Barack Obama has rescued America from Economic Disaster

[Sheilbh]

Weirdly Irwin Stelzer sort of agrees with Obama.  Indeed it's the only thing so far that he thinks Obama's got right (in terms of domestic/economic policy):

At last Barack Obama has good news for angry voters
Irwin Stelzer

Washington has changed overnight. Yesterday the Senate followed the House of Representatives' flight from the city. On vacation? Certainly not. According to the official House schedule, its members are on their "summer district work period", a time off from legislating that the Senate calls its "state work period". Translation: members of both Houses will take some time off, and hear from constituents. With Congress's approval rating at about 24%, members should get an earful. More on that in a moment.

When Congress leaves town, the lobbyists cannot be far behind. Or the president: the Obamas will be heading for Martha's Vineyard, the summer playground of wealthy, liberal Democrats. But Obama will interrupt his holiday to flit round the country trying to explain to angry voters how a healthcare plan that the non-partisan Congressional Budget Office reckons will cost some $1 trillion can reduce the deficit, as he claims. And why he is trying to destroy a system that close to 90% of Americans are satisfied with.

He also has to persuade voters to press their senators to back the cap-and-trade plan to reduce carbon-dioxide emissions. That chore was made more difficult when India's environment minister told Hillary Clinton, secretary of state, that his country would not even consider accepting limits on its greenhouse-gas emissions until 2020, if then. This means that nothing the Senate can do will affect global warming — and the high cost of limiting American emissions would merely be an act of economic masochism.

The problems the president faces in persuading voters that the huge deficits he is running up are sustainable, that the government can run a healthcare industry that accounts for one-sixth of the economy, and that taxes on energy are a good idea, have caused a shift in the administration's strategy. The name of the game now is to trumpet the nascent economic recovery, and take credit for it.

Here, Obama is on firmer ground.

In the jobs market, less bad is good. Friday's report showed the loss of 247,000 jobs in July, way down from the monthly rate of almost 750,000 in January. Unemployment fell from 9.5% to 9.4% but only because of exits from the workforce. Average hourly earnings rose 0.2%. The recession has ended, say many economists.

The housing market seems ready for a transfer from the intensive-care unit. Prices have stopped falling and in some cities are rising, sales of new single-family homes rose 11% from May to June, and the supply of new homes available for sale is dropping. Pending home sales (those not yet completed) have risen for five consecutive months, suggesting existing sales are due to rise.

The rest of the economy is also improving. The manufacturing sector rose in July for the seventh straight month, propelled by a growth in new orders. Second-quarter GDP declined by only 1%, compared with a drop of 6.4% in the first quarter. Banks are on the mend, able to raise capital and to charge more for services now that many competitors are no more. Several have repaid the bailout money they received, giving the government an estimated 20% profit on those loans. The prices that investors are willing to pay for risky loans still on banks' books have risen to 90% of face value, the highest level in more than a year.

"The optimism is justified," Goldman Sachs headlines the latest report of its Investment Strategy Group. For the firm, euphoria would be justified. Goldman made more than $100m in trading profits on 46 days in the last quarter, during which it racked up record profits of $3.4 billion, the largest quarterly profit in its 140-year history. So far this year profits total $22 billion, of which half is being reserved for staff bonuses. The company's chief executive, Lloyd Blankfein, has bowed to the populist wave sweeping the liberal Democratic Congress and the Oval Office and asked all employees to eschew ostentatious purchases. Make the old Ferrari do for a while at least. And other firms on Wall Street — banks and lawyers — are looking forward to $1 billion in fees for managing the break-up of insurer AIG.

Obama can't take credit for those profits, but since government spending is up by about 10% while consumers continue to keep their wallets zipped, he can reasonably claim that the stimulus package he pushed through Congress is responsible for the improved condition of the economy. But he is being cautious lest this proves to be a false dawn.

Still to come are more write-downs of loans on the banks' books. The business default rate exceeds 11%, and is headed toward 13%, compared with 2.4% last year. Businesses are loaded down with more than $1 trillion in high-yield bonds and loans, and so will have to concentrate on debt repayment before they can undertake big new investments. The number of prime borrowers behind on their mortgage payments rose 13.8% between March and June, according to a study by Standard & Poor's. Delinquencies on credit cards are rising. And it is estimated that some $30 billion in loans backed by commercial property will have trouble getting renewed, and might end up having to be written off.

Most ominous, the huge deficits, soon to be increased by an estimated $20 billion over five years to finance the training and expansion of the Afghan army, are forcing the Treasury to auction off more IOUs. The increased supply of these bonds has forced down their price, which means the interest rate the government must pay is rising. If the rise in rates spreads to other securities, the recovery will be slowed as consumers and businesses find borrowing to spend and invest more expensive.

