazon URL see: https://www.amazon.com/review/RR5GROLG3YQIJ/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

"Downshifting to Slower Growth," UCLA Anderson Forecast, December 2018

Downshifting to Slower Growth

David Shulman

Senior Economist, UCLA Anderson Forecast

December 2018

After growing at a 3.1% pace on fourth quarter to fourth quarter basis, the growth in real GDP is down shifting to 2.1% in 2019 and 1% in 2020. (See Figure 1) This is consistent with our prior forecasts characterizing a 3-2-1 growth path for the economy.[i] The down shift in growth is based upon our view that above-trend growth is difficult to achieve for an economy operating at full employment given the sub-1% growth rate in the labor force and productivity gains just above 1%. So unless we witness surprising gains in productivity, the speed limit for the economy is around 2%. Then you might ask, why are you forecasting a further slowdown to 1% in 2020?

Our explanation is that the benefits coming from the huge fiscal stimulus of tax cuts and spending increases will wane by the end of 2019 and the lagged effects of the Federal Reserve’s normalization of interest rates along with the negative effects of the administration’s trade policies will dampen growth further.

Figure 1. Real GDP Growth, 2010Q1 -2020Q4F, Percent Change SAAR

                      

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

In this environment payrolls will continue to expand, but the 190,000/month average gain thus far this year will slow to 160,000/month in 2019 and a much weaker 40,000/month in 2020. (See Figure 2) The unemployment rate will continue to decline from the current 3.7% to about 3.5% for most 2019 and then gradually increase to 4% by the end of 2020. (See Figure 3)

Figure 2. Payroll Employment, 2010Q1- 2020Q4F, In Millions, SAAR

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 3. Unemployment Rate, 2010Q- 2020Q4F, Percent, SAAR

         

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

The Fed Normalizes Policy

The Federal Reserve has been on a policy of gradually normalizing interest rates. After years of holding the Federal Funds rate at 0% - .25%, over the past two years the policy rate has increased to its current 2.0%- 2.25%  and we expect another 25 basis point increase to 2.25% -2.50% later this month. Further we anticipate three or four rate hikes in 2019 that will bring the funds rate up to 3.25% -3.50% by late 2019 or early 2020.

Why so high? We perceive that the normalized funds rate, what the Fed calls R*, to be equivalent to a real rate of 1%. With inflation running somewhat above 2%, that implies a normalized funds rate somewhat above 3%. We would note that prior to the financial crisis R* was perceived to be 4% (2% real) and in the post financial crisis environment it was perceived to be 2% (zero real). We split the difference at 1% real. Given the 2+% inflation environment we foresee along with the Fed’s balance sheet shrinkage and trillion dollar federal deficits, more on all of this below, we forecast that 10-Year U.S. Treasury yields will exceed 4% by yearend 2019, up from the current 3.2%. (See Figure 4)

Figure 4. Federal Funds vs. 10- Year U.S. Treasury Bonds. 2010Q1 -2020Q4, Percent

  

Sources: Federal Reserve Board and UCLA Anderson Forecast

Underpinning the Fed’s move to higher interest rates is that inflationary pressures in the economy are growing.  At long last wage rates are increasing and employee compensation is on track to increase 3.3% in 2019 and 4.0% in 2020. (See Figure 5). Simply put the tight labor market is now showing up in the form of higher wages and benefits. Similarly inflation as measured by the consumer price indices will approach 3% both 2019 and 2020 largely driven by higher service sector prices. (See Figure 6)

Figure 5. Employee Compensation/Hour, 2010Q1 -2020Q4, %CHYA

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Figure 6. Consumer Price Index, Headline vs. Core Inflation, 2010Q1 – 2020Q4F,

%CHYA

 

Sources: U.S. Bureau of Labor Statistics and UCLA Anderson Forecast

Moreover the long end of the Treasury curve will be pressured by the Fed’s balanced sheet normalization program and trillion dollar federal deficits as far as the eye can see. (See Figures 7 and 8) During the financial crisis and its aftermath the Fed increased its balance sheet through three round of quantitative easings from $800 billion to $4.5 trillion, an unsustainably high level for it to conduct monetary policy.  Now that policy is being reversed with the Fed selling government securities on the order of $40-$50 billion a month. You can call this policy quantitative tightening.

