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The Economy’s Biggest Problem: Politicians

12:00 AM, Mar 2, 2013 • By IRWIN M. STELZER
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Poor kids to go without lunches and vaccinations, meat sold without being inspected, firemen and cops laid off, illegal aliens released from prison, 17,200 teachers fired, airports closed, long lines at airports, and 700,000 workers laid off. Egypt in ferment? Syria at war? Austerity-ridden Greece? Nope. The United States of America as described by President Obama now that the sequester, an across-the-board cut in some domestic and military spending, is in effect.

Obama Boehner

All of this pain, says Obama, is being inflicted by  those nasty Republicans who refuse to go along with still another tax increase on “the rich” instead of relying completely on spending cuts to make a tiny dent in the on-going deficit. The sequester will take one dollar out of every $100 dollars the government plans to spend in the remaining seven months of the fiscal year. On a full-year basis the reductions will come to $2 out of every $100 of spending. Not much, but better than no cuts at all given that we are borrowing almost $40 out of every $100 we spend, and that even with these cuts, government spending will be more than 7 percent higher than it was when the Obamas moved into the White House.       

The pity of all of this is that the cuts in spending could be apportioned more sensibly to mitigate their effect if only an epidemic of bipartisanship would break out in Washington; that it confirms those, here in America and abroad, who believe the U.S. has become ungovernable, caught between a president determined to expand the welfare state and Republicans equally determined to retain more space for private-sector actors; and, and most important, that it diverts attention from what is going on in the real economy.

Americans are largely inured to all the Washington strum and drang and cries of “wolf.” Another budget crisis will follow this one later this month when Congress and the president have to agree how to fund the government going forward (the continuing resolution), then another when the debt ceiling issue is revisited, and still another if the politicians ever confront the real problem—the country can’t afford all the “entitlements” it is committed to dole out. It is likely to be a long, hot summer in Washington, and not only because of its ghastly hot and humid weather.

Best to shrug and ignore the Jeremiahs who see bankruptcy or inflation in our future, and get on with life, which increasingly confident investors and consumers seem to be doing. Share prices are up about 8 percent this past year. Consumer confidence has recovered from a January dip after the 2 percent payroll tax increase cut in, and now is above last year’s level. Consumers are cheerier both about the present situation and the outlook for the future. Their balance sheets in good shape, they are willing to take on more debt, some of it in the form of mortgages at the attractive rates that Fed chairman Ben Bernanke told Congress this week he intends to maintain for some time, even in the face of some opposition from his colleagues.

Which is one reason the housing market goes from strength to strength. House prices in December were about 6-7 percent higher than a year earlier. Sales of new homes jumped almost 16 percent in January, and were 29 percent higher than last January—the highest level in almost five years. Sales of existing homes also rose, but by considerably less than new homes because of a shortage of inventory, which is at its lowest level since 2000, forcing house hunters out of the used and into the more expensive new house market.  In response to this demand, home builders are scurrying to get new homes built, at a pace up 20 percent on last year’s build rate. Unless mortgage rates rise from current low levels, unlikely given Fed policy, home building will contribute to growth this year, rather than act as a drag as it has in recent years. 

Consumers also continue to replace their aging vehicles. Sales are running more than 4 percent above last year, itself a very good year. New models are proving attractive, and discounting is down. Automakers are expecting to get a further fillip in coming months from construction workers who need small trucks and SUVs to get themselves and their tools to work on the construction sites on which all those new homes are being built. The result is the re-activation of shuttered auto factories and significant new hiring. Estimates are that 90,000 jobs have been added since the 2009 low-point in the industry’s fortunes. But one cheer only: employment is still about half of its 1999 peak of 1.2 million, and many of the new workers are being hired at wage rates below those of existing staff, perhaps only because union contracts now permit such a wage differential.

Most analysts agree that the manufacturing sector, or at least many of its components, is on the upswing. Factory activity in January expanded at the fastest pace in nine months. Orders for so-called core durable goods, which exclude volatile orders for non-defense aircraft, jumped 6.3 percent in January. Both production and new orders rose in February. Société Général’s economists, after studying activity reports from around the country, see “positive momentum in the data.” 

All in all, there are signs that the economy continues to grow, and that it is only policymakers who stand between it and a really good year. One example of the cost of uncertainty: a major oil pipeline company is reluctant to lay pipe from the new Western oil fields because it can’t be certain that the administration will allow continued development of those resources. Uncertainty trumps the incentive provided by the new oil discoveries.

Then there are the plans the administration has for the business community.

·     Obamacare will cut in next year, imposing costs on small businesses that grow to need 50 employees during the current year, and on large businesses that now are contemplating paying the $2,000 tax that will be imposed on them if they do not buy mandated, generous health insurance for their employees, policies that will carry premiums in excess of $2,000 per employee.

·     If the president and the Democrats have their way, taxes on high earners will be raised yet again.

·     Regulations are being prepared that will drive up energy costs and result in the closure of many coal-fired power plants.

·     Small groups of employees within large companies are being recognized as legitimate bargaining unions, and will be in a position to shut down a giant company even though most of its employees have refused to join a union.

·     The president is pushing for an increase in the minimum wage to $9 per hour from $7.25. 

These are called headwinds. They blow with mighty force, inducing corporate boards to seek shelter behind walls of uninvested cash. Reduce them from gale force, and the economy could sail forward more rapidly than most expect.

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