The American economy is being re-floated on a sea of red ink. Yes, there is good news. Factory sales are up, as are retail sales. Orders for capital goods, if the volatile aircraft-order segment is backed out, are coming in stronger than expected, and the figures for back months are being revised upward. Profit reports are all that investors could hope for in most cases. Ian Harwood, chief economist at Evolution Securities, is telling his firm’s clients that “US economic expectations have recently improved sharply … [and] we think this ‘upgrading’ process has further to run.” That view is borne out by a significant rise in the Conference Board’s index of consumer confidence, apparently as a result of increased confidence in the labor market.
But the housing sector continues to lag. December sales of new homes were 7.6 percent lower than last year, and prices seem to be continuing on their downward trajectory. Still, December new home sales, led by greater activity in the Western part of the country, were up 17.5 percent over the previous month, and economists at Goldman Sachs have concluded that home prices might have stabilized at year-end.
All in all, the monetary policy gurus at the Federal Reserve Board (technically the Federal Open Market Committee, or FOMC) decided last week that “the economic recovery is continuing…. Growth in household spending picked up…. Business spending on equipment and software is rising….” Each bit of good news was accompanied with a caveat, related to the still-fraught jobs market, but it was not so long ago that these bits of cheer were absent from most reports. Besides, if you want to justify continuing to print money, as Chairman Bernanke does, it is important to argue that a weakened economy cannot fully recover without a transfusion of new fiat money.
For those with short memories, times are good and getting better – unless they are out of work. For those with a longer time horizon, who know that he who pays the piper calls the tune, the outlook is not quite so brilliant. For them, the image of the leaders of the Chinese regime sitting atop trillions of American IOUs while they decide how to reduce the influence of the dollar in world trade, and the influence of American power on world affairs, is unsettling.
The late Lloyd Bentsen, a long-time senator from Texas and the Democrats’ candidate for vice president on the 1988 ticket that went down to defeat at the hands of the first George Bush, once said, “If you let me write $200 billion worth of hot checks every year, I could give you an illusion of prosperity, too.” Bentsen was a piker by comparison with President Obama and his enabler, Federal Reserve Board chairman Ben Bernanke.
In his State of the Union message, the president called for more spending on education, roads, light rail, clean energy, and a host of other infrastructure components. He did promise some tiny cuts in a few items in his budget, and a semi-freeze of some other spending, and then left town before the non-partisan Congressional Budget Office (CBO) released its revised forecast of the deficit for the fiscal year ending September 30. The increase in the forecast the CBO offered only four months ago comes to $400 billion, largely because by law it had to project then-current policy, which included expiration of the Bush tax cuts. That forecast revision comes to twice the total sum Bentsen, who served as secretary of the Treasury under President Clinton, said would enable him to create the illusion of prosperity.
The CBO now guesses that the deficit this fiscal year will come in at $1.5 trillion, 9.5 percent of GDP. Worse, if current policies remain in place, the accumulated deficits, America’s total debt, will reach 100 percent of GDP in ten years, a level most economists agree will create interest payments on that debt so high that economic growth will be virtually impossible.
The president and his economists don’t see things that way. They believe the spending will forestall a double-dip recession, bring down the unemployment rate, and restore America’s competitiveness. If that requires more borrowing and higher taxes, so be it. Details to follow on February 15 when the president sends his proposed 2012 budget to Congress, round two when the Republicans in the House begin debate on a bill to set spending for the remainder of this 2011 fiscal year, and round three in March, or later, when the government hits the debt ceiling set by Congress, and the Republicans fight for spending cuts in return for support for an increase in the ceiling.
Meanwhile, buoyed by data that it says show that inflation is well under control, the Federal Reserve’s monetary policy committee voted to continue printing money, despite the fact that consumers in the real world are watching food, apparel, gasoline and other prices take off in response to increased demand for commodities from developing countries. Whoever compiles the official statistics neither eats, wears clothes, drives, nor takes medications, but spends his or her money on electronic goods, the prices of which are indeed declining.
All of this is a two-front war, one front manned by politicians, the other by economists. Democratic pols believe that government spending can produce not only worthwhile projects, but full employment. And, most important, victory in next year’s congressional and presidential elections. Republicans in search of votes believe they have a mandate to cut spending, both to reduce the deficit that threatens to be a burden on their children’s children, and to rein in the ever-expanding reach of government into the lives of the American people. They take the recent congressional elections, in which Obama admits he took a shellacking, as a sign that they are correctly reading the will of the electorate, and will add control of the Senate and the White House to their control of the House in 2012.
Economists fight on higher, less self-interested ground. Former presidential adviser Larry Summers, returned to the Harvard’s John F. Kennedy School of Government to head the Mossavar-Rahmani Center for Business and Government, argues that with interest rates and therefore the cost of capital so low, and idle resources available to build infrastructure projects, now is the time for America to invest in roads, airports, bridges and the like.
In response, conservative economists argue that the burden of debt is already so crushing that further borrowing to fund infrastructure investment will send the dollar down and interest rates up, and freeze out private investment by absorbing much of the investment funds available in the market. In addition, economists such as my Hudson Institute colleague, Diana Furchtgott-Roth, argue that if the nation really needs these infrastructure projects, the private sector will build them more efficiently, relying on the revenues from toll roads and bridges, privately owned airports, and voucher-funded schools to cover costs.
Tilting the American battlefield in favor of the frugal brigades of politicians and economists is the example of the eurozone, its southern front overrun by debt, routed by the markets. America might not be Greece or Portugal or Ireland or Spain, but the rating agencies are casting a troubled eye over our ledgers, and warning us to get our deficit under control or lose our AAA-bond rating, as Japan has recently lost its AA rating. Unless we regain our ability to compromise, we will pay a high price in money and lost prestige by having the sovereign debt of the United States lose the credit rating it has held ever since its securities were rated.
