A DEEPLY TROUBLED ECONOMY; SOLUTIONS NEEDED NOW!

By Bill Breakstone, August 24, 2010

I received a survey from the Democratic National Committee last week asking respondents to rate President Obama’s performance on five key issues ranging from the economy to international relations. I completed this survey, and was quite surprised at my answers. I imagine I am similar to many other politically aware individuals, in that my enthusiasm for our President has been tempered by both the difficulties posed by economic conditions and an opposition party that has refused to compromise on policy that could alleviate the challenges we as a Nation face in recovering from the worst economic conditions since the Great Depression.

The survey asked what issues individuals ranked as most important today, and I immediately and unhesitatingly checked off “our economy.” As to Obama’s performance in that regard, I rated it as “poor”, and that is what surprised me. Yet how could it be viewed otherwise?

Looking back 18 months ago when the Administration was formulating the Economic Stimulus Act, several Nobel Prize-winning economists were of the opinion that the size of the stimulus fell far short of what was needed, and that the Administration was making a serious mistake in not asking for a stronger package, as going back later for more would be impossible given the political realities. However, Obama and his economic team decided to seek what was possible rather than what was necessary. Was this decision politically savvy, or indicative of a lack of courage? Whatever the answer, the fact is that we now are facing economic conditions that are reverting to the initial slump of 2008, and, seemingly with no options available to once again reverse that trend.

There were two ingredients, among others, in the Stimulus Act, that were successful in creating increased consumer demand and halting, temporarily, the rapid increases in unemployment: the First Time Homebuyers Tax Credit and the IRS Tax Credit for New Automobile Purchases. Both of these programs were designed as intermediary economic boosts, and have expired. They both achieved the results they were designed for. The economic floodwaters receded; but now they are returning, and with a vengeance. This morning, the National Association of Realtors announced that existing home sales declined in July by a record 27.2%, and the sales volume likewise decreased to a record-low $3.83 million, while inventories rose to 12.5 months from the June level of 8.9 months. This data far exceeded expectations of economists prior to the news release.

The auto industry is faring better, though the pace of its recovery is uneven at best. July marked the eighth consecutive month that U.S. auto sales rose from year-earlier levels but also the lowest percentage growth since November 2009, when sales were flat. Our two government-backed automakers, GM and Chrysler, continue to post good sales data, but Toyota and Honda, the two largest foreign auto companies, posted disappointing sales figures.

Both the housing and auto industries are crucial to our economy, and economic recovery. Perhaps no other segments are so subject to a trickle-down effect on jobs and sales activity. If President Obama and his economic team want to take action to revive economic activity and avoid the fate that Japan suffered during their “Lost Decade,” here is where the focus should be directed. But given the political climate, what can be done? Legislation, for the time being, is out of the question. Thus what options exist for our leadership? Does the answer lie in tax policy? Economists view the importance of increasing what they term “aggregate demand” as a key to long-term economic health and a sustainable recovery. It directly affects consumer confidence and job growth, other key economic indicators. And all three of these factors are currently at extremely low levels.

A quick read of today’s economic news headlines reveals the following:
Nobel Prize-winning economist Joseph Stiglitz said the European economy is at risk of sliding back into a recession as governments cut spending to reduce their budget deficits.
“Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish,” Stiglitz, a Columbia University professor, told Dublin-based RTE Radio in an interview broadcast today.
Euro-area governments stepped up efforts to cut their deficits to below the European Union limit of 3 percent of gross domestic product after the Greek crisis earlier this year eroded investor confidence in the 16-member currency union. While the economy expanded at the fastest pace in four years in the second quarter, the recovery is showing signs of weakening.
“Because so many in Europe are focusing on the 3 percent artificial number, which has no reality and is just looking at one side of a balance sheet, Europe is at risk of going into a double-dip,” Stiglitz said.
On CNBC’s Squawk Box, guest host Stephen Roach of Morgan Stanley and Credit Suisse economist Doug Cliggott discussed our worsening economy at length. Both agreed that there is an increasing likelihood of a double-dip recession, at worst, or a prolonged period of economic stagnation and deflation, at best. They see interest rates remaining at historically low levels for the foreseeable future and a continuation of risk aversion in the capital markets, draining equity investment in favor of the bond markets for perhaps the next decade. Both see an increased possibility of the feared double-dip.

In this economic scenario, doing nothing simply doesn’t seem to be a reasonable position for the Administration, or The Fed, to take. And yet, that appears to be where both are at. Something needs to be done, and the failure of our leadership to come up with some creative economic thinking is what most bothers this writer, and the public at large.