Some thoughts:
1. Rice is a direct link to the Bush Administration and many of its more extravagant disasters. Iraq War, anyone? There's a reason the VP pick hails from as far away from D.C. as humanly possible.
2. It is my understanding that Rice is pro-choice. Can't have someone with a 21st - or, hell, 20th - century view on reproductive rights on the GOP ticket, now can we? Incidentally, this is also one of the major factors that did in Ridge as a VP option.
3. In terms of actual governance, as in, would Palin or Rice be superior if disaster struck and they found themselves elevated to the Presidency, I think Rice would clearly be superior (well...probably. She did help construct Bush's foreign policy, and that's not something you want on your resume). Palin ran her tiny town into major debt and has positively no experience on the national scene. She's just not ready.
4. Politically, Rice would have been suicide. Her pro-choice views would obliterate any chance of the base turning out, and her having helped created the worst foreign policy debacle in American history would ensure that swing voters wouldn't vote for the GOP ticket.
Palin is a clear play for the base. Her convention speech was little more than red meat for the base, and the Christian nuts are tickled to death that they have enough sway over the GOP that John McCain will buckle entirely when he needs them. I don't think (and the extremely early polling indicate) that she'll be much of a help with the swing voters, though.
5. No way, no how will McCain drop her from the ticket. That's admitting he's wrong about his most important decision so far, and that's suicide. It would be the same if Obama had to drop Biden. Just can't happen.
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