“WATCH what we do, not what we say,” President Richard Nixon’s attorney-general told the press. Unfortunately for both men, the press eventually did that, and we got the first of the “gates” — Watergate. The consequences for President Barack Obama of watching what he does rather than what he says will be less dire, but nevertheless revealing.
Americans overwhelmingly say their main concern is jobs, and that they are satisfied with their present healthcare arrangements. In response, an allegedly chastened Obama “pivoted”, and said his primary concern from now on will be job creation, which will take priority over his controversial plan to radically change the nation’s healthcare system.
Yet last week he backed a $15 billion job-creation bill, which passed the Senate, and a $1 trillion healthcare bill. Since the federal balance sheet is already under huge pressure, this set of priorities tells us that the Obama administration intends to concentrate its resources on transforming the economy — a permanent restructuring of the healthcare and energy sectors that was planned long before the failure of Lehman Brothers triggered the financial mess Obama inherited.
Not that the president will try to rein in stimulus spending: more is in the pipeline. Which is why Ben Bernanke, the Federal Reserve Board chairman, warned Congress last week that, although it is too soon to turn off stimulus spending, it must address the structural deficit — the red ink that will continue to flow even when the economy has recovered. Bernanke said that structural deficit will run somewhere between 4% and 7% of GDP, well above the sustainable level of 2.5%-3% or less. He also said that if Congress and the president don’t soon plan to attack the structural deficit, the market might decide that enough is enough, and interest rates would rise.
Investors are watching not only the size of the federal deficit, but of state deficits as well, since they are guessing that in the end the federal government will not allow state governments to go bust. Instead, if the states can’t satisfy their creditors, the federal government will take their $146 billion of debts on to its own balance sheet, raising its deficit to 11.6% of GDP. And that doesn’t count the $1,000 billion funding gap in state pension reserves.
But austerity is for later. Now, policymakers and politicians worry that the economic recovery is showing signs of weakness. New home sales fell in January to an all-time low annual rate of 309,000 units. Mortgage applications plummeted. The number of loan payments overdue by at least 30 days is the second highest on record. In short, the important housing sector is still struggling.
Janet Yellen, president of the San Francisco Federal Reserve Bank, doesn’t see the American economy hitting its full stride until 2013. Bernanke is predicting “low rates of resource utilisation” — econospeak for high unemployment and idle factories — and “an increasing incidence of long-term unemployment” for some time to come. And he worries that duff commercial property loans will bring down more small and medium-sized banks. The number of banks on the Federal Deposit Insurance Corporation’s “problem” list stood at 702 at the end of last year, up from 252 a year earlier.
Given news of this sort, it should come as no surprise that consumer confidence is plunging — it is at its lowest level in 27 years. Add to this banks that don’t want to lend, businesses that are reluctant to hire, and an anti-business government, and there is reason enough for worry. Obama spent part of last week trying to reassure business leaders that he is not a socialist and that his plans to raise taxes on foreign earnings, on banks, on “the wealthy” were merely a rebalancing of inequities introduced by his predecessor. One top White House economist tells me that he spends a lot of energy damping down the president’s anti-business rhetoric.
Any hope for an export-led recovery seems to be receding as European growth stalls, several countries are being forced to impose austerity programmes, and turmoil in the market for sovereign debt drives interest rates higher. Even China, long seen as a huge potential market for American products, is reining in credit to cool the economy, and persists with policies that discourage imports.
All of this has produced an important change in policies. Scrooge has become Lady Bountiful: the International Monetary Fund, long famous for prescribing austerity as the medicine for ailing economies, now warns that it is too soon to start cutting budget deficits. Bernanke more or less agrees, although he wants America to begin formulating plans to reduce the structural deficit once anti-recession spending winds down. This is music to the ears of such as Obama and Gordon Brown, both presiding over enormous deficits, both facing elections (congressional in the US, a general election in the UK), both unwilling to cut spending just yet.
The rating agencies and investors in sovereign debt are less enchanted with the newly blessed profligacy, and it may well be that in the end the bond markets will dictate policy by forcing up interest rates to growth-stifling levels unless the government cuts its deficit. Recall that one of President Bill Clinton’s advisers, frustrated at his inability to get his spending programmes adopted, lamented: “I used to think that if there was reincarnation, I wanted to come back as the president or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”
For now, it is safe to assume that the government will keep on spending, deficits will continue rising, and the Fed will keep interest rates low. That delicious cocktail of loose fiscal policy — Congress is busily drafting more stimulus bills as you read this — and easy monetary policy will, Bernanke said, produce growth of 3%-3.5% this year, and 4% next year. With little inflation. It’s rather like the old airline slogan: “Fly now, pay later”.
Now I don't think there's much government can do to create jobs except get out of the way, so I'm not looking for some huge "job creation" bill to replace the trillion+ healthcare bill, I want to see both dropped and actual pro-growth policies such as reduced regulations, corporate and capital gains tax cuts, accelerated depreciation, allowing corporations to repatriate foreign capital without enormous taxes, etc... but this administration will implement those when pigs fly. The curreent policy of unfettered spending and money creation can only lead to disaster.
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