However the Fed is not the biggest seller in the market, the federal government is. The trillion dollar deficits that we envision means that the U.S. Treasury will be net new issuance of between $80- $100 billion a month. Thus the path for long term interest rates is higher. It also implies that interest payments on the debt will double from the current 1.4% to 3.1% of GDP thereby crowding out other federal spending.

Figure 7. Federal Reserve Assets, 12-18-02 to 11-14-18, In Millions $

    

Source: Federal Reserve Board, via FRED

Figure 8. Federal Deficit, FY 2010 – FY2028F, Billions $, Annual Data

Sources: Office of Management and Budget and UCLA Anderson Forecast

Financial Turbulence Ahead

The recent volatility in stock prices appears to be signaling that the era of benign financial markets we have been used to for the past several years is coming to an end. (See Figure 9) Although most market pundits blame the increased volatility of Fed policy and a peak in the growth rate in corporate profits, when you look under the hood you will notice perhaps more serious risks facing the financial markets, namely over-leveraged corporations and escalating trade tensions, especially with China. And don’t forget the energy, social media, banking and pharmaceutical industries will soon find themselves in the crosshairs of the newly elected Democratic House of Representatives.

Figure 9. S&P 500, 17 Nov 17- 16 Nov 18

 

Source: Standard and Poor’s via BigCharts.com

While the zero and low interest rate policy of the Federal Reserve helped pull the economy out of the Great Recession and later stimulated growth, it also induced corporations to leverage up. For example AT&T borrowed $190 billion to finance its acquisitions of Time Warner and DIRECTV.[ii] And AT&T was far from alone with such debt financed acquisitions made by Bayer, Verizon Communications, Abbott Laboratories, Walgreens Boots Alliance, CVS and Broadcom. As a result about half of all investment grade corporate bonds now rated Baa by Moody’s, their lowest tier. That means the slightest of economic downturns can force many of these credits into “junk” territory. And this data does not take into account the huge issuance of less than investment grade paper that has taken place over the past decade that now accounts for about half of the $9 trillion corporate bond market.

Further exacerbating the corporate credit situation has been the “huge deterioration,” in Janet Yellen’s words, in the $1.3 trillion leveraged loan market.[iii] Although not as over-extended as the mortgage market was in the mid-2000’s, the corporate debt market has the potential to trigger the next recession. We do note that the credit risks we are discussing have only just begun to materialize in the bond market with high yield credit rising from 3.22% in early October to 4.11% in mid-November as the market responded to problems at General Electric, PG&E and oil exploration companies. (See Figure 10) It is important to note here that the last three recessions had their origins in the financial markets with the 2001 recession being caused by the collapse in the high flying technology/telecom shares and the 1990 recession was caused by over-zealous lending to the commercial real estate sector.

Figure 10. BofAML U.S. High Yield Option Adjusted Spread

 

Source: BofA Merrill Lynch via Fred

With respect to trade it appears that we are in the process of entering an economic cold war with China. President Trump is threatening to impose tariffs on up to 25% on all $537 billion of Chinese imports. At an average rate of 20% that would amount to a $107 billion tax on the U.S. economy. Although most market participants cling to the hope that a reasonable deal can be made I would caution them to take careful note of the recent remarks made by Vice President Pence and  former Secretary of the Treasury and Goldman Sachs CEO Henry Paulson, a longtime friend of Beijing.

Pence speaking to Hudson Institute said the following:

   “America had hoped that economic liberalization would bring China into

     a greater partnership with us and with the world. Instead, China has chosen

    economic aggression (emphasis added), which has in in turn emboldened its             

     growing military.”[iv]

And:

   “Beijing provides funding to universities, think tanks and scholars, with

     the understanding that they will avoid ideas that the Communist Party

     finds dangerous or offensive. China experts know that their visas will be

     delayed or denied if their research contradicts Beijing’s talking points.”

Although the rhetoric coming from the Trump Administration might have been expected, Henry Paulson’s comments were not. Paulson has long championed engagement with China, but in his Singapore speech he noted that an “economic iron curtain” may soon descend between the two parties. The result of which would be “a long winter in U.S-China relations” and “systemic risk of monumental proportions.”[v]

In other words both countries are playing with fire. In fact China is already feeling the pain with slowing economic growth and a nearly 30% stock market decline. (See Figure 11) There are few winners in a trade war with lots of collateral damage.

