Wednesday, September 19, 2012

On Romney's Remarks

Well, the political news cycle really jumped on Mitt's remarks at a private fundraiser. If you are the type of person who reads political blogs, you've probably already got to the soundbite friendly bits. Here's the full video:

If it weren't for the whole 47% thing, these videos would be unremarkable. They show a very perceptive, intelligent candidate for President fielding questions about political strategy, the economy, and foreign policy from very rich donors. But the media and the partisans aren't content with that. The 47% remark was what got Romney into hot water yesterday.

Already, many politicos are already declaring that this was the day that Romney sunk his candidacy. And if he does lose the election, journalists and politicos will mark this event as the decline and fall of the Romney campaign, along with such gems like Bush 41's tax pledge, the Dukakis tank ad, and Romney's father's own "brainwash" quote.

Well, it certainly isn't going to wind up as a net plus for Romney. But I don't think his goose is cooked just yet. While the video is going to be replayed endlessly throughout the remainder of the campaign, there's a few things to consider:

Voters are not intelligent:  There will be plenty of people who look at that video and think "you know what? That sounds about right. About half of this country is mooching off the government teat". A significant minority within that group is actually going to be part of the 47% that Romney was referring to that don't pay Federal income taxes.

The thinking goes something along the lines of "hmm, I wouldn't have put it like that, but I see where he's going with this". Will it cost him some votes? Definitely. But the amount isn't going to be nearly as large as people think. Why?

Voters don't vote: Romney is right in another respect. The President has a floor of anywhere from 47 to 49 percent of the electorate who will pull the lever for him come election day. Romney has a floor of approximately 45 to 47%, which is why his path to victory was always harder than President Obama's.

If you actually saw the bit after that controversial bit, Romney talks about the 5-8% of undecided voters that he needs to win the election. So in order for this brouhaha to affect him electorally, the following has to happen:

1. The undecided voters watch/read/hear the remarks made by Romney
2. They are repulsed enough by them to not vote for Romney
3. The undecided voters reside in OH/VA/NC/FL/WI/NV/CO/IA/NH
4. They decide to vote

So a lot of things actually have to fall into place for something like that to happen. It'll be impossible to say what will drive the vote, but I have a feeling it'll be something along the lines of...

The economy: And there are significant headwinds on the economic front. Although the Fed has announced QE3, it is unlikely it'll improve economic prospects. Banks and corporations aren't lacking cash. They're lacking demand, which is unlikely to improve anytime soon.
But one thing an easy money policy does is promote price spikes in commodities like oil. Although it remains to be seen whether there is any significant inflationary pressures caused by QE3, it is more likely to occur than not. Higher gas and food prices can be felt within weeks and that typically doesn't bode well for the incumbent.

The debates: Everything gets thrown into much sharper focus in September and especially October. Why? Because of the debates. About half of all households will tune in at least some portion during the debates. And many will watch the whole way through.

Considering that the airwaves will be saturated in political ads, most voters are going to tune them out. What they want to do is see their guy go up against the opponent. The debates are also good for the challenger because it puts him on equal setting with the President, which has a profound psychological impact on the electorate.

I'm spinning the best out of a bad situation. I think Romney really screwed the pooch on this one. But I also don't think it's his death knell. The reality is it is extraordinarily difficult to unseat an incumbent and I was going in expecting a Romney loss. But I'm excited to watch the debates. I don't think Romney is going to floor Obama, but I think he'll surprise a lot of people.


  1. How can QE cause inflation but not raise demand?

    Thats impossible...inflation is a result of increased spending on output.

    1. Investors plowing more money into commodities doesn't mean there's increased demand for commodities. It simply means it'll cost more money to clear the market of its current supply. Those costs get passed down to consumers.

      Monetary policy is neutral in the long term precisely because prices readjust to reflect the "appropriate" relationship between currency and the total wealth and output of a market.

      But investors can react much more quickly than consumers. And they are upstream of consumers when it comes to being affected by monetary policy.

      When the Federal Reserve conducts its open market operations to fulfill its monetary policy, the first people affected are the primary dealers. Then the big funds and non-financial corporations. Then the smaller companies. Then the consumer.

      The people at the top are simply more nimble and more in tune to the Fed than the people at the bottom. It's that simple.

  2. "Investors plowing more money into commodities doesn't mean there's increased demand for commodities."

    But it does. Think of a Phillips curve, it shows you how increased spending on output manifests in the real economy, via inflation and/or increased real output. Commodities like oil and food are generally constrained on the supply side, so increased demand shows up almost exclusively in price increases.

    In aggregate our economy is not running at full capacity. We're not producing as many goods as we can and, consequently, we're not employing as many people as we can. So increased spending on output now is likely to translate into increased real output now.

    "Monetary policy is neutral in the long term precisely because prices readjust to reflect the "appropriate" relationship between currency and the total wealth and output of a market."

    Right. The supply side will always overcome the magic of money, except now we're not up against the supply curve. So now theres scope for monetary policy to increase output.

    1. You gave me a good idea for a new blog post. The issue we're discussing is going to need a greater context and explanation than can be jammed into a blog comment.

      I will say that we shouldn't treat excess industrial capacity as a sign that our economy isn't as healthy as it should be, otherwise we'd have to look at other issues such as the workforce to population ratio, the number of hours worked per capita, etc.