This Philly Fed survey of 43 forecasters paints a pretty ugly picture of the 2012 economy:
I’m not quite as pessimistic as he is about Obama’s chances, but if unemployment really is at 8.5%, I have to think that he will at the very least face a really tough campaign battle–yea, even if Sarah Palin is his opponent. Unemployment was 7.7% when he took office. I think he’s going to have a hard sell if four years later, it’s almost a full percentage point higher. If we put the car in D, how come it’s not going anywhere, Mr. President?
It will be particularly hard if it’s not changing fast. Unemployment was much higher under Reagan, hitting almost 11% at its 1982 peak. But the rise was short and sharp, the decline equally dramatic; by June 1984, unemployment was back down to 7.2%. We’ve already spent as many months above the 9% unemployment line as Reagan did, and it doesn’t look ready to drop below that level in the next few months. Reagan was dealing with a pure monetary recession: Volcker raised interest rates dramatically in order to get inflation under control, and as soon as he loosened his iron fist, the economy bounced back. This recession is vastly more complicated, with fiscal, regulatory, and other problems that still need to be worked out. I would be very surprised if we saw any sort of dramatic bounce in the next eighteen months–and the next eighteen months is what matters, because most political analysts I’ve talked to think that after about June, an improving economy doesn’t help the incumbent. George H.W. Bush had a fabulous third quarter, economically speaking, and still lost to Clinton.
That doesn’t mean that Obama can’t get re-elected if unemployment is 8.5%. But I don’t think any president since Roosevelt ever has–and if unemployment hadn’t hit nearly 25% under Hoover, I doubt Roosevelt would have won re-election either. If I were the Obama administration, I’d be praying like hell for something in the low sevens.
Megan is absolutely right that recessions after financial crises tend to be nasty beasts. That argues against a 2011-2012 boom like the one Reagan had in 1983-1984 when GDP growth averaged 6 percent and the unemployment dropped by more than three percentage points. There have also been some polls showing Obama trailing possible GOP contenders like Romney and Huckabee. Then again, Intrade still gives Obama a near 60 percent chance of a second term. And I have yet to meet the GOP consultant whose best-case scenario is anything much better than an extremely close contest.
The Hill sets the economic bar awfully low:
Economists who study the labor market said this week that they expect unemployment in 2012 to average 8.5 percent, down more than a point from the 9.6 jobless rate of today. Heidi Shierholz, an economist at the Economic Policy Institute, said every forecast she has studied predicts rapid job growth in 2012, even though the national number will still be a far cry from full employment. “It’s still going to be so high in 2012, but people are going to be feeling better,” Shierholz said.
Mark Zandi, the White House’s favorite economist to quote because of his advisory role with Sen. John McCain’s (R-Ariz.) 2008 presidential campaign, sees the same picture. Zandi said Obama’s stimulus plan has achieved its goal. The plan, Zandi said, prevented another Great Depression while giving the public sector time to kick in and start hiring, which will be in full effect when Obama is running for reelection.
“The trend is going to be in strong favor of incumbents in 2012,” said Shierholz.
I really don’t think so, though Ms. Shierholz from the liberal EPI would surely like that to be the case. There is a huge lag between what the numbers say about the economy and what people perceive. Bill Clinton won the 1992 election on the economy (“it’s the economy, stupid”) even though GDP had been growing for six full quarters. According to Gallup, 88 percent of Americans thought the economy was “fair” or “poor” in October 1992 with some 60 percent saying the economy was “getting worse.”
Two years later, it was the Democrats turn to feel the brunt of widespread economic anxiety as the Republicans captured both the House and the Senate. Even though the economy had then been growing for 14 straight quarters and the unemployment rate was down to 5.8 percent, 72 percent of Americans still thought the economy was “fair” or “poor” and 66 percent though the nation was headed in the wrong direction. Hard to believe, but 3 1/2 years after the 1990-91 recession ended, the economy was still a big negative for voters and hurting the incumbent political party.
So let’s say the unemployment rate is 8.5 percent on Election Day 2012. That is twice as high as what Americans have grown accustomed to. As recently as May 2007, it was 4.4 percent. It was also under 5.0 percent from July 1997 through August 2001. And before this recession, Americans hadn’t seen 8.5 percent unemployment since 1983. In addition, housing will still be in the tank, and budget deficits will still be in the stratosphere. Morning in America II? Good luck with that.
If the Obama wants to be a one-termer, he should pay attention to people like Hendrik Hertzberg:
Part of the Democrats’ political problem is that their defense, confusingly, depends on counterfactuals (without the actions they took in the face of fierce Republican opposition, the great slump would have metastasized into a Great Depression), deferred gratification (the health-care law’s benefits do not kick in fully until 2014), and counterintuitive propositions (the same hard times that force ordinary citizens to spend less money oblige the government—whose income, like theirs, is falling—to spend more). Another part of the problem, it must be said, is public ignorance.