Figure 11. Shanghai Composite Index, 17 Nov 17 – 16 Nov 18

Source: MarketWatch.com

China is not the only trade issue the markets face. With the Democrats taking control of the House of Representatives in November it is not clear that the newly signed substitute for NAFTA, the USMCA Treaty will pass muster. Remember that the Democrats are less free trade oriented than the Republicans and it is our guess that come this spring the markets will once again be worried about the deal. Further the risks remain that BREXIT will blow-up and Italy will slug it out with the E.U. over its nonconforming budget. Thus unless cooler heads prevail the risks to our forecast coming from the trade sector are all on the downside.

Meantime the U.S. trade deficit continues to expand as the Trump administration unconsciously uses the trade deficit to finance the budget deficit. As long as the United States is a capital importer it has to, by definition, have a trade deficit. In real term the U.S. trade deficit will increase from $914 billion this year to $1.04 trillion and $1.1 trillion, in 2019 and 2020, respectively. (See Figure 12)

Figure 12. Real Net Exports, 2010 – 2020F, In Billions $, Annual Data

   

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Sources of Strength and Weakness

Our main theme is that growth will gradually taper off in all of the major sectors of the economy. It looks like real consumer spending growth peaked at 4% in the second quarter and it will likely taper off to 2% by the fourth quarter of 2019 and 1.5% by the fourth quarter of 2020. (See Figure 13) Although consumer spending has been strong of late, we can’t say the same for housing activity. Put bluntly housing activity remains in a rut. Housing starts will advance to 1.26 million units this year up from 1.21 million units in 2017. We forecast further modest gains to 1.31 million and 1.32 million units in 2019 and 2020, respectively. (See Figure 14) This level of activity lags below the 1.4-1.5 million units that we believe to be consistent with long run demand.

Figure 13. Real Consumption Expenditures, 2010Q1 -2020Q4F, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Figure 14. Housing Starts, 2010Q1 -2020Q4, In Millions of Units, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

A real bright spot in the economy has been investment in intellectual property which is forecast to increase a white hot annual rate of 9% this quarter. This broad category consists of computer software, research and development and filmed entertainment. To be sure growth in this sector will taper off, it will still be consistently growing faster than the economy as a whole. (See Figure 15)

Figure 15: Real Investment in Intellectual Property, 2010Q1 -2020Q4, Percent Change, SAAR

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Another bright spot for next year will be the continued strength in real defense spending. After increasing at 3.4% this year, real defense spending is forecast to rise by 4.9% in 2019 and level off with a 0.8% gain in 2020. (See Figure 16) The Trump defense buildup is for real.

Figure 16. Real Defense Purchases, 2010 -2020F, Percent Change, Annual Data

Sources: U.S. Department of Commerce and UCLA Anderson Forecast

Conclusion

The economy is in the process of down shifting from the 3% growth in real GDP this year to 2% in 2019 and 1% in 2020. At full employment 3% growth is not sustainable. With the Fed tightening, trade tensions rising and the impact of the fiscal stimulus coming from tax cuts and spending increase waning, financial markets will likely experience increased turbulence.  Over-leverage in the corporate sector represents the major financial risk to the economy. Nevertheless Main Street will likely experience higher real wages coming from a very tight labor market as evidenced by a 3.5% unemployment rate. Thus a good year for Main Street and choppy year for Wall Street.

    

   

---

[i] See Shulman David, “Sunny 2018, Cloudy 2019,” UCLA Anderson Forecast, December 2017 and Shulman David, “Regime Change,” UCLA Anderson Forecast, March 2018.

[ii] Smith, Molly and Christopher Cannon, “A $1 Trillion Powder Keg Threatens the Corporate Bond Market,” Bloomberg, October 11, 2018.

[iii] Fleming, Sam,  “Janet Yellen Sounds Alarm Over Plunging Loan Standards,” Financial Times, October 24, 2018

[iv] Seib Gerald F., “The Significance of Pence’s China Broadside,” The Wall Street Journal, October 9, 2018.

[v] Ip, Greg, “Paulson Forewarns on China,” The Wall Street Journal, November 8, 2018

My Amazon Review of H.W. Brands' "Heirs of the Founders: The Epic Rivalry of Henry Clay, John Calhoun and Daniel Webster"

When Giants Roamed the Halls of Congress

University of Texas history professor H.W. Brands has written a biography of the three giants who dominated Congress in the first half of the 19^th Century, namely Henry Clay, John Calhoun and Daniel Webster. All three were great intellects and orators who had a common dislike, for different reasons, of President Andrew Jackson.

