I have been asked quite a bit lately about my thoughts on the upcoming election and the recent article by Naill Ferguson has sparked a huge outcry from the liberal left.  To be completely honest I really have no clue at this point who will win.  However, I think that are three primary issues that will definitely influence the outcome of the election - employment, taxes and the economy.  I completely realize that these are not new, or novel, concepts but I think it will be how each candidate approaches these issues in the coming weeks that will determine the outcome of the election.  

The key driver to how a person will vote in the upcoming election is not a detailed analysis of economic and financial data but how they "feel" when it comes time to punch the ballot.  If someone is worse off than they were at the time of the last election it is very likely that they will vote for"change."  That psychology was clearly apparent during the last election.  The question that will determine the winner in November is simply: "Are you better or worse off than you were in 2008?"

Employment And The Rise Of The Welfare State

In order for someone to fell "better off" they need a job.  Since the beginng of 2009 there are currently more than 500,000 fewer employed individuals.  The number of individuals that are unemployed, but seeing work, remains near record levels not to mention the mass numbers of individuals that are simply no longer counted because they have given up looking for work altogether.  What makes this problem worse is that the working age population continues to increase each month increasing the demand on the limited number of jobs that available.

It is hard to escape the fact that the quality of employment has likewise deteriorated.  Over the past three years temporary employment, which provides no benefits and low wages, has increased by more than 1.5 million jobs while full-time employment has decreased by 1.25 million jobs.  It should be no surprise that in the current environment the number of “food-stamp” recipients has soared by 14.2 million?

Employment is no trivial matter.  It is not only the basis of voter psychology but also the economy as whole.  Consumption makes up 71% of the economy and employment must increase to achieve organic economic growth.  However, the problem that faces both candidates is that a sub-par growth rate economy only drives lower income and temporary jobs. Reduced income levels impedes individuals ability to maintain their standard of living which is turn forces them to turn to government dependency.  

The rise of the “welfare state” over the past three years has been unprecedented.  Social benefits as a percentage of real disposable income remains at record highs as wages have stagnated due to a large and available labor competing for limited job openings.  Consumers have been very creative in finding alternative sources of income in order to sustain their current standard of living but does not bode well for an improved voter psychology come election time.  The chart shows the rise in “disability claims” and “student loans” since the recession.   

Student loans from the government have more than quadrupled as unemployment insurance has run out.   Once private student loans are included the total amount of student loan debt has surged to more than $1 Trillion.  The problem with the current levels of student loan debt which has likely been used for consumption rather than education is that eventually a large chunk of these loans will default.  However, the difference now, as opposed to the “sub-prime” housing loan debacle, it that there is no asset sitting behind the loan – just a promise to repay.  If you thought sub-prime loans turned out badly – just wait.

Furthermore, the numbers of workers claiming social security disability is now at record highs which further increases the demands on an already underfunded and over-obligated welfare program.  While more than 2 million jobs have been created since the depths of the recession – the problem is that the same number of individuals are now claiming disability and are no longer counted in the ranks of the unemployed.    

Either the work place has become extremely unsafe and reminiscent of Sinclair’s classic novel “The Jungle” or there are a lot of people lying about being disabled

Taxes

As we wrote recently it is election season and taxes are being waved as a key platform.  Should tax rates be raised or lowered.  The argument immediately goes to the national debt and deficits and the need to reduce these obligations.  While the "eat the rich" rhetoric will play well with the 22% of the population that is either unemployed, discouraged, working part-time for economic reasons or have just given up looking for work. It will also play well with the rest of the country that are living paycheck to paycheck as real wages have been on the decline over the last couple of years while the cost of living has risen.  

However, what is missed in all the arguments is that tax rates and revenue really are not the issue.  As discussed above the key is creating an economic environment that promotes real employment.  Since the beginning of 2009 employment has increased and as a result the economy has grown albeit at a sub-par rate of growth. The chart shows the annual changes in employment, federal receipts and GDP.  What is clear is increasing economic growth, which creates jobs and increases wage levels, leads to higher levels of tax revenue.  

Economy

For the voter it will really come down to how they feel about the economy.  Do they have a job?  Are they worried about losing their job?  Can they pay their bills on time?  Are their children well cared for?  These are the real economic issues that the voter will be using at the voting booth.  While the economy is technically growing - it is apparent from the data above that for millions of Americans the economy is still in a recession, or at least, feels that way.  The economic recovery to date has been mostly a statistical one rather than one that has increased the net worth of the average American voter.

According to a recent report by the Associated Press the number of Americans who live within 125 percent of the federal poverty level is expected to reach an all-time high of 66 million in 2012.  In order for a family of four to reach the threshold for legal aid, and other government assistance programs, incomes must be $28,800 a year or less.  Assuming a working age population of 239 million at the end of 2011 more than 27% live in poverty - a level that has skyrocketed since 2008.

Faced with stagnant wage growth and high unemployment - the millions of Americans living below the poverty line and dependent on food stamps, disability and welfare for survival certainly would not agree with claims that the economy is growing.  When it comes time to pull the switch in the election booth it will not be a statistical number of the economy that will decide which box is punched - but "am I better off."  That answer, for nearly a third of economy, will simply be "no."

It's All About Faith

It is clear that a vast majority of Americans have lost faith in the polticial system.  Of course, why wouldn't they?  After being consistently lied to, seeing crony capitalism dominating Washington politics, Wall Street consistently bailed out at the tax payers expense, the legal and regulatory environment catering to those with the most money, and the demise of the "American Dream" - their faith in the system has been shattered.  

America craves a strong leader with a conviction to lead rather than bend to private interests.  A leader that will foster the free market capitalism, innovation, manufacturing and production that once provided healthy economic prosperity.  A leader who will restore the three foundations that made this country a beacon of prosperity:  the freedom of competition, the strength of contract law and a supportive regulatory environment - must be restored.  

There is much that the next President must do – but nothing as important as providing a strong foundation from which the economy can begin to rebuild itself.  America is not lost – it has simply been suppressed by thirty years of misguided politics and distorted policies.   It is time to create a path back to economic prosperity that promotes savings, productive investment and an environment where success is rewarded rather than punished.

The voter wants to have "faith" and are willing to give it freely.  However, it will be up to the candidate to not only convince voters that their "faith" is being well placed but they will have to "earn it," more than ever, over the next four years.