Explaining Election 2010 Part I: Obama's Errors

Why did the Democrats lose on Tuesday? Explanations will range from the election being a referendum on Obama, Obamacare, and perhaps the economy. Pundits and politicians–both Democratic and Republican–will contend that Obama strayed too far to the left, now forcing him and his party to the right as they prepare for 2012.

Yet this explanation and strategy fails to capture the full scope of the errors committed by the Democrats. What were those errors? Simply put, he ignored the basic rules of politics that he appeared to understand so well in 2008.

The Narrative. At its most basic, politics is the power of a compelling narrative. It is a story that describes who you are and what you want to accomplish. The Democratic narrative for 2008 was simple–“Change.” Obama and the Democrats promised change, and that drove them to power. But they lacked a good narrative this year.

In a year where the economy still stunk, how did Obama defend his stimulus bill, financial reform, and health care changes? The narrative was simple: “It could have been worse (had we not acted).” Such a narrative hardly inspires voters or wins over swing voters, but that was their narrative. For the Republicans, their narrative was also simple–“change.” They appropriated the Democratic narrative and used it against them.

Leadership. Obama demonstrated a striking lack of leadership. He wanted health care and financial reform but he delegated the tasks to Congress. The same was true with global warming and other issues. Yet Obama failed to take ownership for the legislation, letting others drive the agenda, producing changes that were more pork than policy.

Timidity. Obama and the Democrats promised a lot, but delivered very little. They passed stimulus bills and financial reform, but their scope was muted. They were not bold but cropped, failing to really address the depth of economic and financial reforms that plagued the nation. Similarly, he proposed closing Gitmo and ending the war in Iraq. Neither really occurred. He did little to pressure Israel for peace. In many ways, the Obama Administration coopted itself into being less bold than it needed to be to effect change.

Siding with the banks. Consistently Obama got it wrong on the economy. He continued Bush’s TARP policy to bail out the banks. He again sided with them on foreclosure. He did not press them far enough on bonuses. Consistently he threw away the Democrat economic populist advantage. He looked to many that he favored banks over homeowners and workers.
Party Discipline. Can you imagine Lyndon Johnson pleading with a Ben Nelson to vote for financial reform? Obama could not even get his own party behind him to support policies he wanted.

Republicans. From day one the Republicans sought to sabotage Obama and the Democrats. Foolishly he tried to placate Republicans even though the latter were not bargaining in good faith. One or two tries to bargain with them should have demonstrated this futility.

Define or be defined. John Kerry is the poster child for swiftboating. Politics is about defining yourself and the opponent or be defined. Obama let himself and his policies get defined–such as Obamacare–and he never recovered from that, forcing Democrats into a defensive posture.

Rewarding friends. Winning campaigns is about building coalitions. It is also about rewarding supporters. To build a lasting coalition one has to reward supporters. Obama forgot this. Unions worked hard for him in '08 but he told them to wait on The Employee Free Choice Act. Gays and Lesbians wanted him to repeal “Don’t Ask, Don’t Tell,” but he also told them to wait. The middle class wanted jobs and economic help, he assisted the banks instead. At almost every critical point Obama alienated supporters by telling them to wait. As a result they abandoned him on Tuesday.

Modifying the Filibuster. Democrats had 60 votes in the Senate but acted like they were powerless. The filibuster rule meant Obama’s agenda was held hostage to the likes of Ben Nelson and Mary Landrieu. The first act of the Senate should have been to repeal this rule.

All politics is national. Tip O’Neill once said all politics is local. Actually it is the reverse. National issues now drive local politics. This happened across the 50 states as local elections became referenda on Obama. Democrats in local races in 2006 and 2008 ran against Bush, this time Republicans did the same by running against Obama.

The roots of the Democratic demise go back to day one with Obama. There are many things he should have done differently but mostly it was to forget the basic rules of politics in 2010 that he appeared to understand so well in 2008.

The Timidity of Reform

But will it work? This is what someone asked me last Friday after Congress sealed the deal on the financial reform package for the banks. My simple answer is that there are some nice reforms here, but much like the health care law, the economic stimulus bill, and the other reforms of the Obama Administration, this too was short of real reform, demonstrating once again the timidity of this president and Congress in addressing real reform that matters.

Economically, there are multiple problems with the US and world economy. One way to slice it is to look at short and long term needs. Short term the problems in the economy are the high unemployment figures, the still depressed real estate market, and slow economic growth. Longer term the problems are many, including financial institution instability, energy consumption, and a looming debt crisis.

The bank and financial regulation bill agreed upon last week addresses some of the longer term problems, but not all of them, and does little for the short term. Long term the best potential features of the bill are the Volker Rule to limit bank speculation and the creation of the consumer credit protection agency. At present the agency looks weak but perhaps over time it can use its administrative rule making to actually do real work to help consumers.

Having said the good things, the bill falls short on real reforms. Real reform should have reinstated Glass-Steagall, imposed more requirements on banks holding capital to cover losses, extended more regulations to cover non-bank financial institutions, and made it illegal for institutions to do hedge funds that bet against their investors.

It might have also made sense to consider policies that make it illegal for FDIC entities to speculate on Wall Street, something similar to a Glass-Steagall requirement. Finally, limits on compensation packages for officers to depress financial incentives to speculate make sense. All of these ideas would help, as would be preventing banks from selling office mortgages that finance (so that they have to bear the risk of their loans). However, even with all these reforms, it is still not clear banks will serve the public interest. Remember, they are private for-profit entities that are not there to serve the public good. This is the purpose of government regulation.

Government regulation is meant to address market failures and correct externalities and moral hazards that the free market cannot address. Beginning in 1978 the USA has been on a deregulatory path, placing firm belief in the market over the government. The Reagan-Thatcher era is famous for this. Obama took office with the promise of change, and he has made some, but they have not signaled the full repudiation of the Reagan Era. Ronald Reagan is dead, but we do not see a real return to regulatory behavior anywhere near the like of the New Deal or close to the scope of what is needed for the economy.

The 2009 economic stimulus was too small and we are now paying the price with a sluggish economy on the verge of a second recession. We never addressed the core problem with the economy–the collapsed residential home market–and now it is slipping again and defaults continue. The health care bill ensures more but does little to address cost containment or quality. Consistently, Obama and Congress have gone less the distance to fixing the problems.