Clay comes on the scene in 1811 where in his first term he becomes Speaker of the House. He and Calhoun would join together as the leading “war hawks” and push Madison into war against England. They would later split over the issues of tariffs, slavery and most important, the preservation of the Union. Clay would become the author of the American System based on protective tariffs, internal improvements and a national bank which made him the true heir to Alexander Hamilton. In 1820 he would put together the Missouri Compromise which delayed the ultimate reckoning of the slavery issue and thereby allowed the continued development of a growing America.

Calhoun, who served as vice-president to both John Quincy Adams and Andrew Jackson, quite a feat in its own right, became the tribune of the South. He fought tariffs, championed slavery and the ability of states to nullify federal laws they opposed which offered the theoretical basis for secession.

Webster had a brilliant career as a lawyer where he was victorious in such major Supreme Court cases as McCulloch v. Maryland, Dartmouth College and Gibbons v. Ogden. Although he is most remembered for his “Union, now and forever” speech in his Reply to Hayne, he supported New England secession during the War of 1812.

In 1850 all three of them, now all over 70, came together in the great debate over the admission of California into the Union as a free state, the treatment of fugitive slaves and the extension of slavery into the New Mexico Territory. The end result of the debate was yet another successful Clay compromise. And it was here where Webster in order to save the Union bent over backwards against his abolitionist constituency, on the issues of fugitive slaves and slavery in the New Mexico Territory, to agree with Clay. Oh to be in the Senate Gallery to hear the debate. The next best thing is reading Brands’ account. All three would be dead within two years.

Brands brings to life these three great personalities as they dominated the Congress for 40 years. It is history at its best. I only wish our current Congress had at least one Clay or a Webster and unfortunately too much of the nullification spirit of John Calhoun is alive and well in both parties today.

The full Amazon URL appears at: https://www.amazon.com/review/R2JBQPK21E3ID1/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

My Amazon Review of Michael Beschloss' "Presdents of War"

Making War

Historian and media personality Michael Beschloss has written an important history of how and why presidents took us to war and of their wartime decision making process from Madison to Johnson. He is at is best in discussing the role of Lyndon Johnson during the Vietnam War. His “tick-tock” of how the Gulf of Tonkin resolution came to be is worth the price of the book. He is very clear that the Johnson administration was deceitful from Day One when they knew in their heart of hearts the war wasn’t winnable. Where I would fault him is that he does not lay enough of a predicate as to the role of John Kennedy in the lead up to the war. After all Johnson was continuing Kennedy’s very aggressive policy with respect to Vietnam.

Beschloss opens his book at the end of the Jefferson administration in 1807 and then fully discusses Madison’s role in the War of 1812. To me he is not critical enough of Madison and Jefferson. In my mind both were guilty of dereliction of duty in failing to maintain adequate naval strength while both Britain and France were raiding our ships and impressing our seaman. They both, having witnessed the Seven Years War that a generalized European conflict would sooner or later make its appearance in the Americas.  Although England was not directly threatening the U.S., Madison was egged on by the “war hawks” Henry Clay and John C. Calhoun to declare war. Be that as it may for the young trading nation that the U.S. was, the principle of freedom of the seas was worth going to war over.

He next is very critical of James K. Polk. To be sure Polk created an incident to trigger the Mexican War and lied to the American people about it, but to my mind Polk was the Bismarck of North America. Polk had the strategic vision that a war with Mexico would bring with it the entire southwest as well as California. He was fulfilling “manifest destiny,” a term that came into use during his administration. But before Polk could go to war with Mexico he had to settle up the Oregon dispute with Great Britain, which he did. Polk was smart enough to realize that U.S. could not fight a two front war against both Mexico and Britain.

Lincoln, of course, comes across as the great Civil War leader that he was. He does this not only by ultimate success on the battlefield, but by elevating the purpose of the war to give rise to “a new birth of freedom.” Unlike other presidents Lincoln was able to witness and agonize over battlefield casualties he was also able to be decisive.  Where I would be critical of Beschloss is that while the fighting was going on Lincoln pushed through Congress three great Hamiltonian projects, the Homestead Act, the Pacific Railway Act and the Morrill Act(land grant colleges), quite a domestic program. This distinguishes Lincoln from other presidents, where domestic engagements gave way to wartime exigencies.

