October 6, 2023

Thought of the Week:

My grandparents immigrated to the United States from Italy as Benito Mussolini’s brand of fascism swept across the country in the first half of the 20th century. It was their journey to America that offered me the privilege of growing up with Italian grandparents in the house; we were the only family on my street who had multi-generations living under the same roof. Having emigrated from small towns in the Abruzzi region, my grandparents didn’t speak much English. But that didn’t stop my grandfather from telling me war stories about his time in Libya during WWI; and it didn’t stop my grandmother from teaching us about St. Anthony of Padua, the patron saint of all things lost, animals, the poor, shipwrecks, and many more. She also reveled in telling us about the Cocullo snake festival, which has taken place each year since at least 1392, just a few kilometers away from her hometown of Sulmona. Growing up I had one must-do job each morning, to fetch a wooden board from the basement, lay it just so on the kitchen table, and flour it. There my grandmother would make homemade pasta almost every day—fettucini, ravioli, gnocchi, spaghetti; none tasted better. At the end of this week, I’ll head to my ancestral homeland for two weeks in search of my grandmother’s pasta.* While I’m on my quest, one thing we can say for sure is that this is no longer your grandfather’s Republican party. In fact, many analysts say, and a University of Pennsylvania study seems to confirm, the most important political trend of this century is the march of college-educated White voters to the Democratic Party—and of non-college-educated White voters to the GOP. The trend hasn’t just changed electoral math, but also the right/left debate. While attempts to explain the educational realignment often focus on the White working class (George H.W. Bush won just 45% of Whites without a college degree, Donald Trump won 65% in 2020, but Bush won college-educated Whites by four points while Trump lost them by 15), the UPenn study shows that Whites with college degrees have driven the polarization process. “From at least the early 1980s to the mid-2000s, there was no difference in attitudes on economic policy between college and non-college voters; beginning in 2004, however, college-educated White voters had moved steadily left on economic issues relative to the working class.” Democrats have long favored regulation and redistribution, while Republicans have favored libertarian economic policy. The GOP’s focus on market economics used to be an asset among voters with college degrees; now, college-educated Whites increasingly favor progressive economics, aligning with Democrats, leaving the GOP with a more working-class voter base. The debate today, at least among policy wonks, is whether a GOP with a more working class voter base should emphasize different economic policies than it did when professionals had greater influence. UPenn says, “No,” and debunks the notion that the White working class is pining for redistributionist or social-justice-inspired economic policy. In fact, the group that has moved against free-market economics is White voters with college degrees. As these views have become more influential in the Democratic Party, Whites without college degrees have decamped to the GOP.  Culture wars also divide Americans along educational lines, with the non-college-educated holding more conservative views than the college educated. What’s changed is the amount of weight voters put on culture in deciding which party to vote for. Whites with college degrees tended to vote according to their culture-war preferences in the 1980s and 1990s, while non-college voters voted more on economics or candidate qualities. The gap has closed, and the White working class is registering its conservative social views electorally as strongly as White professionals have been registering their liberal views. The debate today is not so much about “populism” but education polarization. Although advocates of traditional conservatism have strong policy arguments, they don’t have a good strategy to win college-educated voters back to the GOP. And while President Trump accelerated their exodus, these voters had been shifting left for more than a decade before Trump’s rise. Perhaps the most likely way Republicans could reconstitute their old coalition would be for the Democratic Party to implement a truly radical economic agenda, pushing educated elites back into the GOP’s fold.

*The Washington Connection will take a two week break with the next issue coming out October 26.

Thought Leadership from our Consultants, Think Tanks, and Trade Associations

AEI Views “Bidenomics” Pitch as Falling Flat. As the 2024 election approaches, Democrats have a three-point plan to re-elect President Biden, take back the House, and defend their Senate majority. The first two points may be the Democrats’ version of the culture war: (1) relentless attacks on Republicans’ association with abortion restrictionism; and (2) equally relentless attacks on Republicans as destroyers of democracy, from Trump’s “election denialism” to “MAGA” rhetoric. The theory is that these attacks neutralize Republican messages on crime, immigration, race, gender, and schools, where Democrats are associated with unpopular positions. The third prong of the strategy: an attempt to sell Democrats’ stewardship of the economy as “Bidenomics.” Polls find the public extremely unhappy with the state of the economy. In a recent Washington Post/ABC News poll, Biden received just a 30% approval rating on his handling the economy—working-class respondents gave Biden a 24% approval rating, below the 43% rating of the college educated group. Since “Bidenomics” has been pitched as a way to build working-class enthusiasm, polls signal big problems with the strategy. Similarly, the poll finds only 25% characterizing the national economy positively (excellent or good), and just 14% of working-class respondents say their personal financial situation is better now than when Biden took office; 50% say they are worse off. The sentiments baffle Democratic insiders who note that the rate of inflation has been falling and that unemployment is low. Why aren’t people happy? Simple: unlike unemployment, inflation affects everyone, and what matters is not monthly or yearly price changes but the effect on purchasing power and living standards over time. Here, Biden has a problem. During his presidency, living standards have not risen. Republicans are favored over Democrats on handling the economy by 21%, the largest lead Republicans have had on the measure since 1991. The “Bidenomics” messaging campaign is not working, and the Party would be wise to try a different approach—one that doesn’t rely on telling voters they should be happy when they are not.

