Dems Need a Midcourse Correction

To retain control in 2010, the party needs to forge better relations with industry.

By ROGER C. ALTMAN

Democrats may be headed for abnormally big losses in the 2010 congressional elections. The Cook Political Report, the most respected observer of congressional races, recently gave Republicans a 35%-40% chance of recapturing both Houses. The median forecast probably has Democrats retaining only a 10-15 seat majority in the House and a five seat margin in the Senate.
Either outcome would represent an electoral earthquake. It would force President Obama to the right because he could not govern without Republican support.
How serious is the weakened political standing of congressional Democrats? Recent polls are clear: Only 26% of Americans approve of this Congress, according to the latest Gallup poll. That's the same low level of three years ago, just before control of both Houses shifted from Republicans to Democrats. Even President Obama's approval rating has fallen below 50% in the two latest national polls. All of these readings carry anti-incumbent implications.

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President Obama with the House Democratic leadership.

To turn this trend around, Democrats should implement some midcourse corrections. By providing new incentives for job creation and bank lending, offering more detailed and forceful commitment to deficit reduction, improving relations with industry, and taking a more forceful stance towards Wall Street, the Obama administration can reduce next year's election risk.

This election prognosis is rooted in the troubled economic outlook. It is likely that there will be weak economic growth in 2010, continued unemployment rates around 10%, and, therefore, growing levels of political discontent.
Goldman Sachs forecasts just 2% real growth for 2010; the Federal Reserve Staff is projecting 2.8% improvement. That is just not enough growth to meaningfully lower the sky-high 10.2% unemployment rate and 17.5% underemployment rates we have today. All of this would add to the already dismal approval ratings for congressional incumbents.
Such a weak recovery reflects the troubled financial condition of households and the American banking system. For households, this manifests itself in the rising personal savings rate, up to 5% from zero, as they reduce spending and pay down debt, and in consumer confidence levels, where the Conference Board Index fell again last month. These trends augur poorly for consumer spending, which represents 70% of our GDP.
On the banking side, lending volumes continue to fall. Total business credit outstanding has declined for 11 consecutive months and now is down 16% from its 2008 peak of $1.6 trillion. With both bank lending and consumer spending under such pressure, it's inevitable that employment and growth will be weak.
Other factors are weakening public support for Democrats. In particular, there is serious concern over spending, deficits and debt. The projected deficits are so high that only 42% of the public approves of the president's handling of the budget. There is also deep anger over the bailouts, which we saw in angry congressional hearings last week.
The first priority should be implementing fast-acting incentives to create jobs. The most direct approach is a new jobs tax credit, perhaps a $5,000 employer credit for each job created over its current baseline employment. If this is applied for two years, we could create up to 1.5 million jobs. While this might be expensive, it is acceptable under the circumstances.
The other job-creating opportunity concerns bank lending. Small- and medium-sized employers are starved for credit. We need a temporary mechanism for guaranteeing business loans so that they can be securitized and sold. The guarantee should be partial to retain the benefit of private credit judgments.
A second adjustment involves the alarming deficit outlook. A framework and timetable for addressing it should be put forward now. This might involve a congressional commission, rather than private citizens, together with legislative fast-track authority for its late 2010 recommendations.
A third step involves the party's deteriorating relations with industry. This relationship must be fixed because the views of industry often coincide with those of independent voters. The commitment to address the deficit would help, together with moderate regulatory policy on telecommunications and antitrust, and adding one or two businessmen or women to senior levels of the administration.
Finally, Congress and the administration have been too restrained towards Wall Street. As a member of Wall Street, I'm highly aware that it exists today only by the grace of the taxpayer. Very few—if any—of the larger securities firms would have survived without the $11.5 trillion of emergency, federal credit support. The financial community owes more recompense to the public than it has furnished to date.
These policy adjustments generally fit the president's ideology of pragmatism. They are also timely, coming halfway through this congressional term. Most importantly, their centrist nature should improve Democrats' standing with voters.
Mr. Altman, founder and chairman of Evercore Partners, was deputy secretary of the Treasury in the first Clinton administration.