Beschloss is kind to McKinley. After the sinking of the Maine (an accident) in Havana Harbor, he does not rush into war. However once engaged McKinley becomes an all-in imperialist by taking the Philippines, Guam and Puerto Rico. Intended or not with the Spanish American War the U.S. enter the world stage.

Beschloss likes Wilsonian policies, but he doesn’t seem to like Woodrow Wilson. He comes across as an arrogant intellectual and where Wilson demonstrated great political acumen in passing his domestic program, he is a complete disaster on the world stage. Wilson’s thought process on entering the war is a “theme park” (my words) for executive indecision. In his discussion of Wilson, Beschloss leaves out a lot. He ignores the role of the March Revolution in Russia that made it easier for Wilson to argue that he was “making the world safe for democracy.” He also ignores the challenge that Lenin brings with the November Revolution. Many historians believe that his 14 Points were a response to Lenin. He also only skims through the wave of domestic repression that took place during the war and immediately thereafter. And he ignores Wilson’s hidden agenda, which he accomplished, of orchestrating the transfer of economic power from London to New York.

Roosevelt, on the other hand learns from Wilson’s mistakes. Instead of trying to keep the U.S. out of the Second World War, he molds public opinion into acceptance of the inevitability of a war against fascism. He also brings the Republicans on board, both before and after, something Wilson refused to do. Roosevelt learned what not to do when he was an assistant secretary of the navy in the Wilson Administration. He also brings in the American people, with his fireside chats, into the vast theater of the global war.

Truman does not come off well. He doesn’t bring Congress into the process and that with hostile opposition from the likes of Taft and McCarthy leads to huge problems when the Korean War stalemates on the battlefield. After he rightfully fires General MacArthur his popularity plummets. It is a sad ending for someone who so clearly understood the Soviet menace in the late 1940s to see him so pilloried.

As I said at the outset Beschloss has written an important book, but as I noted he left out quite a bit and in many cases, especially with the earlier presidents he was way too detailed and the average lay reader will likely get bogged down in the weeds. Hence four stars, not five.

The full Amazon Review appears at the following URL: https://www.amazon.com/review/R107WQR5NDUEBL/ref=pe_1098610_137716200_cm_rv_eml_rv0_rv

The Insurance Subsidy Behind the Horrific Malibu/Ventura Fires

The fires in California are horrific, but few realize that much of the housing in the fire zones of Malibu and Ventura County has been encouraged by the insurance subsidies coming from the FAIR Plan. Fire Insurance usually is hard to come by or extraordinarily expensive in areas subject to high fire danger. 

However California has something called the FAIR Plan which stands for fair access to insurance requirements. The program was initiated in 1966 after the Watts Riots to establish an insurance facility for inner city neighborhoods. It was expanded to cover the hillsides after the 1968 Bel-Aire fire. As a result a program to help poor homeowners and small businesses became a subsidy program for the wealthy.

The FAIR Plan works like the assigned risk programs for automobile insurance. As a practical matter  all insurance buyers are assessed to pay for the high risk assets and it is run by a consortium of insurance companies. The maximum amount covered is $1.5 million, but homeowners with the first loss covered can then buy wrap around policies to cover any excess.

Just like the federal flood insurance program subsidizes coastal development in flood prone areas, the FAIR Plan subsidizes development in fire prone areas. Perhaps it is time for the California Legislature to take another look at the program in light of what Governor Jerry Brown calls the "new abnormal."

The Coming Political Realignment: Part II

Two years ago I wrote that both the Republican and Democratic parties were hollowed out shells that would inevitably lead both to split up (See https://shulmaven.blogspot.com/2016/11/the-coming-political-realignment.html) I envisioned a Trumpian Jacksonian/Know Nothing Party ( hostile to nontraditional lifestyles, anti-immigration, anti-abortion protectionist,  isolationist and skeptical of environmental regulation with more than a tinge of racism in its strong white identity and supportive existing entitlement programs), a Right Hamiltonian Party consisting of establishment Republicans (business oriented conservatism favoring low taxes,  entitlement reform, open trade, high skilled immigration, live and let live social policies, moderate environmental regulation and an internationalist foreign policy), a Left Hamiltonian Party consisting of establishment Democrats (supportive of big government, friendly to finance Silicon Valley and Hollywood, open trade, skilled immigration,  pro-abortion, the regulatory state especially with respect to environmental regulation,, affirmative action, and thoroughly believe in the educational meritocracy that runs the country)  and a Social Democratic Party (hostility to capitalism, supportive of an expanded welfare state, pro-abortion, very pro-immigration,  great willingness to sacrifice the economy for the environment, and identity politics)  headed by a Bernie Sanders or an Elizabeth Warren, for example.

