Job Creation: Democrats Have Run Out of Time With Voters


It's summer time, and as the saying goes, "the living is easy." But not if you're a Democrat in Congress. And storm clouds could form for investors, as well, later this year. Here's why.

BP's (BP) oil leak is the worst U.S. environmental disaster in the modern era and will remain a political issue until the spewing crude is stopped. Assuming the leak is plugged and the cleanup is comprehensive, voters probably won't blame either the Democrats or the Republicans. BP will probably bear the brunt of it.

Party in Power Gets the Blame

The voters will, however, assign blame for a lack of progress on the nation's No. 1 problem: The high unemployment rate, currently 9.7%.

And who will the voters blame? The party in power in Washington -- President Obama and Congressional Democrats. It's a political science axiom that the party in power generally gets the blame for a problem that isn't solved. And the dearth of jobs is a major problem.

Hence, as it stands now, the Democrats are likely to lose 20 to 25 seats in the House and about five seats in the Senate in the midterm elections, and there's a small chance of the Republicans regaining majority control of each chamber.

Out of Time

Predictions of heavy losses for the Democrats draw on seminal research on voting behavior by Campbell et al. in The American Voter: In an election year, most voters decide whom to vote for by the end of May, then tune politics out in the summer. And rarely do conditions in September/October change enough to alter their vote.

So the Democrats had up until Memorial Day to return the economy to a condition of adequate, sustained job growth. Earlier this year, it appeared that the job market had turned the corner, with the economy adding 208,000 jobs in March and 290,000 in April, after a severe recession that, incredibly, saw the nation lose jobs in 23 of 24 months during one stretch.

However, job growth stalled in May, with fewer than 50,000 private-sector jobs created in the 431,000 total -- and that means the Democrats have run out of time.

Further, all votes count, but generally speaking, the key voters are the independents. That's because the voting trend of Americans aligned with either of the two major parties is pretty much set.

However, independent voters represent the "swing" vote, depending on whether the party in power is doing a good job and is solving problems. And, as noted, due to the lack of progress at creating jobs, most independents will be voting for a Republican/Tea Party candidate in November. Other issues will play a role, but the lack of jobs and concern about their own job security will be foremost on Independents' minds.

Ahead: Washington Gridlock?

Further, if enough Independents vote for Republicans, the GOP will regain control of Congress, creating a divided government.

Some investors argue that divided government is good for the markets and the economy, as it can 'prevent Washington from doing anything' -- which some Americans view as a good thing. The reality, however, is that given the ideological canyon between today's polarized political parties, it's a prescription for gridlock.

More than likely, a budget stalemate will ensue, as the parties fight over funding priorities. Republicans may also oppose Democratic efforts to raise the debt ceiling. If they do, the uncertainty regarding the funding of U.S. government operations could really rattle stock, bond, and currency markets.

Other spats could also arise that could roil the financial markets as Republicans think of new ways to frustrate President Barack Obama and the Democrats in the GOP's effort to retake the White House in 2012.

What would invalidate the heavy losses for Democrats/possible loss of control of Congress scenario? If the economy suddenly started creating 300,000 or 350,000 new jobs per month, from June through October -- that would decrease the Democrats' projected seat losses.

But barring an unexpected surge in new jobs, investors should expect a stronger Republican voice in Congress after the 2010 election -- and possibly divided government with gridlock.

Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.