Last week we talked about the first stage of the U.S. fiscal crisis: the slow erosion of long-term growth because of mounting government debt. This phenomenon arises from a straightforward application of conventional supply-side economics. Government borrowing absorbs private saving that would otherwise be used for capital formation. The diminished capital stock reduces productivity, growth, and competitiveness.

This week we look at stage two: a rapid economic meltdown precipitated by an untamable accumulation of government debt. Stage two is much more difficult to understand than stage one. Government debt in distress is not something that gets much attention from economists who study developed countries. It’s not something they were taught when they went to economics school. So as the possibility of a crisis has become more real, they are trying out a lot of new ideas.

One nice thing about this otherwise gloomy state of affairs is that politics has not yet infected the economics. The research that you see is not by economists who are pushing a partisan agenda, but by people who are genuinely concerned that the economy may be running itself off a cliff.

Read it all.

It is undeniable that we are on the path to fiscal collapse. This decline will occur in two stages. First there is the decay as the swelling national debt wears away the economy’s foundations and commits more and more future income to foreign creditors. We are already in stage one.

In stage two a lethal combination of phenomena arises in quick succession: greater default risk, looming inflation, higher interest rates, declining growth, financial market instability, and an acceleration of government borrowing. They feed on each other. The economy heads on a downward spiral. Between stage one and stage two there is a tipping point. Experts know it will come, but nobody wants to predict when. (See below.) This article is about the slow economic decline of stage one. Next week part 2 will describe the hell of a full-blown fiscal collapse.

There is no question economics has failed us. The old paradigms have been made obsolete by the hard reality of the 2007-2009 financial crisis and soaring government debt. But some ideas can be salvaged from the wreckage.

Read it all.

The mid-term elections on November 2nd saw the biggest swing to the Republicans for 72 years…With a few results still to come, they have picked up over 60 seats in the House of Representatives, for a solid majority of at least 50. In the Senate they gained at least six seats, though they will fall short of control there.

For Mr Obama, the lesson is simple enough: sharpen up, and prepare for a tough two years. Yes, this was hardly an enthusiastic vote for his opponents, more a howl of rage against incumbents from citizens struggling after the worst slowdown since the 1930s. And he has a string of legislative achievements to his name. But plenty of centrists plainly fear that he has drifted too far to the left, that he dislikes business and that he does not understand middle America. He looks a far less competent figure than he did two years ago. With a hostile House and a gridlocked Senate, the chances of passing any big new laws are remote; and Republican victories in crucial swing states such as Florida, Michigan, Ohio and Pennsylvania will make the president’s re-election battle in 2012 a lot harder. If Mr Obama is to win again, he needs to move back to the pragmatic centre of what is still a pretty conservative country.

But so do the Republicans….

Read it all.

A grand victory for Republicans in the 2010 midterm election? Yes, of course. But also no. In all three of the most recent earthshaking midterm elections ”” 1994, 2006 and now 2010 ”” the same candidate won: divided government.

That is not a coincidence. In the last two decades, a strong and persistent pattern has emerged, one that will dominate our politics for some time to come, because it is rooted in two important political realities. First, the public strongly prefers divided government. Second, it has every reason to.

Read it all.

The Fed is essentially lending enough money to the government to fund its operations for several months, something called “monetizing the debt.” In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.

Read it all (my emphasis).

Read them all.

More conciliatory than contrite, Mr. Obama used that phrase, “take responsibility,” six times but rejected the suggestion that his policies were moving the country in the wrong direction. He conceded that legislation to limit greenhouse gases was dead and said he was “absolutely” willing to negotiate over the extension of tax cuts, including for the wealthy. But he drew the line at any major retreat from signature priorities, saying he would agree to “tweak” his health care program, not “relitigate arguments” over its central elements.

While Republicans also called for more cooperation, they suggested that Democrats might not have fully absorbed the lessons of their drubbing.

“Their view is that we haven’t cooperated enough,” said Senator Mitch McConnell of Kentucky, the Republican minority leader. “I think what the American people were saying yesterday is that they appreciated us saying no to the things that the American people indicated they were not in favor of.”

The trials awaiting a fractured capital could arrive swiftly when the departing Democratic-controlled Congress returns in lame-duck session this month with contentious issues like tax cuts, the federal debt limit, unemployment insurance, an arms control treaty with Russia and gay men and lesbians in the military all on the table.

Read it all.

