Norquist, GOP pin hopes on spending

Republicans are betting their midterm election chips on the hope that Americans will tire of Washington spending by 2010 and punish Democrats at the ballot box.

One flaw in their plan: Spending hasn’t been much of a factor in past elections. Instead, it’s the tax increases and inflation that sometimes follow excessive government spending that turn out parties in power.

Conservative activist Grover Norquist, whose anti-tax campaign has been enormously successful in picking up political support, acknowledged as much during a visit with The Hill this week.

Norquist, head of Americans for Tax Reform, has never seen spending become a vote-moving issue. “When ‘spend too much’ becomes inflation or tax increases, then you’ve got a fight,” he said.

But he sees signs that this is changing. Sen. Arlen Specter (D-Pa.) left the GOP after his vote for the $787 billion stimulus was so unpopular with Republicans that he became convinced he could not win the 2010 GOP primary.

Then the April 15 tax-protest tea parties drew hundreds of thousands across the country. “We couldn’t put 600,000 people at 600 rallies four months into Clinton, or four months into Carter,” Norquist said.

“The big thing that changed in the last year or so is spending, which in the 20 years that I’ve been involved in politics I could never turn into a vote-moving issue,” he concluded.

Republicans have picked up on the theme of spending in press releases and statements.

House Minority Whip Eric Cantor (R-Va.) recently told The Hill there’s growing frustration about the way the government has handled the financial crisis. “People are tired of the incessant desire and habit of spending in Washington,” he said.

Of course, President Obama has actually lowered most Americans’ taxes through the stimulus package, which included the “make work pay” tax break.

Obama’s pledge not to raise taxes on those making less than $250,000 was made because tax increases are a proven liability for politicians. Still, he’ll increasingly come under pressure to break his pledge amid the push to complete healthcare reform and the expiration next year of several tax cuts enacted by President Bush.

He and the Congress may also face new pressure to stimulate the economy by spending. Unemployment is now expected to surpass 10 percent, and will probably still be in double digits as attention turns to the 2010 election next summer.

No inflation worries — yet

Inflation coupled with high unemployment would be bad news for sitting politicians in an election year, but data released on Tuesday suggests the poor economy continues to keep most prices down.

The producer price index for finished goods increased 0.2 percent in May, a smaller hike than in April and less of a jump than some had expected. Excluding food and energy, the price index for finished goods actually dropped in May by 0.1 percent.

“I think there’s very little risk. Inflation has to be driven by demand,” said economist Dean Baker of the Center for Economic Policy and Research. He reasons that airlines, restaurants and automakers, to name three examples, are unlikely to raise prices as unemployment hits double digits and Americans continue to pay off debt.

{mosads}“If the economy is very weak, you’d expect to see downward pressure on wages and prices,” said Desmond Lachman, a resident fellow at the American Enterprise Institute.

He expects inflation to remain low until the economy begins to recover. In the long run, however, he sees severe risks of inflation and thinks markets are right to be worried.

“What I’m very scared about is that the Obama administration is running a highly irresponsible middle-term fiscal policy,” said Lachman, who points to Congressional Budget Office estimates of huge deficits for years to come. “There’s a real inflation risk.”

Lachman declined to speculate on how large the numbers could be, but said it would be in excess of the 2 percent rate the Federal Reserve has sought to manage.

Baker, who is more worried about the U.S. unemployment rate, argues slightly higher inflation rates of 3 or 4 percent wouldn’t damage the U.S. economy.

A profitable TARP

Taxpayers are about to make a profit on the government bailout, though it won’t be enough to get them out of the red.

The 10 big banks cleared to return loans from the Troubled Asset Relief Program (TARP) will be giving the government $68 billion, which includes an estimated $1.8 billion in dividends and interest, according to Ethisphere, which has been tracking the program.

Taxpayers will make another profit when warrants the banks must pay back at a fair market value are repaid. Those securities will also result in a profit, though it’s unclear how large it will be.

In the big picture, however, the government’s investment in the program is down about $151.6 billion. According to Ethisphere, that means each taxpaying household in the U.S. has lost $1,361 on the TARP.

{mosads}Whether those figures improve will depend largely on three TARP recipients, Citigroup, Bank of America and AIG. “Those three are the ones that are weighing this down,” said Stefan Linssen, managing editor of Ethisphere magazine.

General Motors and Chrysler have also received significant TARP loans, and it’s unclear whether they’ll recover as successful companies after bankruptcy (in GM’s case) and bankruptcy and a merger with Fiat (in Chrysler’s).