Tax Cuts Likely – How and When, Who Are Democratic Voters Now, Who Are Republicans, Trump In Asia, and Virginia Election Analysis Nonsense

In Brief

  1. Tax reform is likely yet this year or early next. The House bill will change before any final vote. The Senate bill will change multiple times. If both pass in their houses of Congress, a Conference Committee will make substantial further changes. So, stay tuned…
  2. The partisan coalitions of groups that make up our two parties have changed markedly with the Republicans becoming the white working-class and middle-class party and the Democrats—a bi-modal party of both the rich and of minorities and the poor. These changes will have a dramatic impact on our politics for years and are the main cause of Donald Trump being elected President.
  3. President Trump is on an important 12-day trip to Asia focusing on four-things: 1. assistance from China on reining in N Korea, 2. negotiating stronger trade deals throughout the region, 3. strengthening defense cooperation with allies and 4. demonstrating the US commitment to East and SE Asia.
  4. The Virginia election results and those in NJ and around the country were what one would expect. The sky is not falling on the Republicans. And, Gillespie would have lost badly in VA even if he had fully embraced Trump. VA is now a Democratic state and likely to get more so.

In-Depth

Long-term

A Sea-Change: The new democratic and republican party coalitions.

Recent demographic and geographic shifts in the composition of the Republican and Democratic coalitions have gotten far too little attention from political analysts and political scientists. If you look back to 1996, just 20 years ago when Bill Clinton beat Bob Dole, and compare it to 2016 voting or the partisan composition of our state legislatures you find enormous changes in the demographic coalitions that make up the two parties. Change has also been dramatic in the states in the winning geographic [electoral vote] coalitions.

This week I’ll focus on the demographic coalitions and on the geographic coalitions in future weeks.

Compare the demographic coalitions that made up the two parties for years before 2000 to those comprising the current party coalitions. The standard for being an important part of a coalition is that the demographic group votes by at least 20% more for its party than the other party. For example, Asians now vote more Democratic by about 35%.

 Old Republican Coalition  New Republican Coalition
 White middle class  White middle class
 White upper-middle class males  White upper-middle class males
 White upper-middle class females  White upper-middle class females
 Evangelical Christians  Evangelical Christians
 *White working-class M/F
 *Exurban/small town/rural voters
 Old Democratic Coalition  New Democratic Coalition
 White working class  *—–NOT PART
 Union members – private sector  *—–NOT PART
 Union members – public sector  Union members – public sector
 Poor  Poor
 Minorities  Minorities
 LGBTQ  LGBTQ
 Jewish voters  Jewish voters
 Urban voters  Urban voters
 —–  *Upscale women
 —–  Minority Millennials

NOTE: * denotes major change.

Three major changes are critically important to understand our partisan politics and voting today. They will be for years to come, although the coalitions will change further in future decades.

  1. The white working class, both male and female, has shifted from D to R. This is astounding as this group was the essential core of the Democratic party from 1930 until at least 1996. This group now votes for Rs over Ds by about 65 to 30. Trump did not create this shift, it was already well underway, but he did speed up the shift. And, it was white working-class Rs who were responsible for both his nomination and general election victory.
  2. Moving the opposite direction were white upper-middle class women, defined as white women with 4-year college degrees or greater. White males in the same group stayed with the Republicans, leading to what are, no doubt, interesting political discussions at home.
  3. Much more so than in the past, exurban, small town and rural voters went R in 2016. The swing vote region remains the suburbs while the Ds overwhelming own the urban vote. This creates problems for the Democrats as many of their votes are concentrated in densely populated areas, leading to national and state legislative districts with huge D majorities but also numerous less densely populated districts where Rs win with more modest sized victory margins. Think of it as the Ds wasting votes.

Because the white working class is much larger than the white upper-middle female group and the exurban/small town/rural group is widely spread the net effect of these shifts in partisan coalitions is a substantial advantage for the Republicans. These shifts have caused the R domination of state governorships and legislatures as well as the election of President Trump and the domination of the US House by the Republicans. The linchpin for those changes has been the Democrats purposely shunning the white working class—the “deplorables” with their guns, flags and bibles—in favor of what has been labelled the “Coalition of the Ascendant”—the poor, minorities, LGBTQ, government employees and upscale women.

An increasing number of Democratic strategists agree with this analysis.

