Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

One day shy of his first year as President, Barack Obama faces the biggest threat to his incumbency and possibly to his power.

The voters in Massachusetts will determine today whether the Democrats’ filibuster-proof hold on the U.S. Senate is broken or maintained.

It appears that the expected ‘easy win’ by a Democrat in Massachusetts was a serious miscalculation. With the moniker for the Commonwealth of “The People’s Republic of Massachusetts” tossed so freely about, the misguided assumption by many was that the state was a shoe-in for a Democrat candidate for the U.S. Senate.

But what seems to have been forgotten was the first rule of politics that the Massachusetts Congressman and Speaker of the House, Thomas “Tip” O’Neill so often reiterated. “All politics is local.” In Massachusetts as in any state a loved politician may be the only secure seat. Senator Ted Kennedy was overwhelmingly loved by the people of Massachusetts, from 1962 till his death in 2009. He brought home the bacon and he was there for his constituents. And when he stomped for Democrat Presidents, the people voted for “Ted Kennedy’s” president.

But now the beloved Senator is gone and the hard facts are on the table. As of the 2006 census, there were 4,098,634 registered voters in Massachusetts, of whom 37% were Democrats, 13% were Republicans and a whopping 50% declared themselves as Independents. Fifty percent of the voters in Massachusetts declare that they are unaffiliated with a party. WOW!!

Massachusetts has a long history of electing a Republican as Governor. In fact, in recent history (defined as my lifespan for this piece, i.e. since the middle of the last century) there have been nine Republican and six Democrat governors, and that is counting Michael Dukakis twice (as a Democrat, of course).

Admittedly, the last time a Republican was elected to the Senate was in 1967. That was Senator Ed Brooke, who lasted two terms. In fact, I voted for him, in my very first time at the polls. To be fair, though, with the seat occupied by Senator Kennedy hardly ever in doubt, there hasn’t been much of a Senatorial race for over half a century.

Now it is a different story. The Independents in Massachusetts are free to vote with their heads not their hearts. Massachusetts is actually a hotbed for independent thinking and acting. Remember they created the first tea party.

Polls can be misleading and deceiving as we have seen on too many occasions to count. But a statistic that is worth noting is that the absentee ballots cast for this Senate race are running far higher than is usual. That means there are voters with passion.

It will be fascinating to watch the news this evening. I am making no predictions, but regardless of the outcome of today’s election, a message is being sent to President Obama. If Scott Brown should win big, a big message will have been sent.

The productivity gains that the U.S. economy has achieved over the last twelve months have been nothing short of impressive. Through a combination of increased output and reduced hours worked, unit labor costs have been declining. In the tough world of economics, this is the way the system works.

In a capitalist system, productivity gains are essential for long term success, for the ability to raise real wages and to increase standards of living. During periods of economic growth, it can be relatively easy to grow profits. Productivity often appears to be a bit of a luxury. Holding on to hard-to-find labor carries a higher priority than the marginal profit produced. Capital investment rises along with labor costs – a bit of a guns and butter approach, as profits are easy to achieve.

But when the economy is in a recession, as it is today, the business of finding ways to reduce costs and squeeze profits out of diminishing revenues becomes a necessity. Management cuts the workforce, knowing that labor is cheap and easy to find. And lo and behold, marginal profit starts to increase.

UPS is a case in point. The headline in this weekend’s Wall Street Journal read: “UPS Raises Profit Expectation”. The subtitle was: “Shipper Plans to Eliminate 1,800 Jobs…” That workforce reduction was in addition to the 13,000 jobs it cut in 2009. Despite a significant increase in its fourth quarter volume, as retailers panicked and decided to fill their shelves for the Christmas selling season, the company rationalized its new workforce reduction by pointing out the productivity it has been able to achieve through technology.

The dilemma occurs when the economy bottoms out and starts to improve, a condition that appears to be emerging today in this country, and in many other countries around the world. Wary of the strength of the emerging economic resurgence, managements are loathe to hire laid off employees. So they push production harder and achieve even greater productivity. It looks like a virtuous cycle for capital. What is lacking is the benefit to sidelined human capital. The labor force is the last element to participate in the economic rebound.

There is no reason to believe that this economic cycle will be any different. In fact, given the depth and breadth of the current recession, I believe that employment gains will be slower to emerge as the economy improves. This will be evident in a continued high level of unemployment even as profits continue to grow and revenues rebound during this year and next.

The 10% official rate of current unemployment in the U.S. understates the true level, which includes all those workers who have been discouraged from seeking employment after months of endlessly searching. As the economy improves and those job seekers re-emerge, they will once again be counted in the statistics of the unemployed, further depressing the official Government rate of unemployment. The decline in a number of Federal Government stimulus programs will only exacerbate the situation.

Expect the unemployment rate in the U.S. to stay high throughout this year. I will venture to say it will not likely go below 9%. I hope I am wrong.

The week after Christmas is always my favorite time to go to the movies. Shopped out, and with no more appetite for food, the indulgence of sitting (popcorn free) for two hours in the cinema is sublime. I choose my movies carefully. I am not a “special affects” person; blood and guts disgust me. So my list of possible movies to attend is always far shorter than most people’s.

This past week, I saw four movies and did not regret going to one. In case that sounds a bit like damning with faint praise, I should clarify by saying that of the four, one movie stood out from all the rest. It was Invictus. The combination of brilliant acting by Morgan Freeman and Matt Damon as well as the deep message was a moving experience. At times I actually forgot that Morgan Freeman was on the screen – I thought I was looking at Nelson Mandela.

The movie seemed so perfectly timed, so relevant and so needed right now. It depicted national leadership at its best – the ability of a man, despised by so many, to rally his country together against all odds and to find the best in each other. It actually brought tears to my eyes on several occasions.

The economic and social problems of South Africa in the mid-1990s were far graver than those we face here in the U.S. today. The political divisions among its citizens were far deeper than those existing in our country now. But as elected President, Nelson Mandela led his country and his countrymen and women by his own example. He did more than just cross the aisle, to use American parlance. He forced people who hated each other to come together, to work together and to achieve greatness through that bonding.

In this country today, we have serious issues that need to be resolved – health care, national security and recession are but the largest. Unfortunately, partisanship appears to be of greater importance to our Congressional representatives than reaching mutual agreement on solutions. What we need now is a Nelson Mandela, a leader who can bring together the warring factions within the Government and make Government work for, not against, the common interests of all of us. Let’s hope President Obama can wear that mantle in the second year of his presidency.

Oh, by the way, the three other movies I saw and enjoyed – in varying degrees of enjoyment – were An Education, It’s Complicated, and Up in the Air. Meryl Streep (It’s Complicated) is simply the finest actress today.