Mid-Term Election Outlook & 2011 Policy Implications October 2010 Daniel Clifton

The Recession Election 3 rd Straight Election Voters Will Throw Out Incumbents Elections Have Not Been This Volatile Since Late 1940’s/Early 1950’s. Independent Voters Don’t Believe Either Party Is Equipped To Provide Growth Divided Govt Is Last Shot Before 3 rd Party Challenge

Historic Convergence of Political Party Identification

Macro Indicators Pointing To A Wave Election Macro Data Points To A Wave Election In Which Macro, Not Local Issues Obama Approval Rating, Generic Ballot, Right Track/Wrong Track Are Upside Down For Democrats Republicans Energized, Independents Breaking Republican 60-40, Democrats Demoralized Intrade Odds Place GOP Takeover of the House At 90 Pct and Senate At 25 Pct Bottom Up Intrade – GOP Picks Up 55 House Seats & 8 Senate Seats

Micro Data Beginning To Catch Up To Macro Data 50+ Dems Behind In The Polls, Just 25 GOP Members At This Time In 2006 Traditional Battleground States Are Comfortable GOP, Lean Dem Areas Are Now Tossups Handicappers Placing 99 Districts In House At Risk GOP Senate Takeover Being Underestimated

2 nd Highest Unemployment Rate For A Post WWII Election

Consumer Confidence Remains Depressed

Economy Remains Democrats Achilles Heal

Voters Giving Little Credit To $1 Trillion Stimulus Program A majority of voters oppose the stimulus as they have not felt a direct benefit from the program. This is the conclusion of a Democratic focus group during the State of the Union. Voters Aren’t Buying It When President Obama took credit for bringing the economy back from the ledge or pointed to macro-level indications of economic growth, voters turned their dials down. National Journal, 2/6/10

Anti-Incumbent Environment

Wave Election: Step 1 Presidential Approval Drops

Approval Correlated With Lost House Seats

Wave Election: Step 2 Generic Ballot Switch Parties

Generic Ballot Pointing To Significant Dem Losses

Gallup’s Plug & Chug Generic Ballot Model

Wave Election: Step 3 Dem Enthusiasm Wanes

Intrade: Near 90% Chance GOP Takes Over The House

Intrade Suggests GOP Takes 55 Seats

Placing The Consensus View In Historical Context

Senate Odds: Very Low Probability of GOP Takeover

Intrade Odds Saying Dems Lose 8 Seats But Hold The Senate

10 Senate Seat Pickups Rarely Occurs In One Election

70 Pct Rule Would Suggest Senate Takeover Is Possible

Market Has Begun Pricing In The Election

Election Will Bring Book End Of Outcomes

Days of 2,000 Page Bills Are Over

Equity Markets Applaud Congressional Gridlock

S&P 500 Up After Every Mid- Term Election Since 1938

Election Will Bring “Book End” Of Outcomes

Tax Cuts Will Get Extended For At Least One Year

But Comprehensive Reform Will Be Needed In The Future Budgetary Costs of Expiring Tax Provisions, $BN Comments Total, Expiring Tax Cuts and Credits ,959.5 Total Bush Tax Cuts (2001 & 2003) Income Tax Provisions of EGTRRA for those with incomes below $250k Estimates, Not subject to PAYGO...for those with incomes above $250k Estimates, Subject to PAYGO Estate and Gift Tax Changes Subject to PAYGO Relief from Marriage Penalty Not Subject to PAYGO Credits and Deductions Not Subject to PAYGO Capital Gains and Dividend Tax Reductions Subject to PAYGO Alternative Minimum Tax Not subject to PAYGO Make Work Pay Credit Not subject to PAYGO Other Expiring Provisions Most subject to PAYGO

Korea & Columbia Trade Could Be Area of Agreement

Federal Spending Is A Target For GOP Congress

A Renewed Focus On Unfunded Liabilities…

…As Tea Party Members Must Vote For A Debt Limit Increase

Highway Spending Bill Requires A Tax Increase

Half of Stimulus On Highway/Rails Has Been Spent Federal Stimulus Provisions For Highway & Rail Spending Provision Allocated ($BN) Available ($BN) Paid Out ($BN) Paid Out (% Allocated) Highway Infrastructure $27.50$26.86$ % Transit Capital Assistance $8.40$7.30$ % Total$35.90$34.16$ %

Host of New EPA Rules Coming

House Will Vote To Repeal Healthcare Bill