Yet another day in the yo-yo chronicles. The markets tanked once again, reverting to their extreme behavior of last week; European banks groaned under the presumed weight of unresolved debt burdens; and American economic data, ranging from the Philadelphia Fed’s manufacturing survey to jobless claims, suggested that, yes, Virginia, there may be a Santa Claus, but his bag this year is shaping up as decidedly thin.
Not surprisingly, the net effect of these pressures has been to pummel public confidence and send both Congress’ and President Obama’s approval ratings on the economy plummeting to the teens and 20s, according to the most recent Gallup poll, released yesterday. And not surprisingly, the net effect of those pressures has been to spur the White House to prepare a major new initiative to stimulate economic activity.
According to multiple reports, the White House is readying a post–Labor Day speech to unveil a broad-gauge initiative aimed at job creation and economic growth. The electoral logic is clear: Stuck with high unemployment that he now owns, Obama must be seen as doing something, and indeed, something must be done. What America needs is spending that lays the foundation for long-term prosperity; what politicians need is spending that paves the way for reelection in November 2012.
Not to be cynical, but these time frames aren’t compatible. The details of the proposed plan that have been leaked include tax incentives for companies to hire workers, corporate write-offs for capital expenditures, an extension of the payroll-tax breaks that began this year, an infrastructure bank, and some incentives to prevent teacher layoffs.
Some of these were part of the initial stimulus proposal in 2009 and never made it through Congress—namely the infrastructure bank and capital-spending incentives. And those both made sense then and make sense now: what is most needed for long-term economic health are investments, especially when capital is about as cheap as it has ever been. (Note to Standard & Poor’s: Downgrading U.S. debt decimated global equity markets and then sent yields on U.S. Treasuries to their lowest point since World War II. Oops.) Some of the stimulus more than two years ago was also longer term, such as $16 billion of investment grants for innovative new energy technologies, and while vital, those will take years to reap rewards.
The challenge today is magnified by the Tea Party opposition to new spending of any sort, as well as a political culture that perceives penury in the midst of the lowest funding costs for government debt in generations. Team Obama is squarely focused on reelection, and no one goes to the polls because the Department of Energy awarded a $500 million grant to new forms of bio-algae technology. The result is that any stimulus in the face of anemic economic data and market panic is bound to be stimulus that aims to juice consumption, assuage voters with the illusion of more money, and prop up markets.
Unfortunately, we are at or near the point of substantially diminishing returns for this sort of stimulus. It may come as a surprise, given the news flow, but consumption in the United States is not a particularly weak spot. Mega-chains such as Walmart and Target report that consumers are spending quite well, and national parks like Yellowstone are seeing booming business. Incomes are stagnant, but so, for the most part, are prices—with 2 percent inflation hardly high by any recent standard.
So juicing consumption is beside the point, economically. It isn’t beside the point electorally. Obama was elected on the promise of difference, and yet when push comes to shove, it isn’t difference but numbing similarity that is in evidence. Prime the pump, make voters feel better.
None of that will aid the national economy per se. Infrastructure, investment, innovation, all will be the source of future growth—if there is a source. Today’s Silicon Valley of social media may seem perplexing in its ultimate contribution to productivity, but so too did the search engines and dotcoms of the 1990s, and we now know just how much those enhanced efficiency and led to new industries and ways of commercial interaction.
It would take someone like the Obama of the 2008 campaign to make the compelling, passionate case for that potential and the need to invest in it, but that is not—it would seem—the Obama of August 2011. It certainly is not the Republicans and the Tea Party—who plead bankruptcy of public finances and are wedded to a Luddite dream that less is more and that the only thing standing in the way of job creation is bad politics rather than changing global economies and technology.
Meanwhile, markets swoon as investors try to “price in” worst-case scenarios. And that may be the only positive here: Markets have been searching for a price based on the complete and abject failure of any political class in the Western world to respond constructively. That is a wise assumption, and markets are likely overestimating the harm that political sclerosis just now is causing. Politics aren’t sclerotic in the parts of the world that are booming—though Brazil and India are hardly models for efficiency, Indonesia a questionable model for development, and China no one’s idea of an open society. Still, as Ollanta Humala, the recent left-wing winner of the Peruvian election, attests, Brazil is now a better model for his country’s growth than the United States, and for that we may be thankful.
So as the country turns to a new round of stimulus, even the left should take a hard look at what is proposed. Block grants to states, payroll-tax holidays, and consumption spending should be questioned; they won’t stabilize financial markets, and they won’t generate a new era of competitiveness. Infrastructure, direct hiring, real jobs for the unemployed provided by government in lieu of unemployment benefits, long-term investment, and incentives for companies to focus on the United States—that will matter.
Global financial markets are skittish and panicked because investors are deeply confused, and trading algorithms feed the downside (and, yes, upside as well). Europe has as much to do with this as the United States just now. Markets send amorphous signals to policymakers; pacifying them is difficult at best, and trying to do so should probably be avoided. They will settle and reflect the companies that are booming when there is a sense that the long-term path is stable and clear.
Obama has a small window of opportunity to steer between the Scylla of placating an electorate that may not be placatable, and the Charybdis of doing nothing. If he designs a stimulus for the short term, the effects will dissipate before he can reap the rewards—and he likely won’t get credit for them, anyway. If he thinks for the longer term, he may not get the initial pop from pollsters, but he stands a better chance come next November, and, more important, we all stand a better chance for the coming years.