Even so, Republicans would be foolish not to act on the assumption that voters want policies sharply different from those of the Obama Democrats. No other administration in recent memory has suffered such a repudiation in its first offyear elections. Franklin Roosevelt’s Democrats actually gained House seats in 1934, as did George W. Bush’s Republicans in 2002; John Kennedy’s Democrats came very close to doing so in 1962. Dwight Eisenhower’s, Richard Nixon’s and George H. W. Bush’s Republicans in 1954, 1970 and 1990 suffered small losses, as did Jimmy Carter’s Democrats in 1978.

A more salient comparison is with the fate of Ronald Reagan’s Republicans in 1982. Both Reagan and Obama came to office with reputations as inspiring orators and with professional pedigrees (movie actor, community organiser) unusual for a practical politician. Both came to office while the economy was languishing and both saw recessions deepen in their first two years. But there was a big difference in voters’ responses. In 1982 the Republicans lost 26 seats in the House – a significant but not enormous loss. Exit polls showed that most voters believed that Reagan’s economic policies would produce a good economic recovery in the long run. Lower tax rates, reductions in scheduled government spending -voters believed these would lead to a private sector recovery after an extended period of economic stagnation.

Compare that with the results this week. The Obama Democrats lost about 65 seats – an unusually high number. And polling showed that most voters believe that their policies of increasing government spending and deficits and increasing at least some tax rates will lead not to a private sector recovery but to a continuation of the stagnation so apparent in just about every economic statistic.

Read it all.

Change in government is almost always good for the country, in spite of the loss of experience in the process. A lot of that occurred in Tuesday’s elections. Now the newcomers have to figure out how to make government serve the people, as opposed to serving just themselves. Obstruction and electoral combat won’t be good enough. The short leash in power that the voters gave Mr. Obama’s party made that very clear.

Read it all.

Tuesday’s election results represent a historic repudiation of the president. Yesterday, Mr. Obama acknowledged the severity of this loss and said that he assumes “direct responsibility” for our stalled economic recovery. He also said he was “eager to hear good ideas wherever they come from.” This is progress. He should now propose an agenda that goes a long way toward meeting GOP demands, while preserving a key number of his goals and priorities.

Read it all.

One day after his big 1st Congressional District win, U.S. Rep.-elect Tim Scott gave several interviews to national media but said he doesn’t see himself as an emerging rock star on the national political scene.

“Rock stars are like Darius Rucker, and I can’t sing,” Scott quipped Wednesday, just moments before talking to CNN.

“I see myself as a country boy trying to make a living and make sure entrepreneurs like myself have an opportunity to continue to do what we do best.”

Read it all.

DAVID BROOKS:…My main problem [with the President’s Wednesday Press Conference] was, he was asked several times, were there any policies implicated in this defeat? And, again and again, he sort of dodged that question, or said no, and said, it was the economy.

Now, the economy was obviously a big part of this election. But to say that a whole series of unpopular policies, cap and trade, health care, stimulus, bailouts, were not implicated, well, that — I think that’s, A, wrong, but, B, draws the wrong impression, that you don’t have to change anything.

And so, when he talked about the stuff he had done wrong, it tended to be procedural or message-oriented. But there are some policy implications here.

JUDY WOODRUFF: So, does that tell you that he’s not going to change anything?

MARK SHIELDS: Well, he’s still — I think it was premature for him to have the press conference today, because I think he’s still working it out. I really do.

I mean, I don’t mean to sound like a shrink, but — because he hasn’t come to grips with the reality that the policies were rejected. I mean, in campaign after campaign across the country, Republicans ran against specific policies that Democrats had voted for.

Read or watch it all.

Responding to [Newsweek’s Jonathan] Alter, George Mason University economist Don Boudreaux agreed that interest-group liberalism has indeed been leavened by idea-driven liberalism. Which is the problem.

“These ideas,” Boudreaux says, “are almost exclusively about how other people should live their lives. These are ideas about how one group of people (the politically successful) should engineer everyone else’s contracts, social relations, diets, habits, and even moral sentiments.” Liberalism’s ideas are “about replacing an unimaginably large multitude of diverse and competing ideas . . . with a relatively paltry set of ‘Big Ideas’ that are politically selected, centrally imposed, and enforced by government, not by the natural give, take and compromise of the everyday interactions of millions of people.”

This was the serious concern that percolated beneath the normal froth and nonsense of the elections: Is political power – are government commands and controls – superseding and suffocating the creativity of a market society’s spontaneous order? On Tuesday, a rational and alarmed American majority said “yes.”

