Who will get in next?

Charts That Explain Democrats' Loss

Barry Ritholtz is a Bloomberg View columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He blogs at the Big Picture and is the author of “Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy.”
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The elections are over. The pundits will spend the next few months dissecting the candidates and the campaigns. The Republican Party ran a strong campaign with attractive candidates, while the Democrats did neither. Voter turnout was low, which often gives an advantage to Republicans.

Then there is the economy.

The Democrats seem to have forgotten about that. We didn't hear much about the slow but steady improvement during the past six years. President Barack Obama and the Democrats could have pointed to a number of economic accomplishments: Unemployment has declined to less than 6 percent; the economy grew at a 3.5 percent rate in the latest quarter; gasoline is less than $3 a gallon; the annual federal budget deficit has been cut in half.

None of that got much airplay. There is an argument to be made that it wouldn't have mattered much anyway. As you can see in the chart below, real median household income had a big decline. It peaked in 2007, went straight down through the Great Recession and continued falling. By 2011, it had begun to stabilize, and only recently ticked up a bit.

Despite falling incomes, Americans continue to pay down their real estate-related debts. The hangover from the financial crisis was that lots of leverage accumulated during the boom needed to be deleveraged during the bust. As American families paid down their home-equity lines of credit and other housing-related obligations, they were doing so against properties that were worth less. Net worth fell as well, even as the economy recovered. This chart shows the ratio of liabilities as a share of household median income. It is improving, but at a painfully slow pace.

The continual deleveraging as real incomes fell was a one-two punch the Democrats failed to address. The subtext of the Republican message was, "Are you better off under Obama?" The answer, for many Americans, was no.

Presidents tend to get credit for good economies and blame for bad ones. Of course, it's unfair to place the full responsibility for the lack of progress on Obama. The hangover from the financial crisis deserves much of the blame regardless of who was president. And it would be disingenuous not to place some blame on Republican intransigence. The party's insistence on austerity at state and local levels has been a drag on incomes everywhere. Had Obama enjoyed the same level of government hiring and spending trends that George W. Bush had, the economy would be much stronger, and that ratio would be far less onerous.

None of that matters. The Republicans tapped into dissatisfaction with the Obama economy, despite how positive large parts of it look on paper. The average family has had no gain in income for six years and they are working harder to pay down the excess leverage from the 2000s.

Obama didn't address this. At least, that seems to be the message the Republicans got out, early and often. A diffuse anger toward Obama was tapped and in many subtle ways, directed toward this issue.

Regular readers know I am not big on forecasts, but I am going to make one here and now: The party that figures out how to respond to this issue in a way that resonates with voters will win the White House in 2016.

The original version of this column published Nov. 6 included the wrong chart, showing the ratio of liabilities as a share of household median income. It also included an incorrect explanation of what the chart described. Here is a corrected version of the column including the intended chart, showing the decline in median household income, and rewrites the fourth through seventh paragraphs.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Barry L Ritholtz at britholtz3@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net