Next year’s vote hinges on economic progress

Democrats almost certainly are headed for big losses in the House next year if the economy does not turn around, according to a widely respected economic model developed by Yale University Professor Ray Fair.

Democrats are projected to win 50.5 percent of all votes cast for House candidates in November 2010 under an equation developed by Fair, whose first paper on the subject came in 1978.

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The problem is that winning 50.5 percent of the total vote won’t keep them from losing a significant number of seats.

“If total votes are even, Republicans will probably be winning back the House,” said David Wasserman, who analyzes House races for The Cook Political Report.

The Cook Report isn’t predicting the GOP will retake the House, but does project Democrats losing 15 to 25 seats, Wasserman said.

Because Democratic votes are concentrated in urban districts, the party needs to win a higher percentage of the total vote to retain the 257 seats it now controls, Wasserman said. (That total includes an open California seat Democrats are expected to retain, but doesn’t count the results of Tuesday night’s New York race.)

In 2006, Democrats won between 54 and 55 percent of the vote, and between 55 and 56 percent in 2008, Wasserman said. Democrats gained seats in both of those elections. Anything short of those totals will probably cost them seats in 2010.

Under Fair’s formula, if the economy expands by at least 3.2 percent as measured by gross domestic product per capita in two of the seven quarters governed by Obama before the 2010 midterm, Democrats win 50.5 percent of the vote.

Fair has used his model to predict presidential and congressional elections (both on-cycle and midyear), and consistently has come within a percentage point or two of the outcome. Fair does not predict the number of House seats a party will gain or lose.

In 2010, Fair predicts the U.S. economy will grow at a strong clip; he believes GDP will expand at more than 4 percent per capita in the second and third quarters next year, which would be good timing for Democrats. He also expects unemployment to decline to 8.5 percent in the third quarter of 2010.

“It looks like the economy will be picking up quite a bit in the next four quarters,” Fair said in an interview. “They could do a lot worse.”

Under Fair’s formula, if the economy picks up more than his projection, things look up for Democrats. For example, if there are three quarters in which GDP growth exceeds 3.2 percent per capita, the Democratic proportion of votes jumps to 51.7 percent. A fourth good quarter brings the ratio to 52.9 percent.

If the economy doesn’t perform as well, the election could be dire for Democrats. No quarters with at least 3.2 percent GDP growth leads to a projection of 48.06 percent for Democrats.

Fair’s prospects for the economy are brighter than other forecasts.

The Federal Reserve Bank of Philadelphia forecasts GDP growing at 2.9 percent in the second quarter of 2010, with unemployment at 9.7 percent.

Others are more pessimistic.

“Our best guess right now is that if we’re lucky, unemployment will peak at 10.4 percent and then start going down, but it will likely be at 10 percent all of next year,” said Heidi Shierholz of the left-leaning Economic Policy Institute.

GOP: Pay didn’t cause crisis

House Republicans are pressing forward with the idea that there’s little link between executive compensation and the financial crisis that triggered the recession of a lifetime.

The strategy could pose some risks given the public anger with Wall Street bonuses, though some experts in the field agree that the connection between pay and the crisis can be overstated.

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On the eve of a panel hearing with the Obama administration’s pay czar, Kenneth Feinberg, the spokesman for Rep. Darrell Issa (Calif.), the ranking Republican on the House Oversight and Government Reform Committee, described the connection between pay and the crisis as a “dubious link.”

Spokesman Kurt Bardella also said the administration was misdiagnosing the root causes of the financial crisis, and that assertions by Democrats that executive pay was a significant factor in the financial meltdown are “questionable at best and more likely flat-out incorrect.”

“It’s very widely accepted” that there is a connection between Wall Street pay and the risks some took that led to the crisis, said Douglas Elliott, an expert on banking at the Brookings Institution. The question is how important a factor it was.

“It seems pretty clear that there were those who took substantially grater risks than they should have because the immediate benefits they got were so good,” Elliott said.

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Still, Elliott argues compensation was a relatively small part of the crisis. He puts more blame on 20 years of growth in markets that conditioned people to believe risks paid off, as well as on a flood of cheap money that entered the market in this decade.

Issa has argued for more than a year  that affordable housing policies pursued by Democrats led to unsustainable lending that created a housing bubble, leaving banks loaded with toxic securities.

Issa does support some restrictions on executive pay for companies still under the federal bailout program, according to Bardella, so long as they do not make it too difficult for companies to hire and retain good employees. Keeping good employees will help the companies pay back the government, Issa reasons.