Austerity politics not serving Obama well (updated)

President Barack Obama got a little bounce following Osama bin Laden's killing, and the weak Republican field of challengers has helped give the president an advantage in recent swing-state polls. Public Policy Polling's latest Iowa survey found Obama leading all the named Republican candidates by at least 9 points, for instance.

However, Obama's position looks much more tenuous if the 2012 election is about "the economy, stupid." According to the latest nationwide Washington Post/ABC News poll, disapproval for how Obama has managed the economy is at record-high levels, and the incumbent trails former Massachusetts Governor Mitt Romney among registered voters.

The "great recession" was not Obama's fault, but no one can credibly claim his administration did the best it could to boost the job market and housing sector. By next November, the U.S. may be in a double-dip recession. Complicating matters for Obama, he has played into the eventual GOP nominee's strongest arguments against his record on the economy. Follow me after the jump for details on the new national poll and the latest bad economic news.

The Washington Post/ABC News poll surveyed 1,002 adults in the U.S. between June 2 and 5, producing a margin of error of plus or minus 3.5 percent. Not much good news for the president here:

The public opinion boost President Obama received after the killing of Osama bin Laden has dissipated, and Americans' disapproval of how he is handling the nation's economy and the deficit has reached new highs, according to a new Washington Post-ABC News poll.

The survey portrays a broadly pessimistic mood in the country this spring as higher gasoline prices, sliding home values and a disappointing employment picture have raised fresh concerns about the pace of the economic recovery.

By 2 to 1, Americans say the country is pretty seriously on the wrong track, and nine in 10 continue to rate the economy in negative terms. Nearly six in 10 say the economy has not started to recover, regardless of what official statistics may say, and most of those who say it has improved rate the recovery as weak. [...]

Among all Americans, Obama and Romney are knotted at 47 percent each, and among registered voters, the former governor is numerically ahead, 49 percent to 46 percent.

I consider Romney's chances of winning the Republican nomination remote, despite his strong fundraising and commanding leads in early New Hampshire polling. It's hard for me to see an architect of "Romneycare" winning many GOP primaries. But no matter who the eventual nominee is, the Washington Post/ABC News poll indicates that Obama will be vulnerable to a strong critique of his economic record.

Gasoline prices are likely to remain high by historical standards, and weakness in housing and employment will make it difficult for Obama to build the "recovery" narrative he needs to be re-elected. The latest jobs numbers from the Bureau of Labor Statistics were simply awful. Robert Reich noted that the odds of a double-dip recession "are increasing." The national unemployment rate is about 9.1 percent, and the jobless rate is higher in many states and demographic groups, including young people, minorities, and single mothers. Bringing down unemployment would be the best way to reduce the federal budget deficit, but instead of working out ways to stimulate the economy, Washington politicians are concentrating on cutting spending as an end in itself.

Unfortunately, budget cuts are already hurting the economy, as one would expect:

State and local governments are forecast to shed up to 110,000 jobs in the third quarter, the first time the blood-letting has risen into the triple digits, according to IHS Global Insight.

"We're on a downward path," said Greg Daco, principal U.S. economist at IHS. "It's not looking good."

State and local government employment has been a drag on the economy all year, averaging a loss of 23,000 jobs a month over the past three months. Meanwhile, the private sector has created an average of 180,000 a month during the same period.

In May, public employment shrunk by 29,000 jobs, mostly at the state and local level, while businesses created 83,000 jobs, the Labor Department reported Friday. All told, the sector has lost 510,000 positions since its peak in August 2008. [...]

It's not uncommon for state and local governments to take longer to emerge from a recession. But usually by then, businesses have ramped up their hiring. This time around, private sector hiring has remained soft, making government cutbacks that much more painful.

During the 2012 campaign, Republicans will cite weak job numbers as proof that government spending to stimulate demand can't support the economy. Republican magical thinking holds that cutting taxes is all we need to create jobs, despite vast evidence that the Bush tax cuts did not boost economic growth.

Obama is not well-positioned to win this argument, because he has embraced budget austerity for a long time. In early 2010, he talked about freezing some non-security discretionary government spending. Last summer, Obama proudly introduced his new budget director as follows: "At a time when so many families are tightening their belts, he's going to make sure the government continues to tighten its own."

Christina Romer, who had "argued strongly [...] that the White House needed to spend government money to stimulate the economy," left as chair of Obama's Council of Economic Advisers last year. The president replaced her by elevating Austan Goolsbee, who "maintained that the private sector must drive the economy's growth now that the recession has passed." How's that working out, Mr. President?

After the Republican triumph in the 2010 elections, Obama froze wages for many federal workers as a gesture toward conservatives. When Republican leaders in Congress insisted on deep cuts in current-year spending this spring, the president described the final deal approvingly as "the largest annual spending cut in our history." That was exactly the wrong message to send.

