Obama Can Buck The Trend

Journalists can be as slavish to precedent as judges. Most media round-ups of the U.S. presidential election stakes begin or devote much space to the fact that unemployment is running high and that no incumbent since FDR has secured re-election with it higher than 7.2 percent.

Binyamin Applebaum provides the perfect example of conventional wisdom with his piece for the New York Times on June 1, in which he asserts: “Seventeen months before the next election, it is increasingly clear that President Obama must defy that trend to keep his job.”

Precedents are there to be broken, though, and elections are littered with examples of campaigns that have bucked trends. Obviously, persistently high unemployment is something that’s likely to hurt Obama – I’m sure he’d prefer it below the magic 7.2 percent number – but it may well be that it isn’t the defining factor this time.

With incumbency and no primary challenger, Obama is already enjoying a couple of distinct advantages.

And he has another major advantage going into the election season that will, I suspect, assist him to buck the trend – namely, the weakness of the opposition. The GOP’s current candidates are about as inspiring as Bob Dole was in 1996, an election that saw Bill Clinton coast to victory on much lower approval ratings than Obama now enjoys.

Clearly, Obama is vulnerable because of the agonizingly sluggish recovery and high unemployment. Twice as many Americans think the country is on the wrong track as the right one and anger is high in key battleground states such as Michigan, Ohio and Florida. Obama will focus no doubt on continuing to try to persuade voters that without the stimulus and the takeover of GM and Chrysler, the economy and unemployment rate would be much worse.

I happen to think he’s right but that, though, is a tough sell and comes down to defending a record rather than pitching forward and presenting new ideas. President Herbert Walker Bush was caught in that trap when he sought reelection in 1992 – in fact the economy was pulling out of recession then but people were not feeling the benefits of recovery and he got blamed for the economic pain.

Obama has another major weakness: he has failed to present a credible plan to cope with the budget deficit, currently running at almost 10 percent of GDP. His suggestion is that higher taxes on the wealthy will sort that out. It won’t.

But where is the Republican that can take Obama’s weaknesses and turn them into GOP strengths? Do they have credible plans for reducing the budget deficit while at the same time coaxing quicker growth and providing the circumstances for more Americans to get jobs?

The governors in the race – Jon Huntsman, Tim Pawlenty and Mitt Romney – have to be considered the serious candidates. (Sarah Palin, if she runs, and Michele Bachmann are the circus acts.)  But all they do is trot out the line that pleases the Tea Party consisting of slashing public spending and cutting taxes.

Pawlenty has gone off into never-never land in terms of the scale of public spending and tax cuts he wants to see – his plan has prompted groans of disbelief from the Economist magazine, hardly a publication that is in favor of Big Government or high taxes. Aside from ideologues, few respected economists see much to recommend in the bleak solutions being thrown up by the GOP candidates.

They sound like Bush the Younger when it comes to the magic of tax cuts. He claimed that “tax relief will create new jobs. Tax relief will generate new wealth. And tax relief will open new opportunities.” And how did job growth fare? Well, between pre-recessionary 2001 and 2007 America enjoyed the slowest job growth since World War II. Very impressive. And now we have the Republican candidates coming out with the same old, same old unsophisticated supply-side solutions.

Of course, taxes can be too high and in certain economic circumstances and at some points in business cycles tax cuts can be essential. The IMF is recommending them for the UK currently – and that on top of the spending reductions being planned by the coalition government in London. But for America now tax cuts would be unhelpful for economic or job growth.

Bruce Bartlett, a senior policy analyst in the Reagan White House; and deputy assistant secretary for economic policy at the Treasury Department during the George H.W. Bush administration, has been trying to explain to his erstwhile colleagues on the right about why that is the case. His latest column in The Fiscal Times scorns Republicans for tending to talk as if there is only one factor that affects growth – namely, tax rates.

As Bartlett points out corporate investment is key when it comes to economic growth. It is worth quoting him in full:  “There’s no evidence that the 2003 tax cut did anything to stimulate corporate investment. Indeed, according to the Federal Reserve, nonfinancial corporations have increased their holdings of liquid assets to $1.8 trillion from $1.2 trillion since 2003. Thus it’s implausible that a further reduction in the corporate rate, as Pawlenty and other Republicans favor, would do much to raise investment.

“The bottom line is that neither taxes nor spending by themselves are the most important government contribution to the investment climate; it’s the budget deficit. Consequently, a reduction in tax revenue which raises the deficit is unlikely to stimulate domestic investment because more money will have to be borrowed from abroad. Conversely, a tax increase dedicated to deficit reduction could well be stimulative, as was the case with the 1982 and 1993 tax increases. Contrary to Republican dogma, rapid growth followed on both occasions.”

Ordinary voters may not think in such terms. Polls suggest that the budget deficit scares the blazes out of them — as it should. But are they going to be convinced that drastically cutting public spending pell-mell is the answer or that making America’s wealthiest people even wealthier is the way forward?

One thing, I suspect, Republicans still don’t get is that they scare the majority of voters far more with their talk of radically changing Medicare, Medicaid and Social Security. And their lack of a plan to overcome the clear and present danger of structural unemployment save a shrug of the shoulders and claiming tax cuts will solve everything by magically promoting economic growth just isn’t going to cut it on the stump either.

An approach that talks about public investment in infrastructure, science, technology and education, structural reforms to boost jobs and growth, the importance of savings, cutting public spending over time and not so rapidly that it will derail recovery, retraining, government in partnership with the private sector is much more likely to resonate with voters.

As the Economist has pointed out recently, the Republican “failure on the deficit” is serious. “The deficit is simply too large to close through spending cuts alone. The overall tax take – at its lowest, as a share of GDP, in decades – must eventually rise.”