Read it all.

[President Obama]…should return to his original design for governing, which emphasized outreach to Republicans and subordination of party-oriented strategies. The voters have in effect liberated him from his confining alliances with Nancy Pelosi and Harry Reid and put him in a position where he can and must negotiate with a much wider range of legislators, including Republicans.

The president’s worst mistake may have been avoiding even a single one-on-one meeting with Senate Minority Leader Mitch McConnell until he had been in office for a year and a half. To make up, the outreach to McConnell and likely House Speaker John Boehner should begin at once and continue as a high priority.

Obama tried governing on the model preferred by congressional Democrats and the result was the loss of Democratic seats and his own reputation. Now he should try governing his own way. It cannot work worse, and it might yield much better results.

Read it all.

The White House and a transformed Congress are bracing for a high-stakes battle later this month over a host of expiring tax breaks and benefits for the unemployed that will mark the first test of the new political dynamic in Washington.

If President Obama, his weakened Democratic allies and a resurgent Republican Party cannot find a way to work together, taxes will rise sharply in January for virtually every American taxpayer, and more than 3 million people will lose their unemployment checks – which together could suck more than $300 billion out of the pockets of consumers and business owners next year.

Economists across the political spectrum say such a blow would be devastating to the economy and has the potential to halt the fragile recovery in its tracks.

Read it all.

US mortgage agency Freddie Mac has suffered a further $4.1bn (£2.5bn) loss on bad home loans in the past quarter.

Meanwhile its head predicted “renewed pressure” on the US housing market.

“We believe it will be a considerable time before the housing market has a sustained recovery,” said chief executive Charles Haldeman.

Read it all.

A Congressional majority is a terrible thing to waste, as Rahm Emanuel might say, and yesterday the public took that lesson to heart. Americans erased a Democratic House majority and a huge swath of the “moderates” who Mr. Emanuel had personally recruited to build their majorities in 2006 and 2008 before he became White House chief of staff. They were ousted from power after a mere two terms for having pursued an agenda they didn’t advertise and that voters didn’t want.

Yes, the economy was the dominant issue and the root of much voter worry and frustration with Washington. But make no mistake, this was also an ideological repudiation of the Democratic agenda of the last two years. Independents turned with a vengeance on the same Democrats they had vaulted into the majority in the waning George W. Bush years, rejecting the economy-killing trio of $812 billion in stimulus spending, cap and tax and ObamaCare.

Read it all.

We are especially interested in your take on the local races where you live, as you will have more knowledge of them than the rest of us.

South Carolina has never been this red, and the state Democratic Party has never been this lost.

For the first time since Reconstruction, all nine of South Carolina’s constitutional offices will be held by Republicans, come January.

The one statewide office Democrats held, the superintendent of education, was lost in Tuesday’s Republican landslide. Democrats failed to capture any of the eight other statewide offices already held by Republicans.

Read it all.

Two years ago this week, triumphant Democrats were throwing around the word “realignment,” as in the kind of Democratic majority that could endure for a generation or more. Wednesday morning, those same Democrats awoke to find that their majority had not lasted for even another election cycle.

The question that will dominate the conversation among Democrats in the days ahead is how it came to this, especially since Republicans offered little to voters beyond an emphatic rejection of the president’s policies. Some Democrats believe they fell victim to the inevitable tide of midterm elections. Others blame the economy, plain and simple, while a growing chorus accuses Mr. Obama of failing to communicate the party’s successes.

The truth is that all these explanations probably played some role in the unraveling ”” though, in the case of Mr. Obama’s message, the failure may have deeper roots than his critics assume.

Read it all.

There is no blunter way for voters to send a message. For the third election in a row, Americans kicked a political party out of power.

So you would think that, by now, politicians in Washington would have gotten the message: They must be doing something wrong.

From the moment they lift their right hands to take the oath of office, lawmakers are now on notice that their hard-won power may be short-lived.

Read it all.

From here:

Our current projection is that Republicans will finish with a total of 243 house seats: this would reflect a net gain of 65 from Democrats. The range of plausible outcomes is fairly small: our model thinks there is roughly a 90 percent chance that the G.O.P.’s total will eventually be somewhere between 64 seats and 66.

That’s an amazing result for Republicans ”” and far more remarkable from a historical perspective than the fact that Democrats were able to leg out a couple more wins than expected in the Senate. I’m not trying to be a media critic here, but Republicans have some legitimate gripe with portrayals of the night as having been a split decision.