Me: And none of that is likely to change substantially over the next two years. There will be no second acts for The Stimulus, healthcare reform will still seems off-point as best, and Americans will still think Washington should mimic the austerity of U.S. households. Messaging and optics isn’t going to cut it.
Great, great stuff from Fed member Kevin Warsh in the WSJ. After giving his perfunctory agreement with QEII, he gets after it with a rousing piece of advocacy:
Pro-growth policies include reform of the tax code to make it simpler, more transparent and more conducive to long-term investment. These policies also include real regulatory reform so that firms—financial and otherwise—know the rules, and then succeed or fail. Regulators should be hostile to rent-seeking by the established, and hospitable to the companies whose names we do not know. Finally, the creep of trade protectionism is anathema to pro-growth policies. The U.S. should signal to the world that it is ready to resume leadership on trade.
The deleveraging by our households and businesses is not a pattern to be arrested, but good prudence to be celebrated. Larger, more liquid corporate balance sheets and higher personal saving rates are the reasonable and right responses to massive government dissaving and unpredictable government policies. The steep correction in housing markets, while painful, lays the foundation for recovery, far better than the countless programs that have sought to subsidize and temporize the inevitable repricing. It is these transitions in our market economy—and the adoption of pro-growth fiscal, regulatory and trade policies—that lay the essential groundwork for greater, more sustainable prosperity.
Me: I would say there is as much as a 39 percent chance Kevin Warsh is the next Treasury Secretary of the United States. First, I think Tim Geithner is staying for Obama’s full term. Second, betting markets currently give 39 percent chance Republicans take the White House in 2012. Warsh is highly respected in GOP policymaking circles and has a gold-plated resume. I could see Warsh at Treasury and eventually Glenn Hubbard/John Taylor at the Fed in a GOP administration.
American presidents usually win second terms, even if their parties suffer midterm blowouts. But President Barack Obama better not rely on history for a 2012 victory. To lift his political fortunes after Tuesday’s absolute shellacking — and those of the economy — he needs to work with incoming Republicans to do two big things: cut spending and cut taxes. Here’s why:
1. Unless Obama actually desires to be a one-termer, he really has no other choice. Ronald Reagan and Bill Clinton both sailed to reelection despite suffering midterm setbacks, thanks to good growth and popular policies. When it’s one-and-done, as was the case with Jimmy Carter in 1980 and George Bush in 1992, it’s the economy that sends them packing. And that’s just the scary scenario emerging for Team Obama. The White House’s own forecasts don’t predict unemployment dipping below an average of 8 percent until 2013. Even worse, some of the hardest hit states — Florida, Michigan and Ohio – are big ones in the Electoral College that Obama needs to win again if he’s going to score another four years in the job. And all three just elected Republican governors.
2. Obama could stay the course. He could battle the GOP newcomers including their sizeable Tea Party contingent, pray for a boom and continue to push his agenda, such as capping carbon emissions, through regulatory agencies. But that’s a dead electoral end unless the economy perks up considerably (and immediately) and Republicans choose some incompetent, unelectable nominee. (As the midterms showed, candidate quality matters.) One of the clear midterm messages is that Americans have rejected the beyond-center-left, big government, redistributionist agenda. Exit polls said that some 60 percent of voters think government is doing too much. And voters in blue-state Washington rejected tax increases on the rich.
3. Voters say they want compromise. And there are deals Obama could potentially reach with Republicans that might generate jobs and reassure markets about America’s fiscal seriousness. Obama has already proposed letting businesses immediately deduct new capital investments. He could add cuts in corporate and payroll taxes and temporarily extend some or all of the expiring Bush tax cuts. Both parties should also take a look at the Wyden-Gregg tax reform bill. In return, Obama could bargain for more infrastructure spending, especially if he agreed to suspend federal pay rules that raise the cost of government-funded construction projects.
4. But there might be even more opportunity on the spending side. In a bit of fiscal jujitsu, Obama could challenge the Tea Party folks to cut billions in corporate tax breaks and vote for any social insurance cuts recommended by his own deficit panel. And Obama must surely know that when advanced economies have reordered their fiscal houses by cutting spending, it’s often been under center-left governments able to pull a “Nixon to China” moment with interest groups.
It may not feel like it right now to the shell-shocked White House, but the Democratic election throttling might just help the president pivot to a second term.
National Journal’s Ron Brownstein’s chat with President Obama last week:
It was clear that Obama has started to think seriously about how he will navigate a Washington with many more Republicans in it. But nothing about him suggested that he viewed the impending arrival of those Republicans as evidence that he needed to radically rethink his presidency. Obama sounded neither shell-shocked nor defiant. He seemed entirely focused on the practical: where he might work with Republicans, and where he expects confrontation (education, infrastructure, and energy in the first group; taxes, health care, and Social Security in the second).
