Economists are painting a pretty bleak picture of the economic outlook between now and the November 2012 election. Will this hurt President Obama's re-election chances? Or will voters blame the Party of No?
That, of course, partly depends on what kind of campaign Obama runs and partly on the Republicans. But first, let's take stock (actually, maybe let's sell stock).
The Federal Reserve has been buying up lots of bonds to keep interest rates very low. The Fed disguises what it's doing with the antiseptic and mystifying term, "quantitative easing," or QE for short. This is the second time the central bank has tried this trick, hence the coy nickname, QE 2. The problem is that very low interest rates only take you so far in a depressed economy.
For the most part the Fed's policy has been good for large banks and good for the stock market. Ordinary borrowers, businesses and homebuyers have trouble getting credit.
But other factors are starting to limit the effectiveness of very low interest rates.
For one, the very low rates in the US are depressing confidence in the dollar. That means we start importing inflation. For another, rising commodity prices worldwide -- partly the result of the Fed's policy, partly due to rising demand in India and China -- means increasing prices of consumer goods at home.
Five-dollar-a-gallon gas is not good for President Obama. Nor is the practice of food processing companies shrinking the size of standard packages to disguise price increases. And in the one part of the economy that might benefit from a little inflation, low interest rates have not worked to levitate depressed housing values.
The time-tested remedy, when cheap money ceases working, is expansive fiscal policy -- government deficits and public investment. Now there's an idea.
Oops. Forget it.
There is, of course, huge pressure from the nation's opinion elites to cut the deficit, long before the economy is out of the woods. It comes from four potent sources.
Wall Street deficit hawks have been banging these drums for three decades, even during the late 1990s when the budget was in surplus.
The elite media buys this story, hook, line, and sinker. Big deficits are seen as proof of partisan gridlock and government irresponsibility. The six bipartisan horsemen of budget apocalypse, Senators Warner, Chambliss et. al. are widely depicted as fiscal heroes. The pundits seem to forget where these deficits came from.
Republicans since Ronald Reagan have pursued a strategy of cutting taxes and then expressing shock at the ensuing deficit and demanding program cuts accordingly. We were already having historically high deficits when the recession began, because of the Bush tax cuts of 2001 and 2003. Today's even more extreme Republicans would cut taxes further, slash outlays to their lowest level since before FDR, invoking the gods of deficit reduction.
President Obama, for his part, has fanned these flames with his appointment of the Bowles-Simpson commission, and his premature shift, as early as the 2010 State of the Union Address, from the theme of economic recovery and job creation to that of deficit reduction. His recent address at George Washington University was terrific at holding the line on Medicare, Medicaid and Social Security, but bought into the premise that we need deficit reduction more than we need job creation.
Why is Obama pursuing this strategy? Partly because his conservative economic advisers buy it, and partly because his political advisers look at polls that tell them voters care about deficits, especially political independents. But that current of public opinion exists only because opinion leaders -- including Obama himself -- have made such a fetish of deficits.
There is a whole politics that just isn't on the table: massive public investment to create jobs and growth -- which then increase revenues and bring down the deficit. The political scientist Walter Dean Burnham refers to this sort of dynamic as "a politics of excluded of alternatives."
But wait, isn't the deficit a real problem? Yes, and no. Eventually, deficits at the 2011 level are not sustainable. However, the current accumulated debt held by the public of about 60 percent of GDP is not dire.
We could have two or three years of bigger deficits, very major public investment, let the debt ratio peak at 100% of GDP; and then stronger recovery, lower unemployment, and higher taxes on the wealthy would bring the debt ratio slowly down, as occurred after WW II.
Japan's debt ratio, for comparative purposes, is over 200 % of GDP -- and Japan is increasing government outlay to repair the damage of the earthquake and tsunami. Britain's, after World War II, was over 250 percent, and Britain went on to enjoy a postwar recovery.
Why can't we have massive public reparation with war or natural disaster? Because politicians lack the vision and nerve.
Austerity will only slow down the recovery. The idea that a steeper path to deficit reduction will somehow restore business confidence and thus more than offset the hit to purchasing power is just blarney. And with both parties committed to some version of austerity, we could easily have the worst of both worlds -- increasing inflation coupled with persistent stagnation.
However much the Republicans are at fault--for creating the financial collapse, blocking a stronger stimulus in 2009, and looting the Treasury with tax cuts for the rich, causing much of the deficit problem in the first place -- an incumbent president tends to take the blame for hard economic times. Obama's talk of having a kinder, gentler brand of deficit reduction is no match for rising fuel and food prices and persistent worries about basic economic security.
Can the president shift to a rhetoric and policy that emphasizes the need for more jobs and a stronger recovery, and soon? Let's hope so. There is nothing like an election hanging to concentrate a politician's mind.
Robert Kuttner is co-editor of The American Prospect and a senior fellow at Demos. His latest book is A Presidency in Peril.