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Economic Face Off

12:00 AM, Jan 19, 2013 • By IRWIN M. STELZER
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Take heart: There is more going on than meets the naked ear. Yes, the mud-slinging contest that has replaced serious policymaking in Washington continues, with President Obama the clear winner last week when he told a nationally televised press conference that House Republicans “have suspicions about whether government should make sure that kids in poverty are getting enough to eat...” This assessment of the motives of those who want to cut spending came while the capital was preparing for tomorrow’s second inauguration of Barack Obama. No search for comity just yet.

ryan and obama

The Republicans continue to say they will not raise the debt ceiling, or fund the government, unless the president agrees to cut spending as part of a program to bring the $1 trillion annual deficit under control. “It is possible that we would shut down the government to make sure President Obama understands that we’re serious” about cutting spending, said Cathy McMorris Rodgers, the Washington state Republican who chairs the party’s House conference.

So much for threats by Republicans and what Pulitzer Prize-winning columnist Charles Krauthammer characterized as “essentially a libel” by Obama. This is what passes for negotiation in Washington. A more realistic appraisal of the likelihood of a plunge off still another fiscal cliff is that it is unlikely. The president has been saying that he is willing to consider some reductions in entitlements, perhaps by changing the social security (pension) cost-of-living escalator and introducing means testing of health care and other benefits. And important Republicans, and the party’s supporters in the business community, have launched an effort to persuade the Tea Partiers and other House Republicans that use of the nuclear weapon— shutting down the government, completely or in part—might have considerable collateral damage: the party’s ability to win congressional seats in 2014 and the White House in 2016.

House Republicans gathered at week’s end in Colonial Williamsburg to plan tactics for the coming showdowns with Obama. The proverbial reliable source tells me that they know that “they have to get through this patch” without the intra-party brawl that the president is attempting to provoke, and that “default is a bad fight to have.” At least just now. Paul Ryan gathered strong support for the idea of a three month extension to give Republicans time to negotiate over the sequester and funding for government operations, with the threat of the debt ceiling held in reserve. It is not clear why they think that, having shown themselves unwilling to use that weapon, the president will find their threat to resume the cry of “wolf” more terrifying than he so far has.   And why they don’t understand that the nation just might be better off if this battle were concluded sooner rather than later remains a puzzle, at least to those who believe that the national interest should have some place in Republicans’ ruminations.

The sequester battle, Republicans think, is “a good fight to have.” Discretionary spending, about $1.35 trillion per year, constitutes about one-third of total spending. Unlike entitlements such as social security and Medicare, discretionary spending, which includes everything from the military to maintenance of the Capitol, must be funded every year by Congress, with presidential approval. If no deal is reached the sequester takes effect, cutting about 8-9 percent, or some $100 billion, from discretionary spending. “Museums might have to close one-day each week, and government agencies get by on less than they are accustomed to, but that might not be a tragedy and is an opportunity to see if these agencies can indeed do with less,” my source tells me Republicans are thinking. That would pain conservatives who feel the military is already devoid of “fat,” but might be better for the nation than no spending cuts at all. Besides, the sequester would cut into some of the president’s favorite programs, which just might bring him to the negotiating table.

The combination of a sequester, the recent 2 percent increase in payroll taxes ($20 per week from the average pay check), the Obamacare tax and other taxes on the wealthy will take an estimated 1.8 percent out of GDP. Since the economy was forecast to grow at that rate or less in the first quarter, we will see zero or slightly negative growth early in the year.

But things are looking up for the latter part of the year. The manufacturing sector has gotten over its temporary hiccup, and last month grew more than analysts expected, with upward revisions of the October and November pictures frosting on the cake. Motor vehicle and parts production rose, as did computer and electronics output, and output from mines. The housing sector continued on the upswing. In December, construction of both single-family and multiple-family homes rose in every region of the country, and permits for future building also showed gains. For 2012 as a whole, construction permits were up 30 percent and housing starts 28 percent over 2011. Home prices also continue to rise: the latest S&P/Case-Schiller Home Price Index shows a 4.3 percent rise in October, beating increases recorded a month earlier. And the banks seem in better shape than in recent years.

The jobs market also improved last year, with about two million new jobs added, and at long last there was a bit of decline in the number of workers unemployed for longer than six months. We will know in a few weeks whether that trend continued into the new year, but there are indications that it did: home builders, oil and gas companies, and high-tech industries are among those reporting difficulties in finding skilled workers.

Consumers so far remain unperturbed by the spectacle put on by Washington’s gladiators. Retail sales were up in December, bringing the increase for all of 2012 to a more than respectable 5.2 percent. Unfortunately, it is difficult to predict whether consumers will continue to contribute to growth this year because of the cut in take-home pay resulting from the several tax increases, which already seem to have had a negative effect on consumer confidence.

The fallout from Obama’s ability to force through tax increases, and uncertainty as to future fiscal policy, might be part of the reason that official forecasters are being cautious or, as some prefer, impervious to signs of strength in the economy, which include all of the above plus a resurgent energy sector and increased international competitiveness. The World Bank, as if setting out to prove that economists use decimal places to prove they have a sense of humor, raised its forecast of world growth in 2013 to 2.4 percent from 2.3 percent—it guessed 3 percent in July. It expects the U.S. economy to expand at an annual rate of 1.9 percent, which is about 0.5 percent gloomier than the Federal Reserve Board.

My own view is that if the political air clears by March, the strength of the economy will overwhelm remaining political weakness. After all, if winter comes, as it has, spring can’t be far behind. 

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