Politicians Face Market Woes

The great bull market has ended. Hindsight is 20/20, but we should have seen it coming when Al Gore lost the 2000 presidential election. The ride began in 1994 and for almost eight years it was a heck of ride. The era allowed for free spending, low interest rates, and budget surpluses.

No, I am not talking about Wall Street. I am talking about the great bull market of the 1990s for incumbent politicians. If you were a governor, you could cut taxes, spend money on anything and everything and still run a budget surplus. A congressman or senator could be for just about anything – and it would still add up to a budget surplus. Tax cuts, prescription drugs, pavement, more federal education programs – and that was what the conservative Republicans supported.

But the market has suddenly turned bearish. The politicians just don’t know it yet. The corporate accounting scandals pose a problem for politicians, but not in the way the politicians believe. Right now, both parties are tripping all over themselves to look tough on corporate America. But the real political problem isn’t lack of legislation. It’s lack of credibility. The corporate accounting scandals and the simultaneous market crash have made the American people step back and take a second look at what they’ve been told. The voters are not as willing to buy the “you can have it all” message their financial advisors and elected officials have been selling these past eight years.

This is a problem for both political parties. Democrats are the party of government and now that we’re all looking, it is more than fair to say that the federal government’s accounting standards couldn’t even pass a WorldCom audit. As it turns out, there is no Social Security “lockbox” – at least not one with any money in it. The pensions of members of Congress may be safe, secure (and very generous) but the Social Security system is rapidly headed towards bankruptcy. Apparently, the Democrats plan has been to ignore the subject, and when the money runs out, the government will just borrow tens of trillion of dollars and then raise taxes to pay off the interest. A suddenly more skeptical electorate might have a few questions about this plan. And, the Democrats now have significantly less credibility when answering the questions.

Republicans have their own set of problems in this bear market. It isn’t that they are perceived as the party of big business. Republicans are the party of limited government, but they haven’t been living up to that standard for quite some time. Republicans hold the majority of governorships across the country – and state spending has skyrocketed. Republicans controlled both houses of Congress for six years and still control the House of Representatives – and federal spending has skyrocketed. This year, they plan to go to voters having passed campaign finance, the Farm Bill, and they hope, a new Medicare prescription drug benefit. And they’re the conservative party in America? It’s a credibility thing.

So do I think the voters are going to throw all of the incumbents out this fall? I’m really not sure, it could happen but I tend to doubt it. The real problem for the politicians is that the voters’ reaction will be to stop listening to what the politicians have to say. And if the American people tune the politicians out and the party split remains close, nothing big will get done.

If the American people tune out rather than throw out the politicians, it is a bigger problem for conservatives than liberals. Because conservatives are the only ones who want to do big things right now. Conservatives want to reform Social Security before it’s too late. Conservatives want scrap the current tax code and replace it with a simple, low, fair and flat tax. Conservatives want to enact school choice. Conservatives want to restructure the Medicare system and enact further welfare reforms. These are big ideas and they can’t get done without the attention and organized and mobilized support of conservative activists all across America.

Right now, Republicans lack the credibility to convince conservative activists that, given the chance Republicans will fight for these initiatives. They’re reacting in all the wrong ways. The record doesn’t match the rhetoric. And, after Bernie Ebbers and Ken Lay et al., we’re all a lot more interested in the record than the rhetoric.