Rays of Happiness Cutting Through the Economic Gloom
12:00 AM, Nov 20, 2010 • By IRWIN M. STELZER
“Don’t worry, be happy,” songwriter Bobby McFerrin instructed. But that was in 1988, at the close of Ronald Reagan’s successful presidency. The unemployment rate, at 7.2 percent and rising when Reagan was sworn in, had fallen to 5.3 percent. The economy, which had been shrinking under Jimmy Carter, was growing at an annual rate of 5.5 percent, and the inflation rate, a horrendous 12.5 percent when Carter left Washington to begin a new career as a carpenter, had fallen to 4.4 percent. The deficit only barely topped 3 percent. Little to worry about, much to be happy about.
Times have changed. The unemployment rate seems stuck at 9.6 percent, the economy is growing at an annual rate of only some 2 percent, and no one seems able to figure out whether inflation is so low that it will tip into the dreaded deflation, or about to be pushed to runaway levels by the Federal Reserve Board’s decision to re-start the printing presses. The deficit hovers around 10 percent of GDP, and is headed up.
There are good reasons to worry. On the foreign policy front, emboldened enemies from Latin America to the Middle East to Asia treat America’s president with something close to contempt, the war in Afghanistan carries on, and terrorists still threaten our security. On the world economic front, the eurozone is in serious difficulty, with several of its members unable to pay their bills, and their banks – to which America’s have ties – are wobbling. Trade imbalances have already set off a protectionist wave as emerging economies scramble to protect themselves from the wave of hot money unleashed by the Federal Reserve Board’s decision to launch QE2.
So, worry. But don’t overlook the reasons to be happy. We have survived a potential financial meltdown, and although much remains to be done to put the financial system on a sounder footing, we seem to recognize that better capitalized banks are one ingredient of such a system. A healthy debate has started, amid predicable acrimony to be sure, about ways to rein in the deficit. Fed chairman Ben Bernanke’s QE2 might, just might, give the flagging recovery a needed shot in the arm. Initially derided at home as a precursor of rapid inflation, and abroad as a method of driving the dollar down, QE2 is now seen by some of its initial critics as appropriate to an economy with lots of idle capacity and core inflation at its lowest level in 50 years and facing the danger of deflation. Increased approval of Bernanke’s move is due in part to the vigorous defense mounted by several key Fed officials last week, and in part to the fact that Sarah Palin publicly derided it. Fears of a massive shift out of dollars are ebbing as euros no longer seem as attractive an alternative as they did before the out-of-control finances of Portugal, Spain, Ireland, Greece and Italy sent investors scurrying for the exits.
Another reason for cheer is that our economic recovery might finally be strengthening. The Federal Reserve Bank of Philadelphia – the Philly Fed in investors’ jargon – reports that new manufacturing orders, shipments, and numbers of employed workers rose in October, while mortgage delinquencies and the percent of loans in foreclosure proceedings fell. Nationally, sales at retail shops increased for the fourth consecutive month, and recorded their sharpest gains in seven months. Mid-priced retailers, Macy’s, J.C. Penny, and Kohl’s, report that sales are beating expectations, giving reason to believe that the fears that have kept middle-income shoppers out of the malls are dissipating. New York City’s mid-priced restaurants report that non-rich consumers are once again dining out.
Much will depend on what goes on in Washington between now and year-end, and early in 2011. The lame duck congressional session, which sits until the new boys and some of Palin’s “Mama Grizzlies” take over in January, has to decide whether to extend the Bush tax cuts, due to expire on December 31. Until now, President Obama has insisted that they be extended only for families earning less than $250,000 per year. Republicans say they want all cuts extended indefinitely. A stalemate would allow the cuts to expire and produce a massive tax increase. Less likely since the election. The president is signaling a willingness to extend the cuts for “the rich” for a year or two, and despite some bluster, the Republicans, sources tell me, are likely to accept that deal, especially if it includes reasonable levels for the estate tax.
Perhaps most important of all, Obama seems to understand that his chances for reelection in 2012 are tied to the health of the economy, and that a healthy economy requires a confident business community. In place of repeated attacks on greed, corruption, self-interest and whatever else passes for a crime in the liberal lexicon, we now have “outreach”. Treasury secretary Timothy Geithner and outgoing White House chief economist Larry Summers used the occasion of a meeting of the Wall Street Journal CEO Council to try to repair the rift between the president and the nation’s business leaders, and get the CEOs to begin investing their $2 trillion cash hoard.
Geithner promised more certainty as to tax policy: “It is not a sensible way to run a country to have the magnitude of tax issues left to annual uncertainty.” If a deal is struck on the extension of the Bush tax cuts, some of the uncertainty will be removed. But several issues remain unresolved, most notably the tax rate on overseas earnings repatriated to the U.S. Obama has always viewed overseas earnings as the ill-gotten gains from shipping jobs overseas, and so might not be willing to lower taxes to encourage repatriation of these overseas earnings.
Which leaves regulation. The business community doesn’t really need much by way of concessions from the president. Republicans will have control of the House and enough seats in the Senate to prevent passage of blatantly anti-business legislation. The president might just try to squeeze new bills through the lame-duck session. But with legislators’ eyes fixed on the 2012 elections, and the moderates among them having no desire to follow so many of their colleagues into involuntary retirement, that gambit probably won’t work. So although businessmen might not like the hand that Obama has dealt them in the past two years, they have reason to hope that will be as bad as it gets. In short, they have their much-longed-for certainty!
So, worry if you must, but permit yourself a ray of happiness.