Bad Labor Market A Good Election Barometer

More often than not, a poor economy means political defeat.

Unlike other recoveries, this time unemployment has not improved dramatically.

When voters prepared to go the polls in November, 2008, the jobless rate was 6.6 percent and rising. Democrats retook the White House and padded their already solid advantage in Congress.

Unemployment line
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Unemployment line

A year later in October 2009, it was 10.1 percent, the worst level of the recession and the highest in 30 years. Some 15.6 million people were jobless.

When Democrats took back the Congress in 2006 it was 4.5 percent and less than half that many people were out of a job. When it came to the economy there wasn’t a cloud in the sky.

In 1992, when Bill Clinton upset George H. W. Bush, the economy was improving and the unemployment in the early stages of decline.

Two years later, with the unemployment rate 2 percentage points lower, Republicans took control of the House.

All of the above illustrates the old political adage: A good economy is no guarantee for election victory but a bad one more often than not ensures defeat.

Your Money Your Vote - A CNBC Special Report
Your Money Your Vote - A CNBC Special Report

Timing is obvious; momentum subtle.

In that context, November is clearly right around the corner.

Numbers Game

The most recent numbers show the number of jobless down to 14.9 million and the unemployment rate at 9.6 percent.

Democrats will say it is headed in the right direction. Republicans will say it has barely budged. Both statements are true.

A lot may depend on whether the electorate believes the White House claimthat the stimulus program (The American Reinvestment and Recovery Act) saved 2.5 –3.6 million jobs.

They are unlikely to emphasize another part of that estimate; that the rate will average 9 percent in 2011, 8.1 percent in 2012 and wont fall to 6 percent until the fourth quarter of 2014.

Forget that the administration predicted early on that the stimulus package would reduce it to 8 percent by 2011.

Unlike the recoveries from previous deep recessions, employment has not sprung back. Private sector job creation has been anemic—about 855,000 jobs since last October.

Democrats have little to brag about, but neither do Republicans. Payrolls rose by 3 million, or 375,000 a year, during the two-term Bush presidency, one of the slowest paces in modern times, and a far cry from the 23.1 million created during the eight-year Clinton presidency.

What’s Different This Time?

This time around, the labor market is marked by two very different changes.

One is that state- and local-government payrolls are under pressure and shrinking amid a budget crisis.

A joint studyby the National League of Cities, National Association of Counties and U.S. Conference of Mayors estimated that some 200 cities will cut 8.6 percent of their full-time workforce between 2009-2011. That’s about 481,000 jobs and comes despite massive aid under the stimulus package. The organizations are seeking another $75 billion in government aid.

Government intervention in the labor markets is the second big break from the past.

Though Congress has approved extensions of federally funded jobless benefits eight times in during economic slumps in the prior 50 years—1958, 1961, 1972, 1975, 1982, 1991, 2002, 2008—those during the Obama administration have been extraordinary.

In late July Congress approved a $34-billion package extending benefits up to 99 weeks to the long-term unemployed. The bill picks up on a similar one that expired in June, leaving some 2.5 million people without benefits. The bill is retroactive and runs through November.

If approved, total unemployment spending would hit $150 billion this year, 50-percent more than 2009.

Pros And Cons

Compassion aside, unemployment benefits are not immune to political debate. Proponents say each dollar budgeted has a pass on value of $1.40 to the broader economy and helps others. Opponents say extending the benefits discourages recipients from going back to work.

Why new jobs remain so scarce has become another big debate and there is no shortage of explanations, some of which are intertwined.

Some economists say key sectors like real estate, housing and retail are going through major structural changesand can’t be counted on as in the past.

Others blame a credit-crunch hangover, wherein consumers are still recovering from years of borrowing and buying and in repairing their balance sheets are spending less.

At the same time, small- and medium-sized businesses—the traditional engines of job creation can’t secure loans from banks and other lenders and need government help.

Others say business has no incentive to hire because of uncertainty about its future cost structure, thanks to new and pending legislation and regulations, from health care to financial services to energy.

The prospect of higher taxes for the two highest income-tax brackets—home to many an entrepreneur or small business owner—is also weighing on expansion and hiring.

In the end, though the labor market may be as mystifying as it is frustrating, the message voters send during this election will be pretty clear.