Don't Count Obama Out Yet

As I write this on election night, the major news services have already projected that the Republicans will win control of the House of Representatives and make gains in the Senate. Based on opinion polls leading up to the election, neither of these developments is a surprise. But these results, especially in the House where Republicans put extra effort, send a message to the current administration that the way things are done needs to change.

The Republicans made it perfectly clear that this election was a referendum on the presidency of Barack Obama. No doubt this message resonated with the voters who obviously agreed with the Republicans. President Obama must change his approach to save his presidency, but can he or will he do it? It is clear in hindsight that President Obama misinterpreted his mandate in 2008. The voters wanted a President who would fix the economy. Mr. Obama interpreted his election as a mandate to be a transformational president. The people did not want healthcare or cap-and-trade, or the heavy hand of regulation. The people wanted jobs and a greater degree of job security.

Can Mr. Obama save his presidency? Sure he can. What needs to change? Everything. For a man who campaigned so brilliantly in 2008, he has been the most tone deaf president I have ever seen. When he was inaugurated, the president's top three priorities should have read like this: 1. the economy, 2. the economy, 3. the economy. He signed a poorly conceived stimulus bill into law then promptly forgot about the economy. As a result, the economy has made a weak recovery, with just 2% GDP growth in the third quarter (it was 1.6% in the 2nd qtr), and 15 consecutive months of unemployment at 9.5% or higher. Given the depths of the 2007-2009 recession, producing 3 or 4 consecutive quarters of 6% plus GDP growth should be a lay-up. He pushed healthcare when the people wanted jobs. He pushed cap-and-trade when the people wanted jobs. The people clearly saw both these legislative priorities as job killers.

There are historical precedents here, Ronald Reagan and Bill Clinton. Reagan dealt with a large Democratic majority in the house his entire 8 years in office, but in 1982 his Republicans lost 26 seats in the House. Unemployment was at 10.8% on election day in 1982. Yet, he stuck to his agenda of limited government growth, dereguation and unleashing the private sector. It worked. In 1983, the economy recovered by creating 4 million new jobs (3.8 million private sector jobs), and grew at a 7% rate. Unemployment dropped to 8.3% by the end of 1983. In fact, the economy sustained 4 consecutive quarters of 8% plus GDP growth over the final 3 quarters of 1983 and the first quarter of 1984. So far in the current recovery, the economy has produced only 1 quarter of 4% plus GDP growth (4.9% in 4Q09), a sorry economic performance given the depth of the recent recession.

Bill Clinton encountered a different set of circumstances. On election day 1994, the economy was actually posting healthy results. The economy grew at a very healthy 4.2% in 1994 and the unemployment rate was 5.4% on election day. So what went wrong with Mr. Clinton? His ambitious agenda, largely based on his desire to pass a healthcare bill. People were clearly not on board with the bill. He appointed his wife who was not confirmed by the Senate, who held meetings in secret, hired a panel of experts who were never named, and producted a bill that would greatly expand the role of government in healthcare. In addition, Mr. Clinton always had a character deficit with the American people that sapped his political capital. After the election, Mr. Clinton embraced a more limited government in conjunction with the Republicans in Congress, and the economy enjoyed another 5 years of uninterupted prosperity.

The lesson for Mr. Obama is simple. Embrace a more limited government and unleash the private sector. His rhetoric towards various portions of the private sector has been downright hostile. There is a good reason he has been labeled as an anti-business president by former General Electric CEO Jack Welch. Jobs are not being created because business has been saddled with higher costs and a higher regulatory burden. Companies are hesitant to invest because they do not know how costly these new burdens will be. The president has created a world of uncertainty. He has taken steps to make investment money available, but has also created an environment that is hostile to risk taking and investment that will ultimately be needed to grow the economy.

In the end, it all rests on the economy. If the economy makes a stronger recovery and creates jobs, Mr. Obama will be re-elected in 2012. Simple as that. He still enjoys the personal approval of over 50% of the electorate, although his job performance barely rates 40%. This says people still like the man and want him to succeed. Mr. Reagan and Mr. Clinton both enjoyed high personal approval ratings, and each easily won re-election after horrendous mid-term elections. Don't count Mr. Obama out yet. But, the current path he's on will guarantee Mr. Obama an election defeat in 2012.