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The Data Jigsaw Puzzle

12:00 AM, Mar 5, 2011 • By IRWIN M. STELZER
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As if that were not enough to have many politicians take flight, we are in the midst of a serious outbreak of schizophrenia. Voters are demanding that the federal government bring the deficit under control, and have sent a large contingent of new congressmen with a mandate to cut spending. But 75 percent with a view on the subject say it isn’t necessary to cut Medicare, and 70 percent say cuts in Social Security are not necessary. Those programs account for about 60 percent of the budget. Exempt them from cuts, and eliminating the deficit becomes a virtual impossibility. The search for heroes willing to propose cuts in these programs has so far proved unavailing, although Paul Ryan is promising to lead the attack on the deficit. 

With massive deficits, loose monetary policy, and oil price rises making the headlines, it is little wonder that inflationary expectations are at their highest level since May 2008, especially since Bernanke told Congress he worries more that the rise in oil prices will slow growth more than it will trigger inflation. He is probably right, if past experience with oil spikes is any guide, but his critics see this as one more proof that he is soft on inflation, the other being his refusal to put  QE2, his second quantitative easing program, in dry dock now that the economy is recovering.

Here is a stab at fitting these pieces of the puzzle together to form a coherent picture. Rising sales and production, and an improving labor market suggest that the U.S. economic recovery is on track, although moving along that track more slowly than many, especially politicians with an eye on next year’s elections, would like. The recent rise in oil prices is likely to be with us long after the Libyan problem is resolved because of fears that some more significant domino might be the next to fall. That might slow the recovery a bit, but is unlikely to derail it. Nevertheless, a slowly recovering economy, moving ahead at, say, 3.5 percent, is unlikely to create enough jobs to bring the unemployment rate down quickly, especially since the long-term unemployed will have difficulty retraining and re-entering the work force.

On the political front, current indications to the contrary, progress will be made in bringing government spending down, witness the fact that the serious debate is now what to cut, rather than whether to launch major new spending programs, the subject of debate only a few months ago. But a final attack on the deficit will have to wait until after the 2012 elections. A reelected Barak Obama, with nothing to lose and a favorable legacy to gain, or a new man on a honeymoon with a pocketful of political capital, just might be able to do what needs doing. 

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