Elections

Virginia election analysis nonsense.

Let’s make a list of just a few who got the post-election analysis of the Virginia election results wrong…

  1. President Trump
  2. Steve Bannon
  3. Karl Rove
  4. Chuck Schumer
  5. Nany Pelosi
  6. Almost all media pundits

If you go back to Labor Day this year, just two months before the VA elections they handicapped like this:

  1. The Ds were likely to easily sweep the statewide elective offices—Gov., etc.
  2. The Rs were likely to lose 5-10 seats in the House of Delegates

Northam[D] had nearly a double-digit lead in the polls and many things pointed to a strong Democratic performance.

Much more importantly, all need to recognize that VA is now a Democratic state. As recently as 2000 and 2004 with George W Bush’s easy wins in the state, it was Republican. But, Obama won the state twice, easily, as did Clinton last year. It is a solidly blue state and getting more so.

Polling variation and events suggested Gillespie was closing the gap and he may have been, but the final results were what one would have predicted on Labor Day.

It is important to note the loss of more like 16 Republican House of Delegate seats but that isn’t unusual in a state moving rapidly from one party to the other. In two years it is likely the VA Senate will become more Democratic.

What would have been noteworthy is if the Democrats had done poorly, as that is what would have been unexpected.

There are no real surprises in the exit polling data. All the groups that normally lean D voted that way. All the groups that voted R were the normal conservative groups. This was a NORMAL ELECTION in what is now clearly a Democratic state.

My Democratic friends are going to sputter with rage at this analysis but what counts is deviation from the expected. My Republican friends sputtered with rage when I wouldn’t give kudos to the Rs for holding the 4 House seats in special elections earlier this year. I used the same standard both times…WHAT WOULD WE EXPECT BASED ON THE POLITICAL FUNDAMENTALS?

What would an unbiased handicapper predict based on electoral history and the current facts? In the special elections the Rs should have won and in VA the Ds should have won.

So, no, President Trump, Gillespie didn’t lose because he didn’t embrace you more.

No Mr. Rove, this wasn’t an indication that the sky is falling for the Republicans.

No Ms. Pelosi and Senator Schumer, this doesn’t necessarily presage huge D wins next November.

Turnout was up 25% or more in the strongly Democratic suburban counties of N Virginia. Surprise …surprise. These counties, the District of Columbia, and the equivalent MD suburban counties around DC are the “swamp”. Trump threatens them, and they respond. No surprise there.

So, what are the takeaways.

  1. VA is an increasingly D state.
  2. We have learned little applicable to the rest of the country in 2018.
  3. Almost everything coming out of the mouths of politicians and pundits is spin and agenda driven, not fact-based analysis.

Alabama Senate Race Chaos

Judge Roy Moore, a radical right-wing and religious Republican candidate for an Senate seat in an election next month, has been accused of molesting a 14-year-old about 40 years ago. The facts are unclear, and the biased Washington Post is the source of the story. It may or may not be true and I will not opine or analyze until trustworthy facts are at hand.

Major Legislation and Policies

Tax Reform

I’m not going to get bogged down in comparing the differences between the House Republican plan for tax reform and that of the Senate Republicans. Both plans/bills reflect how you cobble together majority votes among only Republicans in those two houses of Congress. The political dynamics are different in the two bodies.

It is certain that few Democratic votes are there in either house to pass tax reform. Any analyst or politician telling you otherwise is lying to you or is living in a dream world. [The Republicans did the same thing when Obamacare was passed.] There may be a few D votes at the very end, but almost surely none to actually help get the bill ready to be available for final passage.

I won’t get into specifics because the specifics in both the House and Senate versions will change multiple times before either house passes a bill.

If both houses do pass different bills…highly likely…there will then be a Conference Committee to work out the differences. Don’t assume, in this step, that the modus operandi will just be to split the differences that exist. Some will just be split, but others won’t.

Also, in this step, before final votes on identical bills in both houses, new features not in either house’s version can be introduced. I’m not predicting this, but an example is eliminating the health insurance mandate provision of Obamacare. That would free-up billions more for tax cuts and paying for specific further cuts not in either bill because they were unaffordable giving Senate rules.

There are many…many…moving parts. Taking ANY single change in isolation is unwise when you think about your own tax bill.

Passage of tax reform is highly likely this year or early next.

