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The President Pivots to Jobs and the Deficit

While increased protectionism remains a real concern.

12:00 AM, Jan 23, 2010 • By IRWIN M. STELZER
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Enough is enough. That is the message the most reliably Democratic state in America sent to President Obama and his Democratic congress Tuesday when its voters chose Republican Scott Brown to represent them in the U.S. Senate. The majority of Americans style themselves as somewhere between centrist and center-right, and were not happy to see centrist candidate Obama morph into leftist President Obama. He pressed for a government takeover of the health care system, and government involvement in the banking, energy, auto, insurance and other sectors. And he launched a spending spree that will leave future generations to pick up the bill for huge deficits.

The President Pivots to Jobs and the Deficit

Scott Brown's victory in Massachusetts has caused the president to switch gears.

Never mind that his bank bailouts might have prevented a collapse of the financial system, and at least some of the spending made up for the collapse of private sector investment and consumer spending. All in all, the president’s effort to convert America into a European-style social democracy was more than voters could abide.

The message from Massachusetts will have a profound effect on economic policy. When the president delivers his State of the Union message next week we will see the new populist Obama -- not the elitist who derided Senator-elect Scott Brown for driving to campaign meetings in his truck. Banks beware: There is more to come in addition to new taxes as Obama appeals to disaffected voters by beating up on bonus-laden bankers. The presidential wish list includes, among other things, a ban on the operation of hedge funds and private equity funds by any “bank backed by the American people.” It is easy to deride this as vulgar populism, but that hardly describes their principal proponent, former Federal Reserve Board chairman Paul Volcker. The fact is that too big to fail means a bank is too big, as conservative Carnegie Mellon/American Enterprise Institute economist Allan Meltzer has said, and no populist is he. Republicans who deride such a program had better get their intellectual case in order.

We will also see a president who has, to use the Washington word, “pivoted” from “transforming” the economy to cutting the deficit and creating jobs. 

The president wants to appoint a commission to devise ways of reducing the deficit from double digits to 3 percent of GDP by 2015. But Republicans see this as a way of kicking the problem into the long grass until after the 2010 elections, and implicating their party in the tax increases the president and congressional Democrats favor. The last such commission, created to save the social security (pension) system from collapse, made little progress until President Ronald Reagan and Democratic House leader Tip O’Neill, both likeable, pragmatic politicians, cut a deal. But pragmatism and likeability are in short supply in today’s Washington. Still, it seems likely that some form of cooperative effort to restore fiscal sanity will emerge from the on-going negotiations. Despite their disinclination to involve themselves in figuring out ways to pay the bills run up by free-spending Democrats, Republicans will be hard-pressed to refuse cooperation with a commission with a proper remit.

So much for the deficit. On to jobs. It is easy for economists, many with tenure at universities, others at investment banks flush with cash, still others ensconced in secure federal government jobs, to say that the jobs market is improving. And it is. But it doesn’t feel like that to the 17.2 percent of Americans who are out of work, involuntarily working only part time, or so discouraged that they have stopped looking for jobs. Or to their neighbors, who fear they might be next for the chop.

So the president will offer a mélange of alleged job-creating policies ranging from modest tax breaks for companies that add staff and for small businesses, to spending on specific green energy projects, and on infrastructure. However, the words “a second stimulus” will not pass his lips as voters are suffering from buyers’ remorse after supporting the first $787 billion package.

The drive to bring down the unemployment rate will not stop with the proposals in the president’s State of the Union message. The Massachusetts election, in which independent voters deserted the Democrats in droves, increases the party’s dependence on the trade unions that have the cash and the manpower to deliver Democrats’ core voters in the 2010 congressional and 2012 presidential elections. And those unions are not exactly disciples of Adam Smith.

The president has already imposed tariffs on tires and some steel products imported largely from China. The next target of the unions is Chinese-made glass. They point out that the World Trade Center’s Twin Towers were sheathed in good old made-in-the-U.S.A. glass, but the building that is springing up to replace it will be covered with glass imported from China. Whether that is because Chinese glass-makers receive government subsidies, as the unions allege, or because the Chinese are more efficient glassmakers, matters less to politicians, and to many Americans, than the symbolism of America’s new Freedom Tower being covered in Chinese glass. 

Add to the mix the fact that many of the world’s leading economies are depending on export-led growth to get their economies out of recession, and that the Chinese show no signs of allowing their currency to float upward from the undervalued level at which it is pegged. These countries continue to see Americans as the world’s consumers of last resort, while at the same time calling on the U.S. to reduce its trade deficit.

What our trading partners see as the export of goods and services, our politicians will see as importing unemployment. True, consumers here benefit from lower-cost imports, even from those subsidized by job-hungry China. Consumers are the winners, workers the losers. And unlike consumers, unions are organized to put pressure on congress.

Policymakers live in dread of “unintended consequences,” unanticipated and undesirable results of their actions. One unintended consequence of Scott Brown’s election might just be greater reliance on protectionist measures by politicians who believe they have to cut unemployment now, regardless of the long-run consequences. And without increasing spending.

Another, and cheerier possibility, is that the Democrats’ new need for a bit of bipartisan cooperation from Republicans will produce legislative compromises of the sort that resulted in tax reform during the Reagan years and welfare reform when Bill Clinton occupied the White House, the sort of centrist compromise Americans prefer.

Irwin M. Stelzer is a contributing editor to THE WEEKLY STANDARD, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times (London).

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