Still, Obama has a good story to tell about the economy — a lot better than the story he can tell about his largely discredited healthcare plan. So look for him to scale back his ambition to set up a government-run health system, and instead prepare for next year's congressional elections by claiming credit for the emerging economic turnround.

Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

[Hansmeister]

I guess my question as to why we should care what Hans thinks about the topic is because he was among those saying, "Don't worry about the deficits, the rapid economic growth of 2009-2012 will leave us with a surplus."

Shame the old board's gone, to digt up some priceless quotes.

[Razgovory]

I recall that too.  I remember in particular a thread called "this economy is smoking!" back in 2005 where certain sergeant was praising Bush on his expert handling of the economy.

[Hansmeister]

I recall that too.  I remember in particular a thread called "this economy is smoking!" back in 2005 where certain sergeant was praising Bush on his expert handling of the economy.

[alfred russel]

Thats just the point isnt it.  We dont know yet.  We really dont know what the drop in the unemployment rate means yet.

So can I take your unwillingness to take the bet as an indication that you think the chances of positive Q3 growth are 50% or higher? Obviously we don't know what the rate will be--Q3 isn't even half over yet--but a few months ago no one was projecting Q3 growth. It is a definite positive sign.

[Faeelin]

Just the sort of intelligent response we've all come to know and love. 

[Berkut]

I am comfortable with the uncertainty. That isn't the issue. I am uncomfortable with the weight that is given to a sample that has such uncertainty.

Then you're not really comfortable with uncertainty.

No kidding.

Isn't the reliability of statistical sampling rather well understood?

My understanding, which is admittedly not at all professional, is that you can challenge a samples methodology, in that they may screw up how it is done, but barring that, the error rate is very well understood.

A .1% decline is important, if for no other reason than that it is not a .5% decline.

[The Minsky Moment]

Hans makes sort of a point - to really understand what is going on, you would have to analyze the people leaving the work force in more detail.  Are they older workers taking an earlier retirement or younger workers choosing this time to get some more education or training?  If so that is not such a bad thing.  But if we are talking about prime age workers (e.g. Detroit assembly line types) who are simply giving up and permanently joining the ranks of the informal economy, it is more of a long-term concern.

The bigger story is that the efforts to save the financial system from total collapse appear to have succeeded, but no one is rushing to pump that because: (a) it is a bipartisan story, and (b) the popular anger at the "fat cat" bankers perceived to have been the unfair beneficiaries. 

Also - it would be nice to see people get away from the notion that the President has a great deal of control over the fate of economy, but that doesn't seem likely to happen.

[Razgovory]

I recall that too.  I remember in particular a thread called "this economy is smoking!" back in 2005 where certain sergeant was praising Bush on his expert handling of the economy.

It is a shame we lost our archives.  Do you remember that thread?  You started it.

[Berkut]

Also - it would be nice to see people get away from the notion that the President has a great deal of control over the fate of economy, but that doesn't seem likely to happen.

Oh sure, NOW you say that!

[Caliga]

I've been saying that on Languish for years.

[Berkut]

I've been saying that on Languish for years.

Well sure, so have I - I just find it amusing that suddenly JR is banging on that particular drum.

His post, in general, was right on though.

[Valmy]

I've been saying that on Languish for years.

I am not even sure how accurate that view is.  How much impact does the President have on the economy?  I was told over and over again not to give Clinton any credit for the economy being good because he had nothing to do with it...

that usually came from a Republican after I said something like 'I really like Clinton's free trade and globalization policies'

'Yeah?  Well they do not effect the economy because CLINTON IS EVIL AND I WANT HIM DEAD!!!111'

So yeah.  I think, though, that really stupid and bad policies by the government can tank an economy immediately so who knows?

[The Minsky Moment]

Oh sure, NOW you say that!

When did I say otherwise?    

[The Minsky Moment]

I am not even sure how accurate that view is.  How much impact does the President have on the economy?  I was told over and over again not to give Clinton any credit for the economy being good because he had nothing to do with it...

that usually came from a Republican after I said something like 'I really like Clinton's free trade and globalization policies'

'Yeah?  Well they do not effect the economy because CLINTON IS EVIL AND I WANT HIM DEAD!!!111'

So yeah.  I think, though, that really stupid and bad policies by the government can tank an economy immediately so who knows?

The fact that the US didn't engage in significant protectionism in the 90s and that the budget was kept under control was a good thing.  Of course, some of that was Bush Sr.'s administration in conjunction with the old Congress and some Clinton with the Gingrich Congress.  And as useful as that was, there were larger forces at work aside from government policy.

I don't want to suggest the President has zero role or effect, just not necessarily the major one the media sometimes ascribes (when it isn't running its Fed conspiracy theory stories about how the Fed controls the entire economy).