It’s official: There are “widespread signs of a deceleration [in growth] compared with preceding periods.” So concludes the Federal Reserve Board after surveying the state of business around the country. Calm observers would note that slower growth is far from a double dip, that consumer spending is increasing, that “activity was largely stable or slightly up for professional and other nonfinancial services,” that seven of the 12 Federal Reserve districts into which the country is divided report economic growth “at a modest pace,” and that a narrowing trade gap is likely to drive third-quarter growth to something like 2.5 percent, from 1.6 percent in the second quarter. As Ian Harwood, chief economist at Evolution Securities, put it in a memo to clients, “Nothing at present indicates that anything worse than a classic mid-cycle slowdown is underway.”

But incumbent Democratic politicians preparing to face the electorate in 51 days are not calm observers. Neither is their president, who sees massive Republican gains as a personal rebuke and a bad omen for 2012, when he will have to face the voters. So we have a frenzy of activity, or at least of proposals. Never mind that nothing that is done between now and the election can very much influence the economy’s performance – the administration’s advisers are eager to show that the president cares, really cares, about the plight of the unemployed and the sleepless nights of those still in work, but worried that they might be next for the chop. They know that the voters see Barack Obama’s obsession with the costly health care bill they despise, because it is already raising their insurance premiums and reducing their choice of care, as a diversion from attending to their primary concern, the economy. Even achievements such as engineering a new Middle East peace conference are seen as a diversion of attention from jobs, jobs, jobs – which is why Secretary of State Hillary Clinton has been getting most of the photo ops.

So the president has some new proposals: $50 billion of additional spending on infrastructure; an expanded research and experimentation tax credit; and permission for businesses to write off 100 percent of investment outlays through 2011, rather than depreciate them over 3-to-20 years as current law provides. The first will almost certainly be rejected by Congress, since members of the president’s party are having trouble explaining to constituents why they supported an almost $1 trillion stimulus that seems to them to have been ineffective.

As for tax breaks for businesses, they will have little effect since what Obama giveth, Obama taketh away – they will be paid for by raising other business taxes. The president might do better simply to lower taxes on small businesses, and let the entrepreneurs decide what to do with the cash, rather than decide for them that research is more worthy of taxpayer largesse than, say, a beefed-up marketing effort that might well create more jobs. Or hope that tax credits will somehow induce investment in industries with substantial idle capacity and by firms, many of which do not have substantial profits against which to use the tax credits.

With the federal government effectively out of the game until at least after the election, and most likely a much diminished player if Republicans gain as many seats as most experts now predict they will, we can see a little more clearly what the economy will look like without having to guess the government’s next move.

It is almost a certainty that the Federal Reserve Board will keep interest rates low for the foreseeable future. That is good news for the housing market, beset in recent months by plummeting sales. There is a growing sense in the industry that the combination of low mortgage rates and house prices, already well below peak levels, will soon bring buyers back into the market. Indeed, builders are already stockpiling land with infrastructure in place, bought from original developers at bargain prices, in the hope that the good times will soon roll again. But not soon enough to have much impact on the election.

Meanwhile, the policy debate goes on. Some feel that the Fed should be more aggressive. Former Fed governor and now Princeton University professor Alan Blinder is suggesting that instead of paying banks interest on their $1 trillion in excess reserves, the Fed charge them for holding those reserves as an incentive to get them to lend rather than hoard funds. Blinder also thinks the Fed could give the economy a boost by persuading its risk-averse regulators to ease up on the banks because “some modest loans are not sinful, but rather a normal part of the lending business.” Others are hoping the Fed will set sail on QE2 – another round of quantitative easing, aka printing money.

Some prefer that the administration step up spending, and by a substantial amount, even at the expense of increasing the deficit, both because they fear a double-dip and because they believe the economy’s infrastructure is sorely in need of shoring up to support more rapid economic growth. Deficit hawks, seemingly backed by most voters, counter that until the government gets its fiscal house in order, and the president abandons his anti-business rhetoric, businesses will sit on their cash. They now have a new heroine, German chancellor Angela Merkel, whose refusal to countenance a massive stimulus, and who is bringing her already-low budget deficit down, presides over an economy that grew at an annual rate of almost 9 percent in the second quarter, and reduced the unemployment rate to 7.6 percent.

But anti-spending doesn’t mean anti-deficit in the tangled skein that is pre-election politics in America. At year-end the Bush tax cuts expire. The president wants to retain the lower taxes for all, save the rich – families with annual earnings of more than $250,000. His Republican opponents, and an increasing number of Democrats who fear raising taxes in the midst of a fragile recovery, want the cuts to remain in place for all, at least for 2011 and possibly 2012. Obama says the rich don’t need or deserve lower taxes, and that raising their taxes will help to reduce the deficit; his opponents say the geese the president sees right for the plucking include lots of small businessmen who will create fewer jobs if their taxes go up.

Meanwhile, the economy plods along on two tracks – the express lane for big companies, and the slow lane for smaller ones. In the financial services sector the big banks are doing just fine, while many smaller banks are unable to cope with the bad loans in their portfolios. In the industrial sector, large companies diversified into overseas markets are growing rapidly, smaller companies more dependent on domestic markets and with lesser access to credit are struggling.

All of which is the stuff that has investors confused, one day euphoric, the next day certain that the world as they know it is coming to an end. In the longer term, all might matter less than the fact that once past the election, America will have to decide what to do about its huge deficit, swollen when the health care bill takes full effect, about when the ageing baby boomers apply for their new hips. And, perhaps more lethal, America will have to decide what to do should China decide for geopolitical reasons to cash in some of its made-in-U.S.A. IOUs.

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