How Unemployment Will Swing the Elections

The jobless rate will be nearly 3 points higher than Obama promised it would be.

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When President Obama took office in January 2009, the economy was spiraling into a black hole and something needed to be done. Obama's economic team predicted that if Congress passed a huge stimulus plan, the unemployment rate, then 7.7 percent, would drift up to about 8 percent, then start to decline. By the time of the midterm elections in November 2010, it would be at a manageable 7 percent or so.

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Obama got his stimulus plan, of course, but on Election Day in November, the unemployment rate will be 9.6 percent—nearly 3 points higher than what Obama said it would be. By most accounts, it will keep going up for a while and probably peak above 10 percent in 2011. Obama will be extremely lucky if it's back to 7 percent by the time he runs for reelection in 2012.

Virtually everything about the job market has turned out to be worse than the Obama White House predicted. The private sector, which drives the economy, is barely creating jobs, even though the recession officially ended 16 months ago. The government sector, once thought recession-proof, is bleeding jobs as states and municipalities struggle with plunging tax revenue. As the midterms approach, the overall economy is losing jobs, not gaining them, which means we're far away from the 250,000 jobs or so that need to be created every month to drive unemployment down. Of the 8 million jobs lost since the recession began at the end of 2007, nearly half have come since Obama took office. Little wonder that Republicans are poised for huge gains in November, with a good chance to take control of the House of Representatives and an outside chance to seize the Senate.

Obama wasn't alone in his bogus predictions, of course. Most mainstream economists underestimated the severity of the recession and the weakness of the recovery. And the stimulus has done some good, creating well over a million jobs and keeping unemployment at least a couple of points lower than it would have been otherwise. But "it could have been worse" is a pitiful campaign slogan, and no doubt the Democrats are now kicking themselves for their overeager promises. Democratic pollster Bernard Whitman says Obama could have sold the stimulus quite differently, telling the public that unemployment could hit 12 percent without it. He probably would have been right.

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Whoever wins in November is going to face the same thorny problem. For one thing, there's a good chance that unemployment will spike in the next jobs report, which comes three days after the elections. Gallup, which closely tracks employment trends, says that its surveys showed a surge in unemployment in late September, which would not have been captured in the government's latest numbers. If so, that spike could push the official unemployment rate to 10 percent or higher in the next report. State and local governments seem likely to keep cutting jobs, with several states seeking bailouts from Washington to help fix their finances.

A lame-duck Congress might offer some help, but the elections are likely to reinforce voters' disgust with deficit spending by the feds. And as the big stimulus package winds down, those jobs could start to disappear as well. The original idea was that two or three years of stimulus spending would prop up the economy up while the private sector nursed its wounds, and begin to phase out just as private hiring began to ramp up again. But the private sector is still in rehab. Layoffs have eased, but hardly anybody is hiring.

The Federal Reserve is riding to the rescue again, with another round of asset purchases meant to flood money into the system, stimulate investors, boost stocks, and inject some life into the economy. It worked last time, for a while, but when the Fed stopped it became clear that the economy wasn't ready to stand on its own without crutches. So within a month or two, the Fed is likely to give it another try.

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If it works, and there are no more unhappy surprises, two seemingly contradictory things will happen in 2011: private-sector hiring will pick up and the unemployment rate will rise. That will happen because more hiring will draw labor-force dropouts off the sidelines and encourage them to look for work again. So instead of not being counted at all, they'll be counted as unemployed for a while, and then, hopefully, start to find jobs. But progress will be painfully slow, at best, with a good chance the unemployment rate will be higher a year from now, not lower. In the Democrats's best-case scenario, the real gains will come in 2012, as the unemployment rate finally starts to drop consistently. But if they've learned their lessons, they won't promise that.