Orlando's Outlook: Teflon presidency?

Bottom Line With the Republican and Democratic conventions just a dot in the rear-view mirror, the first two of four scheduled debates completed and the presidential election now just 25 days away on Nov. 6, the tone of this critically important campaign is starting to take form. Republicans were hoping that this election would be a referendum on President Obama’s record, which they believe puts him in a poor light. Democrats, on the other hand, want the election spotlight focused on voters’ future choice between President Obama and Gov. Romney, which they believe favors their candidate. Up until now, the Democrats have been dead right, as the polls clearly suggest that voters have seemingly overlooked President Obama’s policy struggles the past four years, and are focusing instead on the fact that he’s a much more likeable candidate—he’s got a great smile, a beautiful family and a passionate stump speech. But that popularity pendulum has begun to swing the other way since the first presidential debate on Oct. 3, as many Americans were actually listening to Gov. Romney for the first time, and noted the stark policy differences between the two candidates. So with the polls tightening and the finish line finally coming into sight, will President Obama’s job performance matter? Will policy differences on tax and entitlement reform, economic growth, job creation, deficit reduction, a balanced federal budget and foreign policy come into play? Or when the dust settles less than a month from now, will the election have just been a national popularity contest?

Subtrend economic growth There’s no question that President Obama inherited one of the worst recessions in history, so he was clearly dealt a tough economic hand. But after bottoming at -3.1% in calendar 2009, U.S. Gross Domestic Product (GDP) has been drifting at a sub-trend 2.0% run rate. To be sure, no fair-minded person blames President Obama for the Great Recession or negative GDP growth in his first year in office, given the normal lag times associated with the successful implementation of fiscal policy. But GDP growth in 2010 and 2011 was 2.4% and 1.8%, respectively, and we’re forecasting GDP growth of 2.1% for 2012 and 1.6% in 2013, all of which, in our view, reflect the efficacy of President Obama’s fiscal policies. Given the depth of the Great Recession, the economy, in our view, should have already rebounded to a level well above trend-line growth of 3%—perhaps to 4% or more. Generally, the deeper the recession, the higher the economic bounce. We believe that fiscal policy matters, and that our suboptimal fiscal policy choices over the past four years may have contributed to the subtrend economic malaise we are currently experiencing.

Employment is healing too slowly Due to a surprising surge of nearly 600,000 part-time jobs in the volatile household survey, September’s unemployment rate plunged to 7.8% from 8.1% in August. This stunning drop notwithstanding, unemployment had been stuck above 8.0% for 43 consecutive months since February 2009, marking the longest such stretch of joblessness since the government starting collecting data on this metric in 1947. While it’s certainly true that unemployment has now fallen from a peak of 10% in October 2009, that’s only because of a 2.1% drop in the labor force participation rate over this period, which is now sitting just above a 31-year cycle low of 63.6%. This is due to a surge in discouraged workers, who have simply given up looking for a job because of the weak labor market—a fact supported by the labor impairment (U-6) rate, also known as the “total” rate of unemployment because it more broadly includes discouraged workers and the underemployed, which held steady at 14.7%. This metric, in our view, is more reflective of the real health of the labor market, and it means that some 23 million Americans are either out of a job or underemployed. Moreover, there are important political implications associated with this data. In the post-war era, no president has won reelection with unemployment above 7.3%. In fact, President Reagan in 1984—with the unemployment rate at 7.2%—is the only president to win reelection with unemployment above 6%. 

Deficit and debt widen Aside from the record surge in unemployment and underemployment discussed above, we’ve also grown the roles of food-stamp recipients from 33 million people in 2009 to 46.67 million in June 2012, at an annual cost of $72 billion, which means that roughly one out of seven people are now receiving food stamps.  In part due to this surge in government transfer payments, we’ve run $1 trillion federal-budget deficits in each of the last four years, and our total federal debt now approximates $16 trillion, with a debt-to-GDP ratio of about 100%. We’re certainly not Greece at almost 160%, but we’re well above a comfortable 50-60% ratio.     

Entitlements on an unsustainable path We need to accept the fact that entitlements are on a demographically unsustainable trajectory, and take corrective policy action—such as gradually raising the retirement age and means-testing benefits for the wealthy—to ensure that the social safety net will be there for the people who truly need it. The baby boom generation is getting older and starting to retire, which is creating an increasingly larger draw on Social Security, Medicare and Medicaid, an incremental strain that the federal budget was not designed to handle. Simply put, when President Roosevelt started Social Security in the mid-1930s, an individual received full retirement benefits at age 65, but the average American died at age 62, not long enough to reap the benefits. Back then, for each person receiving Social Security benefits, 40 others contributed payroll taxes into the system, for a robust worker-to-retiree ratio of 40:1.  But fast forward three generations, and because of advances in medicine, nutrition and exercise, the average American today lives to an age closer to 80 than 62.  So the worker-to-beneficiary ratio is now 3:1, and in the next generation, it could shrink to 2:1. The system was never designed for a country in which so many people lived to be 80 years old. Same situation with Medicare. When President Johnson started Medicare in 1965, an individual received full health-care benefits at age 65, but the average American then died at age 69, so the system was designed to provide an average of four years of health benefits. Today, Medicare is providing 15 years—and counting—of health-care benefits.

Rising energy prices When President Obama took office in January 2009, the average pump price for a gallon of regular unleaded gasoline was $1.80. Today, the national average price is $3.80 per gallon, with prices pushing $4.50 in New York and $5.50 in California.  The rule of thumb is that every $1 increase in gasoline prices at the pumps removes $140 billion in discretionary spending from the U.S. economy, so rising energy prices are clearly one of the reasons why economic growth here has been sluggish. Aside from supply-and-demand imbalances, there are myriad reasons for the spike in energy prices—very accommodative monetary policy, U.S. dollar weakness, inflation concerns, poor domestic energy and environmental policy, and geopolitical risk associated with the Iranian oil embargo.     

Middle East policy Where to begin? The first question in last night’s vice-presidential debate was related to the Sept. 11 terrorist attack on our consulate in Benghazi, Libya, in which al-Qaida is alleged to have assassinated our ambassador, Chris Stevens, and three other Americans. Intelligence now reveals that the embassy requested additional military support earlier this year, but their request was denied by the State Department. In Afghanistan, while we are in the process of winding down our military presence, some 53 coalition forces—some of whom were American soldiers—were randomly killed by the Afghan forces we’re there to train. Finally, Israeli officials are concerned that we may not fully have their back in this ongoing nuclear standoff against Iran. The administration has been a strong proponent of imposing crippling economic sanctions against the Iranians to force them to abandon their nuclear ambitions, thus bringing a diplomatic solution to this crisis.  But we learned two months ago that the administration also granted waivers to 20 countries, including China, Japan and India, to allow them to purchase crude oil from Iran, thus potentially watering down the economic impact from the oil embargo.