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Politics Trumps Economics

12:00 AM, Feb 12, 2011 • By IRWIN M. STELZER
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Don’t hit the panic button just yet. But keep it handy. Absent drastic, “and I mean drastic” spending cuts, and tax increases, and continued bond buying by the Federal Reserve Board to suppress interest rates on the federal debt, the U.S. will be unable to balance its budget. That’s the advice I got from Larry Lindsey, former Federal Reserve Board governor and White House economic adviser, when we discussed the current and prospective state of the political economy.

Politics Trumps Economics

For now, the economy is on the mend. Despite the bleak jobs report, most analysts agree that it is gaining momentum. Profits are topping expectations, with fourth-quarter 2010 results up almost 30 percent on year-earlier levels. Exports are up and the agricultural sector is booming. The commercial property market, which President Obama’s favourite consumer protector Elizabeth Warren predicted last year faced a “tidal wave of … loan failures,” is now deemed by the Fed “increasingly unlikely” to experience that “worst-case scenario.” Consumer sentiment is at an eight-month high as personal income and spending continue to rise: American Express reports that customers increased spending by 15 percent in the final quarter of last year. Ford is planning to step up output by 13 percent this quarter, and despite higher gasoline prices its biggest and its most profitable vehicles, SUVs and trucks, are leading its comeback.

Better still, economists now expect average wage gains this year to almost double the 1.7 percent rate in 2010. And the demand for capital equipment has shown new strength in recent weeks as companies dip into their cash piles to pay for long-deferred replacement of obsolete equipment, and to finance expansion. 

Yes, the housing market has yet to snap back. But the decline in house prices has made houses more affordable for those who can get loans, which an increasing number of buyers don’t seem to need – they are using cash. Fifty percent of recent sales in the Miami area were to cash-rich buyers, who drove prices up 15 percent last year. As usual, there are clouds on that cheery horizon. Analysts still expect prices to fall a bit further, and mortgage rates are edging up in response either to inflation fears or the recovery, or both. In the longer term any one of the plans to reduce the role of the government in the mortgage market will drive mortgage rates to a new, less subsidized plateau.

All of which has little to do with the reason for keeping the panic button handy. It’s the politics, stupid. President Obama says he is seeking a rapprochement with the business community, in part because he wants businesses to step up spending and hiring, in part because he knows that his reelection campaign will cost $1 billion, and he needs campaign contributions from the business elite he has spent the past two years demonizing. He is also having key Republicans around for lunch at the White House, the interior of which very few have seen since he took up residence there.

Alas, all this signifies not very much. The tension between the White House and the business community was hardly dissipated by Obama’s ostentatious stroll across the road from the White House to visit the Chamber of Commerce, its building festooned with a giant “JOBS” banner. His message: avoid big bonuses, share your perks with workers, and step up hiring. The alleged benefits of his economic policies, said the president, “Can’t just translate into greater profits and bonuses for those at the top.” Ever the champion of egalitarianism. Meanwhile, as Obama addressed the executives, calling for the patriotic cooperation he says their predecessors displayed in response to President Franklin Roosevelt’s call for cooperation in ending the depression – never mind that it took WWII to do that – his regulators continued to churn out cost-increasing regulations, which is one reason Republican budget-cutters have the Environmental Protection Agency clearly in their sights.

Worse still, the president and Republicans in Congress, now joined in driving the government machine, continue to disagree, with Obama stepping on the accelerator, and the Republicans in Congress attempting to jam on the brakes. Obama is locked in by the liberal base he needs to provide the energy for his reelection campaign, and continues to call for more government spending, or as he would put it, “investment” in everything from high-speed rail to solar panels.

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