Who is to blame?
Since everything is politicized these days, no doubt your first reaction was to blame either Obama or the Republicans for the tepid recovery.
Both have played a part. Republicans helped overdramatize the budget battles. But Obama is in the White House. He is the leader, and he needed to find more room for compromise. We did see this in the Jumpstart Our Business Startups Act, passed about a year ago, that helped ease the flow of capital to small entrepreneurs and passed with bipartisan support. And with the tax cuts in the 2009 stimulus, as well as the 2010 tax cut package.
But more often, we've had an epic academic battle over broad economic concepts like Keynesianism versus supply-side economics and debt-fueled spending versus budget austerity. Partisan warriors have enlisted economists to justify their positions as skirmishes intensify.
Witness the recent kerfuffle over the work of Carmen Reinhart and Kenneth Rogoff (which has been parodied by Steven Colbert and criticized by other economists) that showed throughout history deeper government indebtedness has been associated with increased vulnerability to financial panics and slower, less vigorous economic growth.
Their work showed that once a government's debt-to-GDP ratio exceeds 90%, bad things happen. (Ours has hit 105% and is still rising.) Critics claim the drag from higher debt is not as bad as budget hawks claim. But it's also true that critics have found reason to criticize the assumption -- also based on Reinhart-Rogoff research -- that financial panics lead to weaker recoveries as well, something those on the left have used to shield Obama from criticism.
Economists are even battling over whether this recovery is truly disappointing or not. I'd say, although the stock market has entered its own reality, most on-the-ground measures such as jobs, wages, and production tell a different story. And the chart below, from Stanford economist John B. Taylor, clearly shows the current recovery is substandard when compared with others in U.S. history.
The confidence problem
Explanations for the faltering recovery have also been politicized.
On the left, the argument is that there is insufficient demand for goods and services, which monetary and fiscal policy stimulus can help. This is the argument used by the Federal Reserve to justify their increasingly aggressive bond-buying program and the fact that interest rates have been at 0% since 2008.
Their solution: More borrowing from China to fund more spending programs and more money printing with which to subsidize the government's indebtedness.
On the right, the argument is that the government's policies are damaging consumer and business confidence while out-of-control borrowing (both the Senate Democrats' and Obama's 2014 budget proposals never come into balance; the House GOP plan closes the deficit a decade from now) increases worries over future tax obligations.
They also criticize Obama's stimulus plan as containing a $144 billion handout to state and local governments to postpone job cuts that ended up happening anyway -- money that didn't do anything to improve the economy's long-term productivity.
The key problem, as I've written before, is one of confidence and inadequate private-sector investment and hiring. We're suffering from the weakest growth in the private stock of productive capital -- machinery and equipment -- in six decades, which is why productivity is falling. When productivity falls, living standards and economic vitality decline as well.
And confidence is down because businesses large and small are worried about higher taxes, increased health care regulation and expenses, uncertain monetary policy, uncertain value of the dollar and a lack of clarity on the government's financial position.
In the latest National Federation of Independent Business survey, taxes, government requirements and red tape are by far the top concerns. Confidence in government policy dropped 10 points in the latest University of Michigan Consumer Sentiment index. And Obama's disapproval rating is higher than his approval rating for the first time since August as the re-election bloom fades.
There is plenty of low hanging policy fruit with which to turn this around. Let's use the bipartisan plan from the Committee for a Responsible Federal Budget -- a group headed by the folks that ran Obama's 2010 deficit commission -- to stabilize the national debt and reform health-care entitlements, reform and simplify the tax code, and cut waste and fraud in government.
Time to ask for a raise?
To this, I would add reform and cost-benefit analysis of federal regulations -- a cancerous byzantine of red tape that serves special interests and lobbyists and hurts entrepreneurs.
Taylor's research suggests that embracing "a gradual and credible fiscal consolidation will help get the economy out its depressed state and into an economic situation where people recognize that lower growth of government spending eventually means lower taxes and more take-home income." He estimates that such a plan could add 1% to GDP growth next year, worth $1,500 per household. Over 10 years, he estimates it would raise the overall size of the economy by 3%, or more than $4,000 per household.
He bases this on the House GOP budget proposal, which would by 2023 take federal spending as a percentage of GDP down from a postwar high of 22.2% today to 19.1%, which is still above the 18.2% seen at the end of the Clinton administration.
Taylor doesn't believe more borrowing and spending by the government is the answer, since "resources to finance government expenditures aren't free -- they withdraw resources from the private economy." Expect this debate to heat up in the months to come as the Treasury once again runs into its statutory debt limit and Congress and the White House start budget discussions.
The takeaway is that Obama needs to get off the links, step away from inflammatory social issues like abortion and gun control, and concentrate on an economy that's losing steam and needs fresh ideas -- ideas that unleash the creative power of the private sector, unleash the huge cash reserves of the corporate sector, and address the deterioration in business confidence and labor productivity.
If he can resist the left's call for more borrow-and-spend stimulus and embrace a more pro-business approach, the Republicans will be hard-pressed to say no. After all, while Americans re-elected Obama, they also re-elected the divided Congress they installed in 2010 in response to Obama's early policies -- including the stimulus, the bailouts and Obamacare. They want solutions both parties can agree on, not more bloody partisan warfare in the context of a weakening economy.