Stay tuned but don’t hold your breath as changes will come for many weeks.

Forecasts

THERE ARE NO changes this week

Political Forecasts – Elections

  1. The chance the Rs will lose at least a few seats in the 2018 House elections is 80 to 90 percent.
  2. The chance the Rs will lose their 241-194 House majority in 2018 is 10 to 20 percent.
  3. The chance the Republicans will still control the Senate after next year’s elections is 90 to 95%.
  4. The chance the Ds lose three or more of their 48 Senate seats in ’18 is 85 to 90 percent.
  5. The chance that Donald Trump will be the 202o R nominee is 90 to 95 percent.
  6. The chance that Trump will win a 2nd term is 80 to 85 percent.

Policy and Legislative Forecasts

  1. There is an 80-90% probability the Congress will pass and Trump sign major tax reform and tax cuts for most by fall 2018.
  2. There is a 50-50 probability that Obamacare Repeal and Replace will be passed and become law by fall 2018. [This issue will not go away as Obamacare is self-destructing with high premiums, increasing state costs and insurance company losses.]

Media

Strange bedfellows

Former President Jimmy Carter and hardnosed interviewer Chris Wallace have both opined in the last week or so that President Trump is receiving highly biased negative coverage from the mainstream media.

That is certainly the case.

Many believe that the media has enormous influence over public opinion and voter choices. There is no doubt they have some but ask yourself …” If the media is so powerful how did Ronald Reagan, who the media reviled almost as much as Trump, win by 10% in 1980 and 18% in 1984?’…”How did Trump beat lead-pipe sure victor Hillary Clinton?”

Don’t forget the Tuchfarber 30 Day test—when you get upset about something in the news ask if it is likely to be IMPORTANT IN 30 days or soOnly seldom will it be so and you can usually ignore it.

Global Politics

Trump in Asia

President Trump’s trip to Asia include five foreign stops.

Japan—Here he strengthened already very strong personal, political and security ties with newly re-elected Prime Minister Shinzo Abe.

S Korea—As S Korea’s new leader Moon Jae-in is left-leaning Trump toned down the rhetoric on confrontation with N Korea and suggested negotiations were possible. This also set -up a more positive basis for the trip to China.

China—President Xi pulled out all the stops to welcome Trump including an historic first ever—a meeting and meal in the Forbidden City with Trump and the First lady. Xi was demonstrating respect for Trump but also treating him as an equal—and implicitly treating China as an equal to the US in world importance.

Vietnam—Here Trump extended ties to an old foe, demonstrated the US commitment to the East and Southeast Asia region and laid out a trade policy focused on fairness, balance and bilateralism rather than multilateralism.

The Philippines—still in progress with the key event being a meeting of the Association of Southeast Asian Nations [ASEAN].

China’s Politics and Economy

Economic Change

China’s politics and economy are so important to the global economy and the general situation around the globe I am adding a regular section on it to the newsletter. The section will periodically include detailed articles on specific things but will also list each week evidence that suggest an economic soft landing for China—a controlled slowdown to “normal” economic growth levels—or a hard-landing—a more rapid, extended and dangerous bursting of China’s asset bubbles.

I WILL ADD AND DELETE ITEMS TO THIS SECTION AS RELEVANCE DICTATES. “NEW” ANALYSES WILL BE SO LABELLED AND REVISED SECTIONS WILL BE LABELLED “CHANGED”.

New or Major Evidence for Soft Landing

  1. The WSJ reports that Chinese regulators removed emergency measures they put on the Chinese stock exchanges in support of equities following crashes in 2015 and 2016. This is a sign of confidence and stability.
  2. The political leadership, including President Xi, and the financial regulators have promised to rein in excessive speculation and credit growth. [We’ve been promised that for many years and the debt has continued to sky.]

