The Bad: Ezra Klein and Kos have noticed the electoral college projections showing blue states losing EVs to the red states in the future and Ezra worries the party could become obsolete.
The Good or at least optimistic: Judis and Teixeira think increases in the non-white population and, perhaps paradoxically, the increase in education levels combined with a new emerging technical professional class suggest better times for Democrats in the future.
More good: The Democrats came surprisingly close in 2004, at least at the presidential level. Bush's winning margin was the smallest of any previous incumbent who won re-election.
More bad: Democrats have typically won large majorities of the Black and Jewish vote, but this means that (1) there's nowhere to go but down with these groups, especially to the extent that religion and foreign policy increase in importance for these groups respectively and (2) If Democrats are maxed out on the Black vote, it's hard to see how either group helps in any states where Democrats are currently doing poorly. If Democrats are getting upwards of 85-90% of the black vote in the south and still losing, Democrats will need to expand their base of support in those states to win. Although the poor southern states would seem an ideal laboratory for trying out new, populist sounding themes, such as those recommended by John McGowan, or a "reform" agenda, such as that suggested by Ruy Teixeira, these issues haven't typically galvanized lots of support in past campaigns. In addition, it's hard to see what the Democrats' mobilizing issues are or could be. The Repubs got religion, which with its high emotional content, and base of anger-fear driven pew dwellers, can usually be whipped into a frenzy over just about anything, like a filibuster battle. The war? Arguments about past decisions, especially when so many Democratic officials supported the war, or at least acquienced to it, aren't probably going to help at this stage, unless things continue on their too long, or the situation there dramatically deteriorates, or unless there was a friendly media or a charasmatic candidate that could exploit it.
And, as I've argued previously, the primary threat facing the republic is the emergence of radical fundamentalism, personified by James Dobson, Tony Perkins, and televangelists such as D. James Kennedy and Rod Parsley. But challenging it presents Democrats with the difficult choice of constructing a nuanced argument that criticizes the leaders but not the followers, a task of some difficulty in a world that doesn't appreciate or do nuance and that isn't likely to win many friends or influence many people.
The best thing Democrats will have going in 2008 is incumbency: The Republicans'. Voters will be willing to hear appeals for change or at least balance. And to have a president named something other than Bush. Or Clinton. That, and the fact Democrats are not faced with the need, as they were in 1988, of having to build on their one state success of 1984. They have a larger pool of states to build on.
Beyond that, Democrats are not going to gain a lot of ground until there is a crisis. The last crisis on 9-11 skewed the balance of power the other way.
The next crises are likely to be either economic or foreign policy related (if Republicans continue to overreach by invading/bombing Iran or the other remaining axis of evil member), or until a coup by the religious right results in laws requiring church attendance on Sundays.
Until then, enjoy our Free America while it lasts.