Orlando's Outlook: Passing the torch—It's the economy, stupid
Bottom Line For the last fortnight, we’ve marveled at the grace of Gabby Douglas, the power of Michael Phelps, the athleticism of Missy Franklin, and the intensity of Rebecca Soni, just a handful of the dozens of great stories surrounding our superb and highly-decorated American athletes. But after their years of preparation and practice, the London medals have all been won and the Olympic torch has now been extinguished. So it’s time to shift our focus to the home stretch of another domestic marathon—the presidential election on Nov. 6. After a seemingly endless two-year race, the finish line is now just a relatively short 85-day sprint away. Unlike the Olympics, however, where Americans from either side of the political aisle burst with nationalistic pride whenever one of our athletes was competing, watching the highly partisan commercials and stump speeches to date for the presidential election leave many of us wishing for better. But “politics ain’t beanbag,” as they say. Regardless, it’s a critically important election, given the severity of the economic problems facing us. And as we attempt to strip away the secondary and tertiary issues and try to really hone in on what we think will matter most to voters, we’re reminded of that instantly-famous quote by former President Bill Clinton: “It’s the economy, stupid.”
What’s on tap?
- Republican Convention Monday, Aug. 27 through Thursday, Aug. 30 in Tampa, Fla.
- Democratic Convention Monday, Sept. 3 (Labor Day) through Thursday, Sept. 6 in Charlotte, N.C.
- First Presidential Debate Wednesday, Oct. 3, at the University of Denver in Colorado. Domestic issues, 90 minutes long, questions selected by one moderator.
- Vice Presidential Debate Thursday, Oct. 11, at Centre College in Danville, Ky. Domestic and foreign issues, 90 minutes long, questions selected by one moderator.
- Second Presidential Debate Tuesday, Oct. 16, at Hofstra University in Hempstead, N.Y. Ninety minutes long, questions selected by undecided voters in a town-hall format.
- Third Presidential Debate Monday, Oct. 22, at Lynn University in Boca Raton, Fla. Foreign issues, 90 minutes long, questions selected by one moderator.
- Presidential Election Tuesday, Nov. 6.
It’s a matter of priorities There’s no question that President Obama inherited one of the worst recessions in history, so he was clearly dealt a tough hand, we get that. But rather than focus exclusively on restoring job growth and digging the economy out of the Great Recession, Congress and the administration appeared to spend much of their political capital during President Obama’s first two years on restructuring health care. To be sure, everyone recognizes that health care in this country has long been dysfunctional. And there’s no one—left or right—who doesn’t believe that keeping their kids on their policy until they’re 26 years old, or preventing insurance companies from discriminating against pre-existing medical conditions, or establishing no lifetime limits for insurance coverage, aren’t all good ideas. The question has always been what will all of this cost, how will we pay for it, and what impact will it have on the economy and the financial markets? The bigger question, in our mind, has always been that by intentionally diverting our attention towards health care and away from restoring economic growth and job creation, have we impeded the pace of our recovery out of the Great Recession?
Subtrend economic growth Gross Domestic Product (GDP) troughed at a negative 3.1% in calendar 2009, but no one honestly blames President Obama for that, given the lag times associated with the successful implementation of fiscal policy. But 2010 GDP growth was 2.4%, 2011 growth was 1.8%, and we here at Federated are forecasting GDP growth of 2.0% for 2012, and all of those subtrend results, in our view, accurately reflect the efficacy of President Obama’s fiscal policies. As President Harry S. Truman once said, “The buck stops here.”
U.S. economists believe that trend-line economic growth is 3.0%, and that the deeper the recession, the stronger the economic rebound should be. President Reagan, for example, inherited a GDP decline of 7.9% in the second quarter of 1980, and he enjoyed a positive 9.3% GDP bounce by the second quarter of 1983. In contrast, President Obama inherited an 8.9% GDP decline in the fourth quarter of 2008, but our largest GDP bounce to date was a 4.1% increase in the fourth quarter of 2011. Studying both the Reagan recovery and the Obama recovery in total from deep inherited recessions, then, it would appear that the trajectory of growth under President Reagan’s fiscal policy approach was significantly more robust.
President Reagan, during his election-year debate with President Jimmy Carter, once famously asked “Are you better off today than you were four years ago?” Our conclusion is that fiscal policy matters, and that our suboptimal fiscal policy choices over the past three years may have contributed to the subtrend economic growth we are currently experiencing.
Employment stuck in the mud Unemployment, which is now at a five-month high of 8.3%, compared with a peak of 10.1% in October 2009, has only declined from that elevated level due to the 2% drop in the labor force participation rate, which has also plunged to 63.7% currently, just above a 30-year low of 63.6% in April 2012. The participation rate had been as high as 65.7% when the Great Recession ended in June 2009, but the combination of a sharp increase in discouraged workers—due to an education and skills mismatch and a lack of housing mobility—and the structural retirement of younger working women and aging baby boomers from the labor force, has caused this metric to plunge, dragging along with it the unemployment rate. Meanwhile, the labor impairment rate—also known as the “total” (U6) rate of unemployment, which more broadly includes discouraged workers and the underemployed—is sitting at an unacceptably high 15.0%. The unemployment rate is now above 8.0% for 42 consecutive months since February 2009, marking the longest such stretch of labor-market ineptitude since the government starting collecting data in 1948.
Not surprisingly, there are potentially important political implications. Our research friends at ISI report that since 1948, no president has won reelection with the unemployment rate above 7.3%. There were three failures over this period of time: President Ford lost in 1976 with an unemployment rate at 7.8%; President Carter lost in 1980 at 7.5%: and President Bush lost in 1992 at 7.4%. Today, we’re at 8.3%, with only three more employment reports before the election on Nov. 6. It’s unlikely that the rate will come down much below 8.0% by then, much less below 7.3%.
Elections matter When the so-called Grand Bargain failed between President Obama and House Speaker John Boehner last summer to potentially resolve the impending fiscal cliff issues associated with tax and entitlement reform and spending cuts, President Obama explained “That’s what elections are for.”
He’s absolutely right, of course, except that the American people thought that they had already made their voices heard during the 2010 midterm congressional election, when they voted for the largest change in seats (63) in the House of Representative since 1948. They believed that their mandate was moving the federal government toward a more fiscally prudent approach.
Dr. Christina Romer, the former chairman of the Council of Economic Advisors under President Obama, wrote an op-ed piece in the New York Times at the beginning of this year in which she said “What needs to happen on fiscal policy is relatively straightforward. The hard part is getting politicians to do it.”
She’s right, too, of course, in that we all seemingly know what needs to be done in terms of boosting economic growth and job creation, deficit reduction, and tax and entitlement reform. So our collective homework assignment is to study hard over the next 85 days, pull the curtain behind us on Nov. 6, and elect the Congress and president we deserve.