New or Major Evidence for Hard Landing

  1. NEW—Saturday’s WSJ Heard on the Street columns include a story of how foreigners are now being permitted to own 51% of Chinese security and fund-management firms, up from 49% and potentially expanding further. Everything in China is done for the benefit of the state, especially under “Emperor” Xi. The benefit here is to build foreign reserves, not to give foreigners more profit. This is a sign of financial weakness, not strength. [Also note #5 below before assuming China is opening up to the outside world.]
  2. China’s totalitarian regime is now taking control, over instant messaging apps, video streaming, and new content platforms in China. The economy and society are being more and more shut-down. Ask yourself…is this a sign of a healthy economy or society. What if the US or Germany were doing this? Think about that.
  3. For years the Chinese government has set very specific economic growth goals …7%, 10%…and then managed the economy, mostly through lending/debt… to meet those goals. It has stimulated the economy with $3-4T in debt each year since the 2008-9 Great Recession with total debt currently over $35T…300% of GDP. Now that President Xi has consolidated virtually all power in his hands, Xi’s senior economic advisor has announced in a press conference, a shift from quantity targets for growth to quality growth…” growth with quality, efficiency and dynamism” …said Yang Weimin. TRANSLATED THAT MEANS SLOWER GROWTH AND LESS DEBT CREATION. But, note that less debt creation doesn’t solve the already staggering debt problem.
  4. China’s central bank chief, Zhou Xiaochuan, warned repeatedly over the last week that China faces the risk of a “Minsky Moment”. Named after economist Hyman Minsky, such an event is a sudden market sell-off driven by an over-leveraged asset. In other words, an asset like real estate, stocks, or commodities whose prices are much too high, often because of speculation. It is remarkable that Zhou made his comment during the 19th Party Congress where the past and future successes of China are to be celebrated. Zhou cites corporate debt in China being too high corporate and household debt rising very fast.
  5. In an under-reported Chinese initiative, the government is demanding partial ownership and substantial control of China’s private companies, especially the big successful ones. That is almost surely a prelude to sharing profits with the government. China already owns and runs most of the older major companies in the country and fears the wealth being gained by Jack Ma of Alibaba and other tycoons. One simple way to understand what is happening is to imagine the US government telling Apple that it is “buying” into the company, will have multiple seats on the board, will name some managers, will share in the profits and will do what is best for the country, not the company or its shareholders.
    Governments have proven to be bad managers and terrible predictors of winners and losers.
  6. The WSJ headlines…” Consumer Loans Fuel China Housing”. Short-term consumer loans have grown at an astounding 100% rate in the last year but not for retail spending whose growth is little changed. Rather it is for investments in housing extending the housing bubble and adding more debt.
  7. Party Secretary/President XI continues to purge opponents and those offering him only weak support so as to have almost complete control of the levers of power when the economic/financial crisis starts to bite. On Oct 18 every 5-year Party Congress starts. Expect major news at the end of it and for months to come.
  8. S&P has joined Moody’s and Fitch in downgrading China’s debt because of excessive and growing levels of that debt.
  9. Two quotes from separate stories in a recent WSJ accurately describe where things are with China’s economy. “China’s economic mandarins are unlikely to permit an overly sharp slowdown in investment that could tank commodity markets right ahead of the twice-a decade Communist Party leadership shuffle kicking-off in mid-October.” “An all-powerful leadership can likely keep the forces of disruption at bay for some time. But they haven’t disappeared…”
  10. A WSJ story reads— “…China has been reeling in some of its biggest deal makers on mounting concerns about capital leaving the country and debt loads posing a risk to its economy.”
  11. The WSJ’s Heard on the Street [Sept 8] wrote…” This doesn’t mean China’s bad loan problem has gone away, it just has been swept under a convenient nearby rug.”
  12. WSJ article points out that the yield curve in China has flattened—the prices of 3-year bonds are essentially the same as 10-year bonds. Such flattening is often, but not always, indicative of an economic slowdown on the horizon.
  13. Weeks ago, the IMF raised its projections for Chinese growth but sternly warned that rapidly increasing Chinese debt will hit 300% by 2022. Others like the Institute for International Finance [IIF} asserted in June that Chinese debt already totaled over 300% of GDP, a high percentage for a developing country.
  14. China is now officially and publicly instructing its companies that they must stop foreign investments in areas like insurance, hotels, other real-estate, gambling facilities, etc. Foreign investments are to be directed to two areas. The first is into strategic areas, as defined by the government, such as technologies where the intellectual property gained fits with government plans for China to become a major, worldwide competitor in various fields. [Sound like Japan in the 1970s and 80s?] The second area is into investments consistent with China’s One Belt-One Road strategy to tie it more completely with all of Asia as well as Europe and Africa.

These all indicate concern that economic, financial and political risks are rising.


Until next week…
Al Tuchfarber
Professor Emeritus of Political Science, University of Cincinnati