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The Economy Will Do More Than Define the Elections

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Most political observers agree on two things: The economy will be one of the major defining topics in this year's presidential campaign, and probably the overwhelming one; and to boost his re-election prospects, President Obama needs it to stop weakening ­-- if not improve (as reflected in robust job creation, higher labor income, and enhanced consumer and business confidence).

It should therefore come as no surprise that the recently-released monthly employment report, which disappointed across the board, generated such opposing political narratives.

For the Republicans, it was yet another indication that the Obama administration is unable to deliver a robust recovery despite trillions of dollars of deficits, debt and money printing. For the Democrats, it was yet another reminder of the deep mess that Obama inherited back in January 2009 from his Republican predecessor, and the related inevitability of a protracted recovery.

Looking forward, both parties are asking the same question: Was the May jobs report an aberration or does it point to a renewed slowing of the US economy that could even reignite talk of another recession?

While volatile monthly numbers should never be taken as unambiguous signals, recent data do suggest that America's employment machine has lost substantial momentum and, more generally, the economy is having problems maintaining the growth vigor required to attain escape velocity and thus overcome the downward drag of too much debt accumulated over too many years.

After three encouraging monthly employment reports (December 2011 to February 2012, where average net monthly job creation exceeded 200,000 in the context of generally improving economic data), the economy added fewer than 100,000 jobs per month in the next three-month period; worst of all, net new jobs in May came in at a disheartening 69,000. Taking into account those not counted because they have dropped out of the labor force altogether, the proportion of the adult population with jobs today is stuck at around 58 percent. This compares to the mid-60s-percentile numbers that prevailed in the years prior to the 2008 global financial crisis.

All this speaks to both the extent of the economic and financial mess inherited by Obama and the inevitable difficulty of engineering a "normal recovery."

Whoever had come into the White House in January 2009 would have been challenged by an economy that faces unusual and significant impediments in gaining the cyclical traction that has been "typical" in the past - what we labeled back in May 2009 as the "new normal." Indeed, even the unprecedented amount of fiscal and monetary stimulus that has already been applied -- an extraordinary turbocharge if you like -- has not enabled the economy to attain escape velocity.

The message is clear. There are multi-year supply and demand problems that speak loudly to why the economy's recovery remains disappointing. No wonder it has proven so inadequate - especially in light of all the Americans that are out of work, those that are having enormous difficulties making ends meet, those that have already slipped into the poverty trap and the too many that have insufficient savings for their retirement years. And all this in an economy that, under Obama's predecessors, got significantly more unequal in its distribution of income and wealth and, therefore, its social compact.

Regardless of where we are in the election season, more needs to be done now to maintain forward progress.

This is not just about battling the internal headwinds created by the triple legacy that Obama inherited: too much debt; too little investment in education, job training and infrastructure; and too great a loss of competitiveness vis-à-vis other countries. It is also about building better defenses against the additional collateral damage that will hit us in the next few months from Europe's ever-deepening debt and growth crises - especially at a time when the usually-buoyant emerging economies seem to be hitting their own soft patch.

This is not the time to risk yet another mid-year economic slowdown that could even risk a recession. And Washington must realize that the urgency of the situation is heightened by what is happening beyond this country's borders.

Now I recognize that the extreme polarization of Congress will stand in the way of a proper policy response out of Washington. Indeed, realism dictates that, unfortunately, we should not expect to see a "first best" policy response. It will certainly not materialize in the run-up to the November elections.

Fortunately, there are steps that the administration can implement, and do so with or without the cooperation of the highly divided and divisive Congress. And while White House officials are only in a position to kick the can down the road for a while, this would avoid us tipping into an even worse situation.

Whether or not the administration succeeds in maintaining the growth and job momentum over the next few months is clearly an important question. And it is one that can only be answered if the administration shows greater resolve and if Congress stops standing in the way of virtually every policy proposal, big or small. Yet we should also realize that this is not the end of the challenges facing the American economy.

You see, the May employment report also demonstrated again the deep-seated nature of our unemployment crisis -- from the shockingly high and persistent number of long-term unemployed (stuck at 5.4 million Americans or 43 percent of officially-recorded unemployment) to the disastrous incidence of joblessness among the young (e.g., a 24.1 percent unemployment rate for 16-19 year olds in the labor force) and those that did not complete their high school education (a 14.6 percent unemployment rate relative to 4.5 percent for those with at least a bachelor's degree). Here, there is an unacceptably high risk that unemployed citizens can become unemployable if they remain out of work much longer.

For the economy to grow robustly for a number of years -- which is the only way that unemployment would come down properly, spreading poverty would be reversed, and the country would stand a chance of "safely de-levering" after the many years of excessive debt creation and credit entitlements -- Washington needs to move simultaneously and boldly on a number of different policy fronts. Otherwise, actions taken in any one area would be quickly undermined by lack of progress elsewhere. This is especially true for the long list of required but repeatedly delayed reforms in housing and housing finance; federal, state and local budgets; the labor market; education; regulation; lending; infrastructure and more.

Success here speaks to much more than whether it is Obama or Romney who wins the November presidential elections. It also relates to whether our political system as a whole can regain over time the ability to agree on a common economic vision, and to pursue it with the proper sense of shared responsibility, adequate seriousness and focused implementation.

Anything short of this would entail something that America is yet to experience in its proud history: the highly unsettling prospect that our our children's generation may end up worse off than ours. We should certainly not go there.

This piece appeared in the inaugural issue of Huffington.