Eurasia Group Says Trump’s Fraud Trial will not Damage Him in the Primary, but Could Hurt His Pocketbook in the General. Former president Trump went on trial this week in New York to defend himself against civil charges that he committed fraud by falsely inflating the value of his assets, including his business and his club at Mar-a-Lago. Trump, who unexpectedly attended the trial in person, has already been found civilly liable on some charges, and the trial will resolve the remaining charges and determine the penalty, which could be as high as a $250 million fine and a prohibition on conducting business in the state of New York. Because it is a civil trial, there will be no jury, and the ruling and penalty will be up to Justice Arthur Engoron, a Democrat Trump has derided as “unfair, unhinged, and vicious” in a social media post. Because Trump’s base perceives the trial as politically motivated and illegitimate, it will not damage his standing in the GOP primary. However, this trial, and the others that will follow, could damage Trump in the 2024 general election. If Trump is forced to pay a large fine and end his business in New York, it could damage his ability to pay for legal and campaign expenses, potentially damaging his ability to run.

Eurasia Group: It’s Scalise, Jordan Competing to be New Speaker, Flat Funding in FY24. The unprecedented ouster of Representative McCarthy (R-CA) as House speaker dims the outlook for both full-year FY24 funding increases and additional Ukraine aid. It also sets up a contested election for a new speaker that could come as soon as next week. House Majority Leader Scalise (R-LA), Rep. Jordan (R-OH), and Rep. Hern (R-OK) have begun marshaling support ahead of an election. Scalise seems the early favorite due to his broad base of support among the conference. Because a speaker is elected by the full House, deep divisions in the Republican conference mean that any candidate will struggle to build a large enough consensus to win a majority with only GOP votes. Speaker Pro Tempore McHenry (R-NC), McCarthy’s hand-picked placeholder, is presiding over House business until a new speaker is picked. While  the House Parliamentarian will decide the extent of his powers, there are no forcing mechanisms to oust McHenry from his role. Whatever the outcome, the path forward for funding in November will likely be another short-term funding package. If the government is still operating under a continuing resolution (CR) in January, it would trigger a 1% across the board spending cut known as a sequester that would affect all discretionary spending. This is likely to occur (60% odds), although it would not actually take effect until the start of May and can be turned off if Congress acts before April 30. Any path forward for Ukraine aid this year would involve attaching border security measures to a November CR. 

Observatory Group’s Take on the Federal Reserve’s Dilemma: Lags + Yields vs. Energy + Tariffs. A growing fear among macroeconomic/geopolitical analysts is that higher energy prices and the prospect of higher tariffs should Donald Trump be re-elected President in 2024 pose significant enough inflation risks to make a Fed rate hike before year-end more likely now than only a few weeks ago. Indeed, on their own, those factors contribute to upside inflation risks over the medium-term; however, over recent months, other factors—higher yields and the FOMC’s gradual reassessment of the lags in the impact of monetary policy—argue in the opposite direction. In fact, higher yields and the lag effect are far more persuasive to the FOMC than the increase in energy prices. Higher tariffs are a hypothetical for another day, another year, and not part of the current policy debate. An in-depth review of the balance of developments since the September FOMC meeting shows a strengthened case for no move in November and a case for no further rate hikes period. Observers should keep an eye on month-over-month core inflation data as the most consequential factor for the outlook. 

“Off the Record”

Kevin McCarthy (R-CA) was toppled as House speaker by members of his own party, ending a tumultuous nine month term and sending a fractious Congress into disarray. The California Republican, who navigated political cross-currents to avert a debt default earlier this year and an Oct. 1 government shutdown, became the first House speaker removed from the job. The 216-210 vote raises fresh questions about dysfunction in Washington. McCarthy’s fate was sealed by hardliners frustrated with his bipartisan deal making. Democrats, who vented their grievances against McCarthy in a closed-door party meeting, refused to rescue him. The resolution was brought to the House floor by Rep. Gaetz (R-FL). While the last time the House voted on removing a speaker was 1910, there’s no obvious successor to unify the party, a vacuum that comes as a Nov. 17 deadline to keep the government open approaches. A disruptive shutdown would have effects across the economy. In addition, aid to Ukraine, hangs in the balance. So, too, do battles over immigration. The House will likely grind to a halt during the upcoming battle over the speaker’s gavel; Rep. McHenry (R-NC) has been named interim speaker.

In Other Words

“I might’ve been given a bad break, but I truly still consider myself the luckiest man on the face of the Earth,” Rep. McCarthy (R-CA) quoting baseball great Lou Gehrig after being ousted.

“It’s a shame, first time in history, for us to be at this point where it’s almost a political sin to work with the other side,” Senator Manchin (D-WV) on former Speaker McCarthy’s ouster.

Did You Know

Before Speaker McCarthy (R-CA), only two previous speakers had faced motions to vacate. In fact, prior to this week, the House had never voted in favor of removing a speaker; the last vote on the floor to vacate was in 1910. Then, the House voted to remove Speaker Cannon (R-IL)—the namesake of the Cannon House Office Building—from his position on the Rules Committee, but the motion to vacate his speakership failed 192 to 155. Cannon held onto his speakership until President Woodrow Wilson was elected, shifting control to Democrats. Cannon ended his career in 1923 as the then-longest serving member of Congress.

Graph of the Week

 This week, the yen crossed 150 to the dollar, weakening to 150.16. It then suddenly strengthened to 147.30, prompting speculation that the Ministry of Finance (MoF) had intervened. Because the yen later returned to trading in the 148-9 range, speculation shifted, with observers venturing that the MoF had not intervened and that market factors had caused the yen’s brief rally. While the MoF’s top foreign currency official declined to say whether it had intervened, the political reality is that rising prices, which a weak yen exacerbates, are weighing down Prime Minister Kishida’s approval rating, which stands near 35%. The weakness is creating political urgency to address the negative economic effects of the yen’s decline.

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