Many political pundits doubt that an incumbent president can win re-election with an unemployment rate over 8% After all, we are told, no American president has been re-elected in the last 50 years when unemployment was above 7.2%.
Is that predictive or not? I say: not.
Unemployment is the focus of the government policy from the president down to the Federal Reserve chairman. An employed populace is a happy populace. Full employment means a Navigator in every driveway and big screens streaming a zillion channels in each living room. As long as the payments are affordable, life doesn’t get any better. It’s a land of Keynesian milk and honey.
The headline unemployment rate — which was 7.8% when Obama took office — remains stubbornly high at 8.3%. Just over 12 million people were unemployed when the president was sworn in. Now the number is closer to 13 million.
Unemployment rates in July rose in 44 states, including critical election swing states such as Iowa, Florida, Michigan, Nevada, Pennsylvania and Virginia. With all this bad employment news, one would think the polls would have Romney ahead by double digits.
Then there’s the more-hidden problem of labor participation. Some 3 million people have dropped out of the whole picture. Vanished. This fact alone skews the numbers since the unemployment count is based on those who are seeking work.
To look at the numbers, a person would think the government hasn’t done anything. If only. You may remember the day after the 2010 midterm elections when the Federal Reserve announced the second round of quantitative easing (QE2), what The Associated Press called “a bold effort to invigorate the economy.” The Associated Press reported, “The idea is for cheaper loans to get people to spend more and stimulate hiring.”
However, QE2 was just a drop in the bucket compared with the $8 trillion in federal government power that had already been unleashed through actions by the Federal Reserve, TARP, guarantees made by the FDIC, and other direct bailouts.
Since then, the Fed has implemented Operation Twist. The Fed sells short-term securities and buys long-term bonds with the idea that long-term rates will be forced down, making borrowing more affordable for businesses and consumers. The central bank has committed to keeping interest rates at or near zero until late 2014. The theory is that companies that borrow will hire. Consumers that borrow will buy and buying will stimulate hiring.
If the Fed’s actions weren’t enough, on Feb. 17, 2009, a couple of weeks before the stock market would hit a low, the president said: “And tonight, I am grateful that this Congress delivered, and pleased to say that the American Recovery and Reinvestment Act is now law. Over the next two years, this plan will save or create 3.5 million jobs.”
With the passage of Obama’s nearly $1 trillion fiscal stimulus plan, White House economists predicted unemployment would never reach 8%. Despite the Keynesian full-court press, it did.
For pushing down rates, the plan has worked and is working. As for goosing employment, not so much.
At the end of October 2008, the yield on the government’s 10-year bond was 3.92%. It ended last week yielding 1.81%. Lending your government money for one year snagged you all of 20 basis points last week. Four years ago, for the same duration, you earned a comparatively fat 1.44%.
Fed policy has ruined life for savers.
Also, the prime lending rate that banks base their commercial loan pricing on has been slashed from 8.25% just before the crisis to 3.25%, where it has remained for the last three years. Thirty-year fixed-rate mortgages were 6.87% the week of Oct. 31, 2008. Last month, the rate had hit an all-time low of 3.34%.
So while the Fed thinks more money means more employment, the real result of all this stimulating has been more unemployment, not less. Economist Frank Shostak explains that quantitative easing undermines capital formation, and less capital formation in turn weakens economic growth. These low rates serve only to redistribute real wealth from wealth generators to nonproductive activities.
The numbers bear this out. While interest rates have fallen, unemployment has risen. In October 2008, the unemployment rate was 6.1%. In July 2012, the rate was 8.3%. If you count discouraged workers and those forced to work part time, the unemployment rate is 14.9% nationally. By this measure, in Nevada, the unemployment rate is now over 22%
The average length of official unemployment increased to over 40 weeks, by far the longest since government began tracking these data in 1948. The number of long-term unemployed (i.e., for 27 weeks or more) jumped to over 6 million in 2011, again an all-time high, and remained stubbornly high at 5.3 million in June 2012.
In May 2012, more 46 million Americans were participating in the government’s Supplemental Nutrition Assistance Program (SNAP). In other words, 46 million people were buying their groceries with food stamps.
So all of this rate cutting and monetizing didn’t put anyone to work or stabilize anything other than dependence on the government. And while the folks at the Bureau of Labor Statistics say that price inflation is virtually nonexistent at less than 2% CPI. John Williams, who calculates CPI the way it used to be done, says consumer prices are rising at nearly 10%.
Where the Fed’s funny money has gone is into the stock and bond markets. The S&P 500 index hit an intraday low of 666.79 on March 6, 2009. Just a little over three years later, that index has more than doubled, closing last Friday at 1,418.16. At the same time, the market for high-yield bonds has been described as “giddy,” the municipal bond described as in a “frenzy.”
Meanwhile, Goldman Sachs, a “too big to fail” financial company that was at death’s door in late 2008, delivered blowout earnings in the second quarter with revenues of $6.63 billion. Last year, Goldman earned $4.44 billion on nearly $29 billion in revenues.
So everything’s okey-dokey on Wall Street. The average Joe and Jane’s 401(k) statement is looking a little better, and the folks at The Socionomist figure the stock market is a better gauge of the voting public’s mood than anything else. The upshot is that a positive stock market means the incumbent gets re-elected.
In their paper “Social Mood, Stock Market Performance and U.S. Presidential Elections: A Socionomic Perspective on Voting Results,” researchers at the Socionomic Institute studied the results of every presidential election, since 1792. According to the paper, stock market performance is the best predictor of election results: better than unemployment, GDP or inflation.
It turns out, the higher the DJIA, the better the chance of re-election. Voters give incumbents a pass for their first year in office, figuring it was, in this case, George W. Bush’s fault. So the Dow 30 stood at 9,712.73 on Oct. 30, 2009, when Obama started his second year. That’s the point of no return. It will take a 25% market meltdown, from over 13,000 on the Dow to below 9,712, for Ann Romney to start thinking about rearranging the furniture at 1600 Pennsylvania Ave.: That is if the social mood folks have it right.
So while the Fed’s money policy hasn’t produced more jobs (and won’t), the ground-hugging interest rates have levitated the securities markets and may just get Obama elected to four more years.
Job One in Washington is to be re-elected. How Lord Keynes’ methods get it done doesn’t matter.
