Monday, May 18, 2009

Rising Incomes May Help Democrats Avert 2010 Election Debacle

Coping with the worst economy in a half century and unemployment likely to peak at a 26-year high around the middle of next year, Democrats by rights should be facing the prospect of a disaster in the November 2010 congressional elections.

They aren’t.

Personal disposable income, which has dropped in seven of the last 12 months, is forecast to begin growing steadily by early this fall, and it counts more than unemployment when voters go to the polls, research shows. Gross domestic product is also predicted to edge up by 0.5 percent in the three months ending September, after contracting in the past three quarters, and continue improving in the fourth quarter and next year.

“If economic growth picks up reasonably well starting in the first quarter of 2010, then that would be a plus for the Democrats in Congress,” says Ray Fair, a Yale University economist whose forecasting model has called the top vote-getter in the last three presidential races.

Since 1945, the party that controls the White House has lost an average of 16 seats in the House of Representatives in a president’s first midterm election, according to the nonpartisan Cook Political Report. Recessions have made the damage worse, as former President Ronald Reagan learned in 1982, when an election-year slump cost Republicans a net 26 representatives, erasing gains the party made two years earlier.

Democrats currently control 59 seats in the 100-member Senate and have a 256-to-178 margin in the House, where one seat remains vacant. A Republican gain of 40 seats there would swing the majority to the opposition and present President Barack Obama with a major obstacle.

Credit or Blame

“It’s the party in power that gets either the credit or the blame” for the economy, says Texas Senator John Cornyn, chair of the National Republican Senatorial Committee campaign group. “I think there’s going to be significant opportunities for us to have a referendum on the Obama administration.”

While unemployment affects voter sentiment in presidential and congressional elections, the growth of personal income has the highest correlation of all economic data with the fate of the party that controls the White House, says Douglas Hibbs, a retired Massachusetts Institute of Technology economics professor.

That’s because personal income is the best measure of changes in voters’ economic well-being, he says his research shows. Income fell 0.06 percent in March and 0.09 percent for all of 2008, adjusted for inflation, according to the Commerce Department.

Bread and Peace

Income is one of two variables in an election-prediction model Hibbs developed called Bread and Peace. The other is U.S. casualties in undeclared foreign wars, which he says likely won’t affect the congressional races.

Hibbs’s model predicted Barack Obama would win last year’s presidential election by 7.5 percentage points; the final margin of victory was 7.3.

Personal-income growth moves in tandem with GDP growth, “and it should turn up sometime around the summer or early fall of 2009,” says Lakshman Achuthan, managing director of the Economic Cycle Research Institute in New York. St. Louis-based Macroeconomic Advisers LLC forecasts disposable personal income per capita will rise 1.1 percent this year and 1.3 percent in 2010.

GDP, the broadest measure of the economy, will expand 0.5 percent in the third quarter of this year, according to a Bloomberg survey of 61 economists, and grow at a pace of 1.9 percent in 2010. GDP fell at a 6.1 percent annual rate in the first quarter, after contracting 6.3 percent in the last three months of 2008.

Confident Consumers

Consumer confidence is improving, portending growth in consumption, which represents two-thirds of the economy. The Reuters/University of Michigan preliminary index of consumer sentiment rose to 67.9 in May from 65.1 in April -- the highest since before last year’s credit-market collapse.

A drop in inventories is setting up manufacturers for a burst of production. Industrial output decreased 0.5 percent last month, the smallest drop since October, signaling the recession’s grip is loosening. Stock prices are surging; the Dow Jones Industrial Average is up about 26 percent since March 9.

“If the economy sticks to the script laid out by the consensus view, that would have real disposable income turning up prior to the election,” says Mark Zandi, chief economist at Moody’s

Rising Unemployment

Still, unemployment, at 8.9 percent in April, will likely continue to rise through 2010, hitting 10 percent in the fourth quarter, according to economists at Goldman Sachs Group Inc. The median forecast of a Bloomberg survey of 58 economists indicates the average jobless rate for the entire year will be 9.6 percent as major industries endure further shakeouts.

General Motors Corp. and bankrupt Chrysler LLC are both slashing their U.S. dealer networks. GM’s planned cuts will eliminate as many as 137,000 U.S. jobs by the end of 2010, according to National Automobile Dealers Association in McLean, Virginia.

Unemployment is a lagging indicator, improving later than other economic data such as GDP. That’s because the rate often continues to climb -- and sometimes even spikes -- after a recession ends. Workers who stop searching for employment aren’t considered part of the labor force. As they begin seeking jobs again, they are counted among the unemployed until they find work.

While the last U.S. recession ended in November 2001, according to the National Bureau of Economic Research, unemployment didn’t peak until 19 months later, in June 2003.

Republican Strategy

Republicans will likely attempt to capitalize on the high jobless rate.

“Right now I think the country is likely to say that the Democrats’ policies have not been successful in creating jobs and allowing those we have to be retained,” Cornyn says.

They may gain the most traction in the hardest-hit states, including California, where the unemployment rate is 11.2 percent; Florida, with a rate of 9.7 percent; and Midwest states such as Michigan, with the highest jobless rate in the nation at 12.6 percent.

Unemployment of 10.4 percent in Nevada could make the re- election climb steeper for Senate Majority Leader Harry Reid, while 9.1 percent unemployment in Illinois could endanger the seat held by Senator Roland Burris.

One mitigating factor may be voters’ expectations. An April Diageo/Hotline poll found that 57 percent of Americans see the recession lasting at least another two years.

‘Wiggle Room’

“That should theoretically give Obama and the Democrats some wiggle room,” says Amy Walter, a congressional analyst for the National Journal’s Hotline.

Voters may also feel Obama’s policies have averted a much worse cataclysm. That happened in 1934, says Alberto Alesina, a Harvard University economist.

More than one in five workers remained jobless the year of Franklin Roosevelt’s first midterm election, down just slightly from 25 percent the year before. Still, personal disposable income per capita rose nearly 9 percent that year, giving many Americans hope that the worst was past. Democrats added nine net seats in the House and nine in the Senate in Congressional races, expanding on large majorities.

Democrats may also be able to continue linking the recession with Bush-era policies, as they did successfully in the 2008 elections.

“Obama will probably be able to blame Bush for a significant part, if not all, of the nation’s economic problems,” says Stuart Rothenberg, editor of the Rothenberg Political Report. He predicts a “modest Republican gain” of five to 10 seats in the House, while Democrats might gain a handful of seats in the Senate.

The election will turn on whether voters “think we’ve gotten out of the ditch or whether we’re on the way of getting out,” says Senator Bob Casey, a Democrat from Pennsylvania. “I think if either of those prevail, Democrats will do just fine.”