Corporate earnings are improving, but unemployment remains high.  These are not unrelated. As the weak economy has held down wage increases, this alone will translate into lower costs and better profits. But this is true only if high competitive pressures have not squeezed margins, which has occurred and if volume remains healthy which varies based on industry.  Demands for technology are solid; demands for housing and construction and related banking services are not.

With tax increases on the horizon investors and business managers are using whatever tools are available to push earnings into 2010 and expenses into 2011.  This will make the current year look better, but it will make 2011 look worse. Business people know this and this is why they are reluctant to make long term investments. For example there is a growth in Rolph IRAs and 401k’s which allows investors to convert current retirement plans and pay taxes this year and get tax free distributions later.

The insistence on class warfare and only increasing taxes on the rich plays well to those seeking social justice, but the reality is that this class will change their behavior the most in response to higher taxes.  They will swap labor for leisure, which they can more easily afford to do, and they will swap tangible assets for financial assets.  They do not have pay tax on the enjoyment of a second home or a new boat. This will drain investable assets that are desperately needed to create new jobs.

Complicated laws measured in thousands of pages have two distressing effects.  They increase the need and function of lobbyists who seek to carve out special advantages for their representatives.  A president who campaigned on the malignancy of lobbyists will cause them to proliferate.

These laws put a burden on the smaller businesses who often lack the political power to influence the legislation that controls them or the counsel to advise them on minimizing their impact.  These small businesses are the backbone of the middle class, and the complex regulations will hurt the middle class and small business much more than the rich who are more adept at managing political risk.

The destruction of the middle class is more destructive to our social fabric than all of the excesses of Wall Street, both real and imagined.

Business is frozen from radical and uncertain legislation and clear anti-business jawboning from the presidential pulpit. Nobody wants to play a rigged game. As some retire early they will not likely re-enter the business world until confidence is restored and they just do not trust the administration as Neil Cavuto so appropriately put it. There is some cost to the loss of the most experienced business people; their wisdom is needed to avoid mistakes they learned from.

All of this keeps unemployment high.  Higher minimum wages and longer unemployment benefits make hiring both more expensive for businesses and less desirable for workers. I have never had a worker ask to be laid off… until this recession.

The only thing keeping unemployment as low as it is has been is the number of workers just exiting the workforce.  Those who are not actively looking are not counted. But at some point these people will return to the workforce. Perhaps they run out of money or their brother in law just tires of them sleeping on the couch.

Ironically the very thing that may push them to re-enter the workforce may be the renewed optimism that may accompany a sharp political reversal in November. We can thus expect an increase in unemployment if the Republicans make significant gains. This will be short lived if the Republicans can make the proper policy changes that we desperately need.

If the Republicans do not make the material political gains so many expect then this terrible business climate and the related unemployment will be with us for some time.