While the political press seems to be talking about everything but the economy, it is the economy, and how people feel about it, that will likely drive the outcome in 2012. If the economy is growing at 4%, inflation is low and unemployment is down to a more reasonable level, the GOP will have a hard time to wrestle the Presidency away from him. Conversely, if the economy starts to double dip, his chances of re-election will recede. According to this paper, for every 1% increase in GDP, an incumbent can expect a 5% increase in electoral vote share. This is a considerable amount as 5% equates to 27 electoral votes, or a state the size of Florida. A 2% increase could add the electoral equivalent of California to an incumbent's totals.
Unfortunately for Obama (and for those of us who need to earn a living), the economy seems to be going in the wrong direction. Today, the second revision to 1st quarter GDP came out. It remained unchanged from the initial estimate of 1.8%, which is pretty anemic. But what is really concerning is the change in the components of growth that occurred between the revisions. The first go round, inventory building added only 0.09% to the 1.8% growth number. This time around, it added 1.19%, meaning that if you exclude inventory building, the economy only grew by 0.6% in the quarter. On top of that, inflation is picking up with the price index going up 3.8% in the quarter, up from 2.1% in the fourth quarter. And if that stagflationary GDP report wasn't enough, jobless claims also came in higher than expected and the previous week was revised up.
The problem for Obama is that he has already used all his Keynesian tools. He has massively expanded the budget, increasing spending across the board, but to no avail. He is even getting the assistance of probably one of the most dovish Fed Chairmen ever, who is leaving interest rates near zero AND monetizing the debt so that the Federal Reserve now is the biggest owner of US Treasuries, bigger than China (ponzi scheme anyone?). Given all that has been done, the economy, according to Keynesian economics, should be on fire right now (although some might say it is burning). It didn't have to be that way. If he hadn't wasted the $800 billion in "stimulus", he would have that ammunition now. Perhaps if he instituted an $800 billion tax cut, things would be better right now. Or maybe he could have concentrated on instituting pro-growth policies instead of focusing on anti-growth recessionary healthcare proposals, which increases taxes or costs on just about every taxpayer (premiums went up 25-50% for insurance plans in the year after Obamacare was implemented! That comes out of our pay and does nothing to benefit us).
The longer Obama waits to fix our problems, the longer he campaigns instead of governs, the worse they will be for all of us and in 2012, for him.