In which direction will the Republican Party head? In case one hasn't 'been reading the papers' (or web sites) lately, the Republican Party is in a bit of a quandary, created largely by economic events.

The party is leaderless, if you don't count the likes of Limbaugh, Hannity, and Ingraham as leaders, and right now there's a bit of a schism over the right direction for the GOP.

On one side (or on the right) are the purists, who believe only conservative economics can lead the party back to greatness and control of the Congress and The White House.

On the other side (or in the middle) are the moderates, who believe only a broadening of the Republican tent – not a party that requires elected officials to agree with conservative values 99 percent of the time – can end the party's losing streak.

The downfall of and current schism in the Republican Party should demonstrate to investors the cyclical nature of American politics. Be wary of any official or pundit who talks about 'permanent' majorities. A few years back, Republican Strategist Karl Rove, then chief political advisor to President George W. Bush, was talking about a 'permanent' majority for the Republican Party. But his analysis seemed oblivious to both the long-term (demographics, among others) and cyclical factors that are working against the Republican Party.

A core, with not much more

U.S. Senator Arlen Specter of Pennsylvania has defected to the Democratic Party, and there could be others. Party purists generally downplayed Specter's defection, arguing that he was a Republican in name only, and pointed to the party's loyal conservative core. The problem is, that core is becoming increasingly concentrated in the South, with the Democratic Party dominating in New York, California and the Pacific Coast, the Northeast, the Midwest, and Florida. That electoral math does not bode well for the Republican Party, and it doesn't include states like Specter's Pennsylvania and Colorado, both of which are moving in the Democrats' direction.

Further, if current trends continue, Democrats will increase their majorities in the House and Senate. In the Senate, the Democrats will have a 60-Senator, filibuster-proof majority, if Democrat Al Franken (as expected) prevails over Republican Sen. Norm Coleman in Minnesota. Hitting 'sweet 60' will make it easier for Democrats to pass economic reform and other progressive legislation. Add three or four more seats in 2010, and the Democrats will likely propose even bigger changes. (The Democrats already have a sizable majority in the House.)

Will the GOP broaden its tent?

What should the Republican Party do to win more seats? They must act courageously and broaden their tent - on economic and other issues - to appeal to a wider swath of the ideological spectrum. However, most signs to-date indicate the party will not do that – that the conservatives will win the party's power struggle, and drive the party (incredibly) even farther to the right. If that occurs, the Republican Party will become the party of Fox News (NWS) - to be sure, a legitimate enough political expression in the U.S. - but know also that this stance is guaranteed to win, oh, at least twenty Senate seats.

And know very clearly that broadening the Republican Party will take courage – courage to buck a power base that wants to advocate more of the same: tax cuts for upper income groups and the belief that mere wealth creation solves every problem known to humanity. But the problem is not wealth creation: the 2001 Bush tax cuts resulted in upper income groups grabbing an additional $4 trillion in wealth. The American people took note of this and also noted that they, on the whole, are not better off because of it. What should the nation do? Pass another upper-skewed tax cut and enable an even larger percentage of wealth to be transferred to upper income groups? We already tried that and it got us in large part to where we are today: a nation with plenty of wealth, but with too little of it where it can generate sustainable GDP growth – in the typical person's hands.

And does the Republican Party have the courage to recognize a corollary problem - that for a considerable portion of the last 30 years, most of the benefits of low taxation on upper income groups and globalization have flowed to capital, and very little has flowed to labor.

Despite the above, Republican leadership – at least the most visible and vocal leaders – appear repulsed at even considering the possibility that more tax cuts on upper income groups are not the answer and that better wages and salaries for the typical person, among other economic reforms, are. If the conservative view holds in the Republican Party, their decreasing numbers in the House and Senate should not surprise anyone.

GOP: Grandfather's Old Party?

A talk with a New York Republican from Harrison, N.Y. is illustrative. A young (age 28-33), educated, white, female professional with a good income, she voted for President Obama in 2008. "I'm for lower taxes, too, but what about the rest of the problems the nation is facing?" she said. "I didn't see any viable plans from the Republican Party." She's been so turned-off by what she sees of Republicans that she's considering registering as an Independent, "but that would break my Dad's heart, and he might disinherit me." I advised her to not leave the Republican Party, for the sake of the estate she surely deserves, but she underscored that she "doesn't feel the Republican Party represents me anymore."

My Independent-leaning friend sums up the Republican Party's challenge. The Republicans don't have to attract Republicans: those party identifiers are theirs for life. And they'll never attract the strong Democrats: they form the base of the new era's new majority. The Republicans need to attract the Independents who have sided with Obama and the Democrats.

Hence, the Republican Party has to become more moderate, with an end to demagoguery. There's only so many times an Independent voter can hear "The nation is being taken over by socialists and the followers of Karl Marx," before he or she says, "Oh, these Republicans have totally lost it. They're being run by total, right-wing whack jobs" and clicks the remote off Fox News, never to return again.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and U.S. economy.

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