Real Disposable Income: Bad News for Democrats?

Back in 2008, before his trucking business failed for lack of freight to haul, Roman Dmytriv and his wife voted for Barack Obama. In this fall's election, they probably won't bother casting ballots. They criticize the President for helping Wall Street while doing little for ordinary people hit by the recession. "For some reason, we believed him. I feel a little bit cheated," says Dmytriv, 43, of Freehold, N.J. "Now I work in [info tech]. I live from paycheck to paycheck."

Never mind the unemployment rate. For early omens of the midterm election results, watch the amount of money going into people's pockets. In the language of economists, that's real disposable personal income per capita—the amount an individual has available to spend after taxes and adjusted for inflation. The numbers are not encouraging for Democrats.

Measured by disposable income, America's standard of living has been stagnant since January 2009, when Obama took office and Democrats tightened their grip on Congress. That's a sharp break with the historical trend: Over the past decade annual growth in real personal income per capita has averaged 1.6 percent. The only calendar years with declines during the past two decades were 2008, when the White House went from Republican to Democratic, and 1991, the year before the defeat of President George H.W. Bush.

Income growth has been the best economic predictor of U.S. Presidential election results since 1952, says Douglas A. Hibbs Jr., a former government professor at Harvard University and economics professor at Sweden's Gothenburg University. "It's the broadest measure of economic well-being," says Hibbs. "It has a very, very powerful effect." Former Labor Secretary Robert Reich puts it this way: "The underlying reality that people live with is their sense of anxiety about paying the bills."

Even lackluster growth is usually hard on incumbents. "Unemployment was falling when the first George Bush was running for reelection, and it did not stop us from running on 'It's the economy, stupid,' " says Stanley B. Greenberg, a Democratic strategist and former pollster for President Bill Clinton. "In 1994, the unemployment rate fell, but we got killed on the economy because incomes did not rise." It wasn't until 1995 that average aftertax income for the bottom 90 percent of earners returned to its 1992 level, according to IRS data.

In Nevada, where Senate Majority Leader Harry Reid is struggling to win reelection, the plunge in the construction and hotel industries drove down per capita personal income last year by 5.8 percent, the sharpest decline of any state other than Wyoming, according to the Commerce Dept.'s Bureau of Economic Analysis. (The agency does not collect state-level inflation data that would allow adjusting state numbers for inflation.)

For Reid and others hoping to remain in office, the lag in personal income is reason for worry, even as other indicators turn up. The overall economy has been growing since the middle of last year, and despite the recent tumult in the market, stocks have risen since Obama took office.

As the U.S. heads into the election at the end of the third quarter, real disposable income per capita will be up "a very anemic" 0.4 percent from a year earlier, forecasts Mark M. Zandi, chief economist at Moody's (MCO). "That suggests for many households aftertax income is still declining," he says.

While it may be hard to appreciate after a jarring recession, job security is improving for most Americans. In February, more workers quit their jobs than left them involuntarily for the first time since November 2008, a trend that has since continued, according to the Labor Dept. Unemployment has remained high because companies have been slow to hire new workers. Beginning in February, layoffs have been running below the historical average since the Labor Dept. began compiling the data in 2000. That is not enough to ease people's job fears, says Dennis J. Jacobe, chief economist for Gallup. "Perceptions will take a long time to turn around because they've been built up over two years," he says. "We have to see some significant hiring. Just stopping the layoffs is not enough."

With most voters not feeling the benefits of recent growth, they tend to view economic policies through a populist frame, Greenberg says, adding that it's "demonstrably ineffective" for the White House and national Democrats to claim credit for progress on the economy. "Democrats should not run on the condition of the economy," Greenberg states. "They should run on what they've done to get the economy moving in the right direction and help the middle class through this crisis."

The bottom line: The flat or lackluster real disposable income figures could spell trouble for Democrats in the midterm elections.

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