Sunday, June 20, 2010

Six Months: Economy (I)

Jobs are issue number one. But in the four months until midterms and the six months until Democrats lose the total control they have today, there’s little more the party will do to boost job creation, given their commitment to New Deal-style government action. The party rejects the private sector-related incentives Republicans advocate, believing such incentives under Bush produced economic collapse. Obama’s election was a mandate to dial back to big government solutions.

But after a rough 18 months of rising, now high, unemployment and rising deficits, Obama seems to be backing off more "New Deal" actions, sticking with what he's already done. Reuters’ James Pethokoukis spells out why:

1. Deficit spending—the jobs stimulus program—hasn’t worked, but hasn’t yet backfired. Deficit spending’s downside is rising interest rates, followed by inflation. But price rises will come later; in the short run, with the economy still underperforming, we need not fear inflation.

2. Congress has no appetite for another jobs stimulus bill. Not just Republicans, but also many Democrats now worry about adding to the deficit. As the Wall Street Journal’s Stephen Moore writes, Congress has taken the unusual step of not passing (therefore, not debating) next year’s budget. After all, it’s embarrassing to grow in the open a budget that already has average federal agency spending rising over 50% just since 2008. Better just to hide the budget.

3. Democrats (secretly) believe Okun’s law is about to kick in. Okun’s law says jobs rise and fall with the GDP, but in the current recession, jobs are lagging behind GDP growth. The Obama camp expects job growth, in line with Okun’s law, will soon catch up with the GDP, providing a sweet rise in employment going into November’s midterms. But Pethokoukis, drawing on Goldman Sachs data, argues Okun’s law is working—current employment’s in line with our modest GDP growth, so don’t expect any sudden jump in jobs.

In truth, presidents don't actually control the economy, and surprises can be positive as well as negative. Look at housing. Increased unemployment has led to rising foreclosure rates. But the latest statistics from Realty Trac, which measures foreclosure rates nationwide, show that in May, foreclosures actually declined 3% from April’s total, and 1% from May 2009. The Realty Trac CEO feels the market is finally beginning to work through the backlog of depressed properties built up over the past 20 months—which would be a positive economic sign indeed.

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