Marooned in the Horse Latitudes

Horse Latitudes

More than a year after glimpsing “green shoots” of economic recovery, President Obama saw nothing but parched brown in June’s employment numbers. The continuing stream of bad economic news is a far greater threat to his Presidency than that sickening orange plume of oil furiously gushing into the Gulf of Mexico. The 9.5% June unemployment rate is essentially the same as it was a long thirteen months ago.. And support in Congress for more pump priming is essentially at an end.  Despite a 59 vote Senate majority, an increasing number of Democrats as well as the Republicans appear unwilling further to increase the federal deficit, even to extend unemployment benefits.

In 2010 thusfar , the economy has replaced only 600 thousand of the 8 million jobs lost in the recession. Only a little more than 100 thousand new private sector jobs have been created in the past two months, while the labor force shrank by almost a million.  If you add discouraged workers and those working part time involuntarily to the people officially unemployed, there are almost 26 million people out of work. A lot of those young people who fought to make Barack Obama President will have spent at least half of his term living in their parents’ basements.

President Obama is trapped between his increasingly angry core Democratic constituents- public sector unions, minorities, young people- and their muse, former economist/now political polemicist Paul “Jeremiah” Krugman, who believes we’re in a depression and need to throw yet more borrowed money from helicopters, and the rest of the country that is trying mightily to pay down their debts and is profoundly uncomfortable mortgaging our future to the Chinese.  It’s not obvious that either formula for salvation- the traditional Democratic balm of more money for worthy causes or the traditional (pre-George Bush) Republican regime of austerity and balanced budgets- gets the economy out of the ditch. Captain Obama has not enough political support to pursue either course, so the Ship of State and his Presidency are becalmed, sails flapping, sweltering in the Horse Latitudes.

Most of the federal policy levers- fiscal and monetary- have been pulled.  The Federal Reserve continues to hold interest rates at, effectively, zero. That’s basically free money for anyone who wants to borrow it.   Interest rates on federal bonds are near historic lows and falling, as foreign investors pile into the safest sovereign debt, our Treasury securities.  Long-term mortgage rates are in the high 4 % range.    Monetary policy is as accommodating as it is going to get, and with no inflation on the horizon, is likely so to remain.  Why isn’t it helping?  Because borrowing more money even at bargain rates doesn’t seem like a sensible solution to an economic problem caused by excessive borrowing.  

What the President wants to happen is, unfortunately, out of his hands. A private sector driven recovery depends on a confident business climate. The business climate in the United States, to put it bluntly, sucks!

Corporations are sitting on a staggering $1.6 trillion in spendable cash and investments.  Why aren’t they spending it?  Wellll, as Reagan would have said, by the end of the year, we will not only have the highest corporate tax rate among developed nations, but a capital gains rate that, between health reform and the expiration of Bush’s tax cuts, will have increased 60% in twelve months.  If you had a choice, as many of the multi-national corporations do, you’d probably invest that money overseas where demand growth is likely to be higher and taxes lower.

Business is a problem for Obama.  As the Economist’s Lexington said of the President, “he doesn’t understand business. . . .he is interested in economics and technology; but not in how you make money”. During the campaign, he referred to capital gains as “easy money”. Capitalism obviously isn’t his thing. This is a President who fired the CEO of General Motors, and who nationalized the Chrysler Corporation and handed a majority equity position to a labor union.  He also basically ordered the Chairman of BP, albeit widely reviled, to suspend his dividend and hand over $20 billion to a Presidentially appointed mediator to dispense to Gulf oil spill victims as he saw fit.  He called health insurance CEO’s into his office and personally berated them for increasing their rates. 

Obama has displayed a camaraderie and light touch with business leaders comparable to that of Vladimir Putin. Democratic fundraisers are coming back from meetings with business and financial leaders empty handed.   Perhaps business people have realized that all they have to do to get rid of this Administration and Speaker Pelosi is . . . nothing.  Just sit on their cash for another eighteen months, the safe and perhaps prudent thing to do, and the Republicans are back “in charge” of the economy. (Wonder what happens then?) 

What, patient reader, does this have to do with healthcare?   Unfortunately, a lot, because it’s all connected.  Health reform is the dry hole down which the President flung a huge fraction of his spendable political capital, which he now doesn’t have to fix the economy.   Three months after enactment, only about half of the public approves of health reform. According to the June Kaiser Family Foundation tracking poll, only 28% of the public thinks that health reform will actually help their families.  The real benefits of health reform- expanded access and reduced uncertainty about coverage-are still three years away- a political light year for a hobbled Presidency.  

And at this inopportune moment, the healthcare job machine seems to be running out of gas.  In this recession, the health system has been the only reliable non-government creator of new jobs, levitating above the rest of the economy as if by magic.  The health system has added almost nine hundred thousand new jobs, since the beginning of 2007, more jobs than the federal government (!), But, in June, the health system created only 9,000 jobs. The business climate in healthcare is coming to resemble that of the rest of the country, in part because of health reform. 

Despite the fact that health reform will eventually create close to thirty million new paying customers for their products, healthcare executives are furious with the Obama administration and Congress.   As they wade through the gigantic health reform bill, health executives have succumbed to confusion and uncertainty about the effect on their business.  Pharmaceutical firms and device manufacturers are laying off workers.  Hospital CEO’s are reading the handwriting on the wall, with Medicaid programs in full retreat, and the safety valve of cost shifting to private insurers gummed up by the quasi-price controls on private insurance.  Hospital payrolls actually shrank in June, for only the third time in the recession.   So even the reliable healthcare jobs machine is likely to reverse gears in the rest of the year. 

By now, I’m sure you’re asking what would I do if I were President?   Wellllll,  since this President seems at his best when firing people who’ve disappointed him, I’d fire my incompetent economic advisors, starting with the idiot who predicted that unemployment would top out at 8% if Congress passed the stimulus package. Then I’d call back my ex-Budget Chief Peter Orszag, the only grownup on his economic team, and pledge to do whatever he felt necessary to get our fiscal house in order. Orszag’s resignation was almost certainly related to his failing to prevail over White House economic and political advisors over the need to attack the deficit.  Orszag’s departure was both untimely and damaging.

I’d have Orszag prepare the FY12 federal budget he wanted, one that aggressively cut wasteful federal spending wherever he could find it.  If the Brits can do it, so can we.    I’d institute a stiff tax on soft drinks and transfats, consistent with the First Lady’s campaign against child obesity.  I’d use that money to pay for a reduction in the corporate income tax rate.  I’d let the Bush income tax cuts expire for everyone, not just the “needlessly wealthy” and use some of the increased revenue to reduce capital gains taxes on  any business investment in plant or technology that increased American jobs. And I’d tell the public sector unions, that unless they agree to wage freezes and sharp reductions in their pension contributions, which are drowning state and local governments, I’ll reduce federal education and other public subsidies to their states. Finally (it’s now next spring),  I’d send Rahm Emanuel up to Capital Hill to negotiate a budget deal with the new Republican majority in the House, just as he did in 1997 for Bill Clinton with Newt Gingrich.   

Finally, I’d begin renovating my house in Hyde Park and preparing for the end of the achievement filled but unpopular one term Presidency Obama said he’d rather have than to live with gridlock.    Academia isn’t such a bad place.    Blaming George Bush for this economy is no longer helpful politically.  This is now Barack Obama’s recession, and unless begins taking some real political risks, including with members of his own party who are a major part of the problem, the bright promise of his Presidency will be extinguished.   

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