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Is it Iraq or the Economy? That's the question the mainstream media seems to be focused on. The obvious answer is being overlooked:

How about both.

Most pundits, politicians and economists have yet to figure out what the public long ago came to realize: We now have a dual economy -- one that distributes gains and losses in a very uneven manner.

The lowest economic strata have seen tremendous job creation, particularly in China, India, Malaysia, Viet Nam, Taiwan, and parts of Eastern Europe. And any owners of hard assets:  real estate, energy, precious metals, as well as global equities, have seen their fortunes move up.      

So while the media drones on about whether the GOP will suffer from Iraq in tomorrow's elections, or prosper from the "strong" economy, you can be sure they know not what they say. While those of us in the top percentiles are doing very nicely indeed, the rest of the country is scraping by.

The economy, despite good overall data and record high corporate profitability, does not exactly imbue to the incumbent's advantage.

usincomeEvidence for this can be found in a recent study, titled "The Evolution of Top Incomes," by University of California-Berkeley economist Emmanuel Saez. Consider the following info from the study about the nation's richest income gainers. This top 1% of all American households -- 719,910 of them -- had:

• an average annual income of $326,720 in 2004;

• this represents 19.8% of the entire nation's pretax income; That's up more than 10% (from 17.8%) from 2003;

• In 2004, the top 1/10 of that 1% -- 129,584 American households  -- reported income equal to 9.5 percent of national pretax income.

• Between 2001 and 2004,  median, or midpoint, family income rose only 1.6 percent.

• Median family real net worth - a family's gross assets minus liabilities - rose only 1.5 percent during those four years.

Compare the recent sluggish income-growth with the four years between 1998 and 2001:

• Median family income grew by 9.5 percent and median family real net worth grew by 10.3 percent.

• Over 2000-05, workers with four-year college degrees saw their inflation adjusted wages fall 3.1%

• Only two groups, who together make up just 3.4 percent of the workforce, saw inflation-adjusted wages rise:  workers with doctoral degrees or specialty degrees, such as medicine or law, according to the U.S. Census Bureau.

• Soaring pay enjoyed by top CEOs, athletes and entertainers has also added to the widening income divide.

• The median value of stock holdings for the wealthiest 10 percent of Americans was $110,000 per household in 2004, according to Morgan Stanley, the banking giant. The value of stocks held by the other 90 percent of Americans averaged $8,350.

Those numbers are precisely why the Middle Class rates the economy only fair to poor, despite the data showing overall (but diminishing) strength.

Depending upon the elections results tomorrow, the Middle Class might force some changes -- in both the economy and the stock market. A minor realignment would produce gridlock, and that would be a good thing: it would act as a check on the profligate spending, and force some of the more heinous lobbying abuses back to merely egregious.

A major shift would reflect a full blown political re-alignment, and that could cause all sorts of mischief as far as markets are concerned. Its more than Iraq, the budget surplus deficit, earnings and inflation. We can expect to hear questions raised about fundamental fairness, given how the benefits of the tax cuts have accrued primarily to the top percentile.

Individual income tax rates were lowered, most especially the highest brackets, down to 25, 28, 33 and 35%. The big cuts in the way capital gains and dividends are taxed also fell to the wealthiest Americans. Indeed, much of the market run from 2003 is in large part predicated on tax policy that made it cheaper/more profitable to be a stockowner. (And I personally benefited from all of these changes).

I expect all of these 2003 tax cuts to be revisited in the event of a major GOP loss.

Former Treasury Secretary Lawrence Summers takes note of the way various economic classes have been impacted by the recent changes. Writing in the Financial Times, he notes:

"Against all odds, we are living in a time of plenty. Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world’s economy from growing faster in the past five years than in any five-year period in recorded economic history...

Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.

Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered." (emphasis added)

That pretty much sums up the upper and lower strata -- but its in the great middle where we see all sorts of angst coming out of this "new era."

And, if we are to believe what members of this group are actually saying to pollsters, its that same middle that is likely to impact the mid-term elections in the United States . . .

Source: It's Still The Economy, Stupid