The Election

Why Obama Won

In two words: The economy.

According to The Political ("Exit polls: Economy top issue"),

The economy dominated voters’ concerns at historical levels in the presidential election Tuesday, according to preliminary exit polls conducted by The Associated Press and the major television networks.

Fully 62 percent of voters said the economy was the most important issue, six times more than cited the war in Iraq (10 percent), health care (9 percent) or terrorism (9 percent).

In a few posts last month (e.g., "Contingency and Causation" and "More from 'The Irrational Electorate'"), we referred to an article by Larry Bartels in The Wilson Quarterly, "The Irrational Electorate". In that article Bartels noted,

...studies of economy-driven voting almost invariably find that voters are strongly influenced by economic conditions during the election year, or even some fraction of it, but mostly ignore how the economy performed over the rest of the incumbent’s term.

The acute worsening of the financial crisis in mid-September erased Senator McCain's small lead in the polls and Senator Obama never looked back.

What sort of economic policies will President Obama pursue?

Broadly speaking, Obama supporters have fallen into two groups: those who voted for him because they thought he was an orthodox liberal (as some of his earlier statements, his background, and his voting record might suggest) and those who voted for him because they thought he was more of a pragmatic centrist (as some of his statements during the campaign, and some of the advisers he surrounded himself with -- e.g., Robert Rubin, Paul Volcker -- might suggest). We'll find out which group was right soon enough.

Is this a historic realignment?

Some pundits have claimed this, but I'm skeptical. Clearly, the Republican brand has been damaged, but the bursting of the credit bubble won't leave Democrats unscathed either. Democrats have benefited from invidious comparisons between the economy and budget under President George W. Bush and President Clinton (e.g., a budget surplus under Clinton and deficits under Bush), but going forward the basis for comparison is going to be a lot different. The deficits during the first years of the Obama administration are going to be easily more than twice as large as the largest deficit during the Bush years. Unemployment rates, and eventually, inflation and interest rates, will probably look significantly worse too. Granted, this will be due largely to the continuing effects of the credit bust, but then the surpluses under Clinton were largely due to the dot-com bubble. Presidents, and their parties, get the blame or the credit for economic conditions when they are in power.

Investment Implications

The conventional wisdom is that green energy and, perhaps to a lesser extent, infrastructure will be beneficiaries of President Obama's policies. That sounds reasonable. A big winner will probably be the venture capital firm Kleiner Perkins¹, which has been savvy enough to get in early on the green tech bubble and sign on Al Gore as a partner. Unfortunately, Kleiner Perkins isn't publicly traded, and if does go public in the next few years, its IPO will probably be a signal that the green tech bubble is about to burst.

A commenter on CNBC today mentioned another investment idea -- life insurers -- which should benefit from the reinstatement of the estate tax (since the wealthy often buy life insurance policies to cover their estate tax liabilities).

If Jim Rogers and others are right that the yawning deficits ahead will eventually lead to much higher interest rates, than it might make sense to short Treasury bonds, as Rogers says he is doing (or to invest in a fund such as RRPIX that inversely tracks Treasury bonds).

The photo above of Obama and McCain is from The Dallas News.


¹A small venture capital firm that is publicly traded, Harris & Harris Group (Nasdaq: TINY), has about 41% of its portfolio invested in what it calls "Cleantech". This page on Harris & Harris's website lists its Cleantech portfolio companies, and provides links for more information about each of them. I've owned a few shares of Harris & Harris since the early 1990s, before it became focused on nanotechnology, and then Cleantech.