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The Fed’s Beige Book, which was released on Wednesday, provides a sobering look at an economy that is sputtering-along on empty. Nearly all the districts reported slower activity amid “widespread signs of deceleration”. The stimulus-fueled rebound which powered GDP above 5% two quarters earlier, has progressively dissipated slashing growth to an anemic 1.6%. As underemployment has soared to 16.5% and deflation has continued to tighten its grip, all talk of a “recovery” has ceased and policymakers have grown more tentative, unwilling to do anything that might cost them votes in the upcoming midterm elections.
Housing prices–which had been holding steady for nearly a year–have started to lose ground following the expiration of the homebuyer tax credit at the end of June. According to economist Joseph Stiglitz, “The foreclosure rate is increasing. Two million Americans lost their homes in 2008, and 2.8 million more in 2009, but the numbers are expected to be even higher in 2010.” Residential construction activity has slowed to a crawl across the country as housing appears set for another leg down.
Not one sector of the economy is thriving. Everywhere demand is weak; from retail to real estate, from car sales to electronics, from manufacturing to exports. It’s a wasteland.
The Obama administration has given up on stimulus and settled on an aggressive new campaign strategy. They’ve jettisoned “Recovery Summer” and shifted into full attack-mode. On Wednesday in Ohio, Obama delivered a blistering speech that rallied the Party faithful and left the GOP reeling in surprise. Here’s an excerpt:
“I ran for President because for much of the last decade, a very specific governing philosophy had reigned about how America should work: Cut taxes, especially for millionaires and billionaires. Cut regulations for special interests. Cut trade deals even if they didn’t benefit our workers. Cut back on investments in our people and our future – in education and clean energy; in research and technology. The idea was that if we had blind faith in the market; if we let corporations play by their own rules; if we left everyone else to fend for themselves, America would grow and prosper.
For a time, this idea gave us the illusion of prosperity. We saw financial firms and CEOs take in record profits and record bonuses. We saw a housing boom that led to new homeowners and new jobs in construction. Consumers bought more condos and bigger cars and better televisions.
But while all this was happening, the broader economy was becoming weaker. Job growth between 2000 and 2008 was slower than it had been in any economic expansion since World War II – even slower than it’s been over the past year. The wages and incomes of middle-class families kept falling while the cost of everything from tuition to health care kept rising. Folks were forced to put more debt on their credit cards and borrow against homes that many couldn’t afford in the first place. Meanwhile, a failure to pay for two wars and two tax cuts for the wealthy helped turn a record surplus into a record deficit.”
Notice how skillfully Obama absolves himself and his party of any blame in the crushing of the middle class and wrecking the economy. Many believe that both parties are equally culpable. And why the sudden transformation from president milquetoast to Jake LaMotta? Is Obama genuinely upset or is it just more political theater? Maybe Obama thinks he can avoid a GOP landslide by castigating the Republicans in public rather than pushing another stimulus bill through congress or closing down Guantanamo? In any event, a spirited bout of political mud-wrestling is bound to be more entertaining than two months of grandiose oratory and visions of the Elysian Fields.
Obama’s speech sent up howls from the usual quarters. The Wall Street Journal took issue with Obama’s “combative” style and dismissed the speech as “red meat” for disillusioned Democrats. The WSJ’s editorial page, which serves as the stomping-grounds for the nation’s far right ideologues, denounced the speech as “low rent rhetoric”. And, while the president did provide some details of a $50 billion infrastructure upgrade and $200 billion in new tax breaks for small business, there’s no mistake that the speech was meant to kick off the 2010 campaign season in grand style with a broadside aimed at the GOP leadership.
Obama must know by now that his abysmal performance has left downcast Dems with no reason to drag themselves to the voting booths in November. In the last few weeks the administration has been frantically trying to link together mini-events to create the impression that Obama is still serious about “change”. The appearance of Mahmoud Abbas and Benjamin Netanyahu at the White House was a particularly cynical attempt to show that Obama is involved in an issue that is of vital importance to many of his supporters. The so called “summit” was nothing more than a photo op intended to establish Obama’s bone fides as a peacemaker. But Obama was unable to get any concessions from Israel, so the public relations scheme fizzled without any real sign of improvement.
Perhaps developments in the Middle East don’t matter–except of course to the small group of “professional leftists” that Obama has publicly repudiated already. What matters to most voters is the economy, and clearly, the outcome of the midterms will be decided on the condition of the economy and, more specifically, on jobs. On that front, there’s both good and bad news. The nonpartisan Congressional Budget Office (CBO) recently released a report confirming that the American Recovery Act (aka–Obama’s fiscal stimulus) did exactly what it was designed to do. It lowered unemployment by about 1.5%, provided jobs for roughly 2.5 to 3 million people, and increased GDP between 1.7 percent and 4.2 percent. Also, former Fed governor Alan Blinder and economist Mark Zandi released a report which showed that–without the emergency actions of the Fed and Obama administration–GDP would have plunged 12% rather than 4%, and unemployment would have skyrocketed to 16.5%. (rather than 9.6%) The two conservative economists concluded that, absent the monetary and fiscal stimulus, the budget deficits would have exceeded $2,600 billion in fiscal year 2011, nearly twice present projections. Bottom line: The stimulus and bank recapitalization programs worked. (although the TARP clearly rewarded crooked bankers who triggered the financial crisis)
Obama can also boast that (according to economist Robert Shapiro) of the 8.5 million jobs that were lost in the downturn, 7,800,000 of those jobs or 92 percent were lost either on Bush’s watch or the first 6 months of the Obama administration. (before his policies were enacted) In other words, Obama can only be held accountable for about 41,000 lost jobs, while the Republicans are responsible for roughly 8 million jobs.
Even so, there’s no indication that the job’s situation is turning around anytime soon. Last Friday, the Labor Department reported that 67,000 new private sector jobs were created in August, a notable improvement. Unfortunately, at least 125,000 are needed to keep up with the growth of the potential work force. That means the economy will have to grow at a 2 to 2.5% GDP before we see a real decline in the jobless figures. And, now that the Fed and the administration are focused on “belt tightening”, it is unlikely that the government will provide the necessary resources to dig out of the hole the country finds itself in. Gluskin Scheff’s David Rosenberg summed it up like this,
“We are currently experiencing the recession with the slowest job creation in history. And based on our prior estimates, the recession will last around 85 months before we regain the unemployment rate seen at the onset in December 2007.”
Meanwhile, the social safety net continues to get more and more frayed as the slump persists. Homeless shelters and food banks are stretched to the max while the Department of Agriculture’s Supplemental Nutrition Assistance Program (aka–the food stamps program) reports that 41 million people–more than one in eight people–now need government assistance to feed themselves and their families. That’s up 10% from last year.
Ordinary working people are hurting bigtime, still waiting for the prophet Obama to lead them to the promised land. But Obama has abandoned “Big Government” as the answer, whether it be a second round of stimulus, government jobs programs, or expanded welfare assistance. He’ll have none of it. Sure, he’ll playfully joust with his GOP rivals, but he’ll never seriously diverge from the path cleared by his ideological twin, Ronald Reagan.