Will Obama triangulate like Bill Clinton did after the 1994 midterm elections? I dunno. My guess is that in the end, Team Obama will try to win ugly, betting that a recovering economy, massive fundraising and a weak GOP presidential field will allow a narrow 2012 victory
Some fascinating numbers from longtime Democratic pollster Doug Schoen (via U.S. News & World Report). Among them: Voters prefer Bush over Obama, want the GOP to control congress, favor extending all the Bush tax cuts, don’t favor another term for Obama and would give Palin nearly 20 percent of the vote if she ran as a third-party presidential candidate.
His survey of 1,000 likely voters finds the following (bold is mine):
The 2010 midterms
– In the generic Congressional midterm election, the Republican Party has a nine-point lead over the Democratic Party, 48% to 39%. 13% are not sure.
– However, when given the choice between a Republican, a Democrat, and a Tea Party candidate for Congress, the Tea Party candidate gains more support (19%) than the Republican candidate (15%). Meanwhile, support for the Democratic Party consolidates (39%) and more voters become undecided (27%).
-- 53% prefer the outcome of this year’s Congressional elections to be a Republican-controlled Congress, while 36% prefer the Democrats to have control.
-- 66% say things in the country are headed on the wrong track, while 26% say they are headed in the right direction. 8% are not sure.
– 57% say the economy is headed on the wrong track, while 31% say it is headed in the right direction. 12% are not sure.
– Those who say they plan to vote for a Republican for Congress do so because they think the Democratic Party is doing a bad job running the country and to oppose Obama’s agenda (37%), and because they agree more with the Party’s position on social issues (17%).
– Those who plan to vote for a Democrat do so to support Obama’s agenda and have the Democrats continue to run the country (34%), and because they agree more with the Party’s position on social issues (30%).
– If the Republicans win one or both houses in Congress, over half (53%) think it is a reaction against the perceived failed policies of Obama and the Democrats in Congress, while 29% think it is because Republican Party special interest groups bought the election. 19% are not sure.
– 39% say the Democratic Party is closer to their views on major issues, while 48% say the Republican Party is closer to their views.
– Despite voters feelings toward Obama personally, 56% say he does not deserve to be reelected, while 38% say he does deserve to be reelected President.
– 43% say that Barack Obama has been a better president than George W. Bush, while 48% say Bush was a better president than Obama has been.
– 42% approve of the way Obama is performing his job as president, while 57% disapprove. Similarly, 43% approve of President Obama’s handling of the economy, while 55% disapprove
Tea Party movement
– The Tea Party movement has unprecedented, broad-based support. One-quarter now says that they are Tea Party supporters, while 27% say they are opponents. 44% say they are neutral. One-quarter of Tea Party supporters self-identify as members of the Tea Party movement.
– Almost half (49%) say they are looking for someone else to vote for in the next Congressional election, while just 36% say they are inclined to vote to re-elect their representative.
– Support for the Tea Party movement is bipartisan. Tea Party supporters say the movement is a protest against business as usual in Washington (43%) rather than a protest against President Obama (20%), Democrats in Congress (11%), or Republicans in Congress (0%).
– Over half (52%) of Tea Party supporters say they support the movement because it is committed to reducing the federal government’s size and spending and the national debt. 13% support it because it supports personal liberty of the individual.
– 39% have a favorable impression of Karl Rove, while one-third have an unfavorable impression. 28% are not sure.
– 45% have a favorable impression of the Chamber of Commerce, while 26% have an unfavorable impression. 29% are not sure
– If a Tea Party candidate is on the 2012 ballot, 32% say they would vote for a Democrat, 19% say a Republican, and 16% say a Tea Party candidate. One-third are not sure.
– In thinking about the 2012 Presidential election, if the candidates were Democrat Barack Obama, Republican Mitt Romney, and Tea Party candidate Sarah Palin and the election were held today, 40% would vote for Obama. 32% would vote for Romney, and 17% would vote for Palin.
– If the candidates in the 2012 Presidential election were Democrat Barack Obama, Republican Mitt Romney, and Tea Party candidate Mike Huckabee, and the election were held today, 40% would vote for Obama. 24% would vote for Romney, and 24% would vote for Huckabee.
Tax cuts and healthcare
– Over three-quarters (77%) favor extending the Bush tax cuts for those making less than $250,000 a year, while just 15% oppose extending them.
– Half favor extending the Bush tax cuts for all Americans, including those making $250,000 or more a year, while 40% oppose this.
– Over half (52%) favor repealing the new health care law that was passed earlier this year, while 38% oppose repealing it.