What we learned from last week’s election is that the Republican Party as we knew it is dead and because there are so many moral eunuchs (i.e. Paul Ryan, Lindsey Graham) cleaving to Trump there is little hope for the emergence of a Right Hamiltonian Party. Indeed the Republican Party has become irrelevant in California, New York and California and in practically every big city and is on its way there in many high income suburbs (witness Orange County, New Jersey, Philadelphia and yes Dallas and Houston for example). Thus the Right Hamiltonians in the Republican Party have two choices. They suck it up and betray everything they once believed in and stay with the Trumpians or they can find common cause with the Left Hamiltonians in the Democratic Party.

Such a move would be analogous to the neocons in the Democratic Party of the 1970's who bridled against the flaws in the Great Society, the failure of Keynesian economics and the weakness of the Carter foreign policy who then found a new home the party of Reagan. In fact it is many of the very same people who left the Democrats in the 1970’s and 80’s are now moving towards them.

While, for the most part, the Republicans welcomed their new converts with open arms, the same cannot be said of the Democratic Party as it is now constituted. Simply put the Social Democratic wing does not want them. Hence the Left Hamiltonians in the Democratic Party also have choice to make. Do they continue to make common cause with the activist Social Democratic wing or do they join with their natural allies, the Right Hamiltonians. And if they do, will the Social Democrats walk and form their own party. Of course the activist/Social Democratic wing might be powerful enough to kick out the establishment Democrats in an open convention. The underbelly of the Social Democrats is identity politics and taxation. There are simply too many identity politics erogenous zones to stroke to maintain coherence in one political party; it is too exhausting. Further the Left Hamiltonians won’t countenance the high rate of taxation required to enact the Social Democratic agenda.

The evidence from the election is that the far left candidates did rather poorly in competitive districts while the more establishment types cleaned the clocks of their Republican opponents. So my guess is that in 2020 instead of the drama being in the Republican Party all of the drama will shift to the Democrats where a split is inevitable, maybe not in 2020, but certainly by 2024.

How it all sorts remains open to too many questions, and this might be wishful thinking, the political party that rises above our current infatuation with the identity politics of both our current parties to become the party of E Pluribus Unum, out of many one, will become dominant. This was the insight of the 19^th Century British Prime Minister Benjamin Disraeli where he linked the concerns of the elite with that of the masses under the slogan of “One Nation Conservatism.” The American version of this is as old as our Constitution, E Pluribus Unum.

After Action Report on the 2018 Elections

Shulmaven had a very good night. As of this morning it looks like the Democrats will pick up about 35 seats in the House inline with our forecast gain of 35-40; assuming Tester wins in Montana and McSally wins in Arizona the Republicans will pick up 3 Senate seats close to our forecast of a 1-2 seat gain and the Dems have gained seven governorships which is spot on with our forecast of a gain of 7-8 state houses. As we predicted the xenophobic Republican Kris Kobach would lose his governor race in very red Kansas and we just missed by about a percentage point that the Democrat Ned Lamont would lose his governor race in very blue Connecticut.

At least for the Democrats, money in politics was devalued. The big spending liberal trifecta of O'Rourke, Gillum and Abrams went down to defeat. Those defeats raise questions about where the big liberal donors will be in 2020. Cory Booker, Elizabeth Warren and Kamala Harris have to be rethinking their plans.

Given the antisemitic themes used by too many Republican house candidates it was heartening to see former synagogue president Jacky Rosen elected to to the Senate from Nevada. We also saw how important the Kavanaugh nomination fight was for the Republicans.  Democrats Heitkamp, Donnelly, and McCaskill all voted against Kavanaugh and went down to defeat. While Manchin who voted for him won in very red West Virginia. And don't forget Democrat Tester is hanging on by his fingernails.

Going forward we have ended up with a much more Trumpian Republican caucus which means that the wreckers in the House will gain ascendancy and the Senate aside from Mitt Romney will rollover for Trump on practically every issue. House Speaker Nancy Pelosi will have her work cut out for her in dealing with the loony left of her party and the wacko Republican caucus. At least the White House will face accountability as the subpoenas fly.

I follow up with future blog post on the coming realignment in American politics.