Realism is something that Americans are likely to appreciate this time round more than ever. They understand that a crossroads has been reached. So far there isn’t a candidate on the GOP side who is offering honesty to counter Obama’s half-honesty.

 

 

 

Let’s Roll — Time for Tax Cuts And More Stimulus

“The movers and shakers of our society seem…oblivious to the terrible destruction wrought by the economic storm that has roared through America.” Thus writes the New York Times’ Bob Herbert, who notes in a weekend column that “nearly 44 million people were living in poverty last year, which is more than 14 percent of the population. That is an increase of 4 million over the previous year, the highest percentage in 15 years.”

And as for the middle-class, Herbert observes, they have “hobbled for years with the stagnant incomes that accompany extreme employment insecurity” and are now in retreat. The economic fear stalking America goes far to explain the severe fall in popularity of President Obama and the rise of the Tea Party.

For all of my fears of the social conservatism that is veined through the Tea party movement, the public focus for most Tea Partiers is on the economy. But their answer is not the right one to deal.

Understandably, they blame government. It was government that gave us the runaway juggernauts of Fannie Mae and Freddie Mac; it was home-ownership encouragement from both sides of the Washington DC political aisle that gave us sub-prime; and it was the administration of George W. Bush that believed “deficits don’t matter” and presided over the greatest splurge of public spending since Lyndon Johnson.

So, why trust government now? For the Tea Partiers it is time to get back to basics – to the U.S. Constitution, to balanced budgets, to limited government. All noble aims. For many of them, though, read “no government” when they say limited government. But this isn’t the time to say “no government” — we need it to sort out the mess it co-authored.

Unfortunately, in the same way that Tea Partiers are going back to basics and mistaking the sky-rocketing deficit as the problem, so various policy-making elites are returning to unsophisticated positions. Free market advocates are becoming more uncompromising; Keynesians more Keynesian. All are over-focused on ideology.

In this fevered political environment the administration is more timid than it should be. The U.S. needs another financial stimulus. Yes, this would add to the federal deficit but when you have cancer, to survive you need to take some poisons as therapy. Convalescence can come later.

For Republicans – and the Tea Partiers – that is heresy. For them “big government” explains the economy’s weakness, and high unemployment is evidence that the President’s fiscal stimulus failed. But this is wrong. As the Economist magazine notes, “the notion that high joblessness ‘proves’ that (the) stimulus failed is simply wrong. The mechanics of a financial bust suggest that without a fiscal boost the recession would have been much worse.”

There has been growing confidence that America will escape a double-dip recession but that is far from certain. The jobs market remains in a slump, recovery is anemic, property prices continue to fall, a further wave of home foreclosures is on the cards.

In 1937-38, fiscal and monetary contraction killed dead a recovery, sending the economy back into a prolonged slump that didn’t end until World War II.  And as Arthur Laffer argued in a Wall Street Journal op-ed earlier this year tax hikes had much to do with the problem. “The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity.”

That lesson seems belatedly to have been absorbed by Obama aides, who are now supporting the idea of extending the Bush tax cuts, except for the top 2 percent of earners.

But this crisis is not a normal cyclical one. There are serious structural aspects to it, as the PIMCO chief executive Mohamed El-Erian has been maintaining. His point?  Policymakers must implement a “structural vision to accompany their current cyclical focus. Measures are needed to address key issues, which include the change in drivers of growth and employment creation; the high risk of skill erosion and lost labor productivity; financial deleveraging in the private sector; debt overhangs; the uncertain regulatory environment; and the unacceptably high risks facing the most vulnerable segments of society.”

El-Erian’s recommendations include “pro-growth tax reform, housing finance reform, increased infrastructure investments, greater support for education and research, job retraining programs, removal of outdated interstate competition barriers and stronger social safety nets.”

Yes, in short, a stimulus from tax cuts that can help encourage consumption and unleash animal spirits AND more public spending to get things moving more.

For the Democrats tax cuts – especially for the wealthy – are anathema. But the U.S. needs to grow its way back into prosperity. For Republicans and Tea Partiers, more government spending is just an excuse for “big government.” Of course, federal deficits will need to be curbed in the long run – preferably starting within a couple of years.

Let’s go back to El-Erian’s point about there being a structural part to this crisis and observe the labor market.

According to the GOP Nevada Senate candidate Sharron Angle, people who receive unemployment assistance are “spoiled.” In short, they should just get a job. Easier said than done. Americans have been used to employment snapping back after recessions. But there is clear evidence now that it isn’t just weak demand that’s responsible for stubborn unemployment but something more structural.

For example, unemployment has not fallen in the way it should have with increases in job openings. Many jobseekers do not have the skills needed by employers. This is nothing to do with being “spoiled.” Half of the eight million jobs lost in the recession were in construction and manufacturing. Many of those workers are unable to slot into jobs in education, say, or health services. Add to that the difficulty workers have now in re-locating because they owe more on mortgages than their homes are worth.

Looser monetary policy will not alleviate this problem. Libertarians  argue that government should have no role in trying to sort this out. But the free market will be too slow.

So far no single growth engine has emerged to pull the U.S. towards strong recovery. Consumer spending and business investment have been too weak. President Obama’s hope that the country can export its way to strong recovery looks forlorn. For that to happen, America’s trading partners need to be buying American goods. They aren’t. China and India are eager to head off inflation and are tightening. The PIGS economies in Southern European are cutting spending and raising taxes. So are some of the more robust EU economies, notably Britain. But unlike the European countries the U.S. has some leeway to increase public spending — the yield on 10-year Treasury bonds remains below 4%, well down from the 8% of 1990 and inflation remains weak.

So government has to seek to accelerate growth – by tax cuts, payroll tax holidays and further government spending. The debt can be focused on down the road when growth increases along with tax revenues.