Still, Democrats will finish with at least 52 of their Senators intact, unless they lose both Washington and Colorado, which is unlikely. That margin would be enough to prevent them from losing control of the Senate even if both Joseph I. Lieberman and Ben Nelson decided to caucus with Republicans.

I would like to keep all the comments tonight on this thread: what we are interested in is what you are keeping you eye on, data as you can provide it, and source urls and geographical mentions where possible (if you are mentioning a House race for example do not assume people know where the district is unless you tell them).

I plan on another open thread near 11 pm est.

American voters streamed to the polls on Tuesday in elections that will recalibrate the balance of power in Washington and in state houses across the nation, with Republicans poised to make big gains, particularly in the House of Representatives where they expect to seize a majority, and Democrats anxious to stem their losses and hold control of the Senate.

With polls showing the public disquieted over a weak economy and generally disapproving of how President Obama and the Democratic-controlled Congress are leading the country, Republicans seemed well within reach of capturing the 39 seats that they need to win a majority in the House, which Democrats now hold by a margin of 255 to 178, with two vacancies.

If they succeed, the Republicans would break the one-party lock that Democrats have held on Washington since Mr. Obama’s victory in 2008. They would also set new parameters for the remainder of the president’s term, potentially slamming the brakes on what has been, by any historical standard, a remarkably ambitious agenda, and forcing the administration to rethink many of its policies, especially on the economy.

Read it all.

Even for a nation that is, by now, used to drinking in political news through a fire hose, election night on Tuesday could be a difficult one to absorb.

More than 500 House, Senate and governor’s races will be decided, if not by the end of the night, then over the course of the nail-biting days ahead as write-in ballots are counted and recounts are requested.

Beyond the individual results, the nation will be looking at the returns for answers to bigger questions: Was this election about President Obama? How powerful a phenomenon is the Tea Party movement? How will the new Congress address the still-weak economy? What will it mean for the crop of likely 2012 Republican presidential candidates? Did anonymous campaign money sway the outcome?

Read it all.

The first big hint of what’s to come will be at around 5:45 p.m., when media outlets begin reporting partial exit-poll data about the makeup of the electorate. These news organizations actually receive all the exit-poll data that is available around the country at 5:00 p.m., but they don’t use it to call races until polls close in the relevant states. Yet they are willing to report the non-candidate data from the exits earlier in the evening–and, if you read it right, that information can tell you a lot about who’s going to win. Here’s what to look for:

”¢Partisan/ideological composition of the electorate: In terms of self-identification by voters, if Republicans outnumber independents, it will be a very good sign for the GOP. If voters are divided into Republicans and Democrats plus “leaners,” any plurality by Republicans will be significant. Similarly, if conservatives outnumber moderates, and/or if conservatives exceed 45 percent of the electorate, look for big GOP gains.

Read it all.

Check it out and bookmark the site for today also.

In the first week of January 2010, Rasmussen Reports showed Republicans with a nine-point lead on the generic congressional ballot. Scott Brown delivered a stunning upset in the Massachusetts special U.S. Senate election a couple of weeks later.

In the last week of October 2010, Rasmussen Reports again showed Republicans with a nine-point lead on the generic ballot. And tomorrow Republicans will send more Republicans to Congress than at any time in the past 80 years.

This isn’t a wave, it’s a tidal shift””and we’ve seen it coming for a long time. Remarkably, there have been plenty of warning signs over the past two years, but Democratic leaders ignored them. At least the captain of the Titanic tried to miss the iceberg. Congressional Democrats aimed right for it.

Read it all.

The website is here.

Of interest at present, the Republicans retaking the House is priced at about 93.5, and the Democrats keeping control of the Senate has slipped to 43.5

The final USA Today/Gallup measure of Americans’ voting intentions for Congress shows Republicans continuing to hold a substantial lead over Democrats among likely voters, a lead large enough to suggest that regardless of turnout, the Republicans will win more than the 40 seats needed to give them the majority in the U.S. House.

The results are from Gallup’s Oct. 28-31 survey of 1,539 likely voters. It finds 52% to 55% of likely voters preferring the Republican candidate and 40% to 42% for the Democratic candidate on the national generic ballot — depending on turnout assumptions. Gallup’s analysis of several indicators of voter turnout from the weekend poll suggests turnout will be slightly higher than in recent years, at 45%. This would give the Republicans a 55% to 40% lead on the generic ballot, with 5% undecided.

Read it all. We shall see–it is not over until it is over.