What Role Will the Economy Play in Election 2012?

It’s hard to disassociate the economy from politics. President Barack Obama and Republican candidate Mitt Romney seem to be running for the role of “chief job creator” at a time when financial stability is at the top of everybody’s priority list. It is widely accepted that the current global economic status is the worst it has been in a long time, and the end is not clearly in sight.

Here’s a snapshot of the United States economy as of September 2012. Data largely sourced from the Center for American Progress.

In the second quarter of 2012:

  • Gross domestic product grew at an annual rate of 1.7 percent.
  • Business investment grew 4.2 percent.
  • Consumption grew by 1.7 percent.
  • Exports grew 6 percent.
  • Government spending fell 0.9 percent.

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These are all barometers of economic health that taken together don’t paint a tremendously positive picture. In order to curb unemployment — currently standing at 7.8 percent — GDP would have to grow at an annualized rate of at least 3 percent. In order to effectively bring that number back to pre-crisis levels, GDP would have to grow even faster, at 4 or 5 percent a year.

Quantitative easing round 3 is the big ticket on the table, which is gobbling up mortgage-backed securities at a rate of $40 billion per month until further notice. Ben Bernanke, chairman of the Federal Reserve, wants to keep rates low and encourage investors to buy assets, such as stocks and corporate bonds. Companies like General Electric (NYSE:GE), Comcast (NASDAQ:CMCSA), and United Parcel Service (NYSE:UPS) have taken advantage of the record low interest rates to sell $91.9 billion in 30-year bonds so far this year, the most since 1995.

How This Will Affect the Election

InvestorsThe central question is what each candidate thinks is the right path to economic recovery. Republicans largely believe that fundamental, long-term free market actions — such as fewer regulations and lower taxes — are necessary. Democrats largely believe that strong government intervention — such as the stimulus package, jobs plan, and action by the Federal Reserve — will lead the country away from the brink.

Dodd-Frank is one of those problematic bridges between politics and business that no one on either side of the street seems to fully understand. Romney has vowed to immediately repeal the entire thing, a strategy that many Republicans, including the very liquid Romney, have since begun to reevaluate. Meanwhile, shares of JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), both questioned for their behavior, have comfortably recovered from the crisis many blame on them.

A report in The New York Times says that: “The historical evidence is robust enough to say that economic performance almost certainly matters at least somewhat, and that poorer economic performance tends to hurt the incumbent party’s presidential candidate.”

ElectionThe key takeaway is that the relative performance of the economy matters more than the objective performance. Voters want to see growth more than anything. Moving from 10 percent unemployment to 7.8 percent unemployment is better than moving from 5 percent unemployment to 4.9 percent unemployment over the same period. A failed policy speaks louder than no policy, something that is at the heart of the differences between Romney and Obama.

What is working against Obama is the slow speed of the recovery. What could favor Romney is the speed of change that he promises to bring to the economy — whether he can deliver is a question answered only if he’s elected. A favorite question of the campaign has been, “Are you better off than you were four years ago?” Here’s where the Gallup Daily U.S. Economic Outlook poll puts the numbers: 56 percent think the economy is getting worse, 40 percent think it’s getting better.

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