Will President Obama get re-elected in 2012 if his party suffers a crushing midterm defeat? His political team likes to point to the example of Ronald Reagan. Congressional Republicans were crushed in the 1982 midterms, but the Gipper cruised to victory two years later.
Of course, the “Morning in America II” scenario depends on a fast economic recovery. Unemployment fell from 10.8 percent in November 1982 to 7.2 percent in November 1984. GDP growth was 4.5 percent in 1983 and 7.2 percent in 1984.
But most economic forecasts don’t anticipate such a boom in America’s near future. More likely is trend growth — about 3 percent or so — with unemployment still over 8 percent by the end of 2012. At best, those numbers suggest a very close presidential contest. And current polls show the president will have a tough time again winning such electoral-vote rich states as Ohio, Michigan, Florida, Indiana, Pennsylvania, Wisconsin and North Carolina.
Obama could try to emulate Reagan by proposing a massive tax cut, but that seems unlikely given the administration’s belief that America is under-taxed right now.
But there is another way, although it is amazingly risky. A Bloomberg story, using a simulation run by Macroeconomic Advisers predicts a 10 percent decline in the dollar in the first six months of next year would do the following:
1. Gross domestic product would rise 1.1 percentage points more than the St. Louis-based firm’s baseline forecast for next year, to 4.8 percent.
2. In 2012, growth of 5.7 percent would exceed the baseline forecast by 1.3 percentage points.
3. Unemployment would fall to 7 percent by the end of 2012, 1.4 points lower than the firm’s baseline forecast.
There you go, Morning in America II, thanks to the weak dollar — unless of course the dollar starts plunging out of control, boosting inflation and creating a panic.
Treasury Secretary Timothy Geithner says he supports a strong dollar — although he wants it to weaken vs. the yuan — but does the White House political team share that view? And what about Ben Bernanke? Here is an interesting bit from a recent Reuters story:
While U.S. Treasury Secretary Timothy Geithner reiterated that the United States supports a strong dollar at the G20 meeting, there were few takers for that. “It is one thing for the Treasury to say that, but then the Fed holds all the ammunition and when it is set to print more money, the dollar will remain a weakened currency,” said Jane Foley, senior currency strategist at Rabobank.
The Washington consensus is that if the GOP takes at least the House, it will give Obama a political foil and give his 2012 election hopes a big boost. And, the media tell us, the GOP presidential field is weak:
Sniping from the sidelines will be potential Republican challengers to Obama in 2012. The road to the presidential proving grounds of Iowa and New Hampshire is already well-trod by more than a dozen possible Republican candidates. The group ranges from Tea Party champion Sarah Palin to former Massachusetts Governor Mitt Romney and Minnesota Governor Tim Pawlenty. Experts believe Obama would match up well against any in this group — if the economy is on the mend and the jobless rate is trending downward from its current 9.6 percent.
But political analyst John Ellis paints a different potential scenario:
What might be an alternative story line? One answer would be: increased volatility. A darker answer might be: political instability and unrest.
As a nation, we are struggling with overwhelming debt at every level of governance and across a vast swath of the electorate. There are at least (at the very least) 15 states and countless municipalities that are functionally bankrupt. The states that are bankrupt, by any real accounting, include New York, New Jersey, Massachusetts, Connecticut, Illinois, California, Nevada, Arizona, Colorado, Ohio, Wisconsin, Louisiana, Missouri, Oregon, Washington and Michigan. They can’t (literally can not) meet their pension obligations. They won’t be able to pay for their ever-rising health care costs. Education costs are eating up too much money (although this will abate somewhat as the echo boom generation matriculates) and virtually every state (and municipality) has huge bond obligations, the proceeds from which papered over previous shortfalls. Oh, and one other thing, the economies in all of those states are stagnant, at best.
Once the last infusions of stimulus money run dry, what remains is a vast desert of debt. The idea that an over-leveraged electorate can be called upon to make up the shortfall is a non-starter. They can’t pay down their own debt and municipal debt and state debt and federal debt. The math simply doesn’t work. They end up with no take home pay.
This is the real avalanche that is about to hit American democracy. The avalanche in two weeks results in Nancy Pelosi no longer being the Speaker of the House. The avalanche of debt that hits beginning in 2011 and keeps on coming will shake our political system to its foundation. That’s the avalanche that matters.
President Obama can either get ahead of this avalanche by proposing a vast restructuring of government debt and obligations while aggressively promoting a venture-based economic growth agenda or he can be consumed by the rubble. The same holds true for the next Republican presidential nominee. He or she needs to be ahead of the avalanche to survive its inevitable onslaught.
Me: Austerity won’t sell. Growth and prosperity will. Whoever gaffs that, wins.