Obama can't be blamed for the economic problems he inherited, but he should be held accountable for his administration's inadequate response. The 2009 federal stimulus was valuable, but it was too small and not targeted enough toward the kind of spending that boosts economic activity. As foreclosures mounted, Obama caved on "cramdown," which would have allowed judges to order mortgage modifications. More confounding, Obama's worst cabinet appointee has allowed Treasury to sit on funding that could have kept more Americans in their homes. Get a load of this utter incompetence:

Critics of the Obama administration's approach to preventing foreclosures have pressed for two years to get officials to focus more of their attention on unemployed homeowners, with meager results. As part of the bank bailout, the Treasury Department was given $46 billion to spend on keeping homeowners in their houses; to date, the agency has spent about $1.85 billion.

Morris A. Davis, a former Federal Reserve economist, estimates that as many as a million homeowners slipped into foreclosure because of insufficient help for the unemployed.

"The money was there and they didn't spend it," said Mr. Davis, an associate real estate professor at the University of Wisconsin. "I don't mean to sound outraged, but I am pretty outraged."

But wait, there's more:

At the start of 2009, the administration announced its primary foreclosure prevention initiative, the Home Affordable Modification Program. It provides incentives to banks to modify mortgages, reducing monthly payments for eligible homeowners.

The administration said the program would help three million to four million homeowners, but so far, only 670,000 homeowners have received permanent modifications. In addition, the program was primarily meant for homeowners with risky mortgages; jobless owners are often ineligible because some payment, albeit reduced, is required.

Administration officials said the program was helping homeowners whose income had been reduced. Sixty-one percent of homeowners who received permanent modifications listed "curtailment of income" as their reason for applying, though it is not known how many of them are unemployed or simply had their hours or pay reduced.

The Department of Housing and Urban Development received $1 billion as part of the financial regulatory reforms that passed last year to help unemployed homeowners. That money will be used to provide government loans to unemployed homeowners for up to 24 months.

Though the program was announced last fall, so far applications are being accepted in only five states; the others are delayed because of "implementation challenges," a H.U.D. spokeswoman said.

Obama should never have appointed Treasury Secretary Timothy Geithner, and it doesn't speak well of the president that he keeps Geithner on board. Obama appears out of touch and misguided about the right economic course. Republicans could save Obama by nominating a very bad candidate, but in this economic environment, I hesitate to write off even their weak presidential hopefuls as unelectable.

Share any relevant thoughts in this thread.

UPDATE: Justin Wolfers thinks "we're halfway to a lost decade" already.

As Bleeding Heartland user ragbrai08 noted in the comments, Goolsbee announced this week that he is resigning as head of the president's Council of Economic Advisers to return to his tenured position at the University of Chicago. That's where I'd rather be as well. Goolsbee will continue to advise Obama's re-election campaign on economic issues. Speaking of which, don't worry, the communications team is working on a plan:

[A]s Democratic pollster Stan Greenberg is fond of saying, there are few more difficult tasks for a politician than telling voters the economy has gotten better when they may not personally feel such improvement. But that is essentially the assignment given to the Obama communications team and, by extension, Goolsbee. On Wednesday, Axelrod and former White House Press Secretary Robert Gibbs stopped by the offices of former Obama Communications Director Anita Dunn for, what one person described, as a "strategy session" on such issues with respect to the 2012 race.

What's complicating the already difficult task, however, is that the White House appears fully opposed to the notion that government spending might make things better. On Tuesday, the Office of Management and Budget put out a statement of administration policy, saying that a "jobs bill" authored by Senate Democrats to expand the reach of the Public Works and Economic Development Administration was too costly.

How deluded can they be? This deluded:

By early last year, Geithner was beginning to gain the upper hand in a rancorous debate over whether to propose a second economic stimulus program to Congress, beyond the $787 billion package lawmakers had approved in 2009.

Lawrence Summers, then the director of the National Economic Council, and Christina Romer, then the chairwoman of the Council of Economic Advisers, argued that Obama should focus on bringing down the stubbornly high unemployment rate. This was not the time to concentrate on deficits, they said.

Peter Orszag, Obama's budget director, wanted the president to start proposing ways to bring spending in line with tax revenue. [...]

The economic team went round and round. Geithner would hold his views close, but occasionally he would get frustrated. Once, as Romer pressed for more stimulus spending, Geithner snapped. Stimulus, he told Romer, was "sugar," and its effect was fleeting. The administration, he urged, needed to focus on long-term economic growth, and the first step was reining in the debt.

Wrong, Romer snapped back. Stimulus is an "antibiotic" for a sick economy, she told Geithner. "It's not giving a child a lollipop."

In the end, Obama signed into law only a relatively modest $13 billion jobs program, much less than what was favored by Romer and many other economists in the administration.

"There was this move to exit fiscal stimulus a lot sooner than we should have, and we've been playing catch-up ever since," Romer said in an interview

That mistake could cost Obama a second term. Even if it doesn't, a "lost decade" would tarnish his legacy. Meaningful deficit reduction isn't going to happen with unemployment stuck in the 9 to 10 percent range.

  • When you have both

    Democrats and Republicans mad at you, you are probably somewhere in the right area - and certainly in the politically doable area.

    Democrats who now scream about the stimulus being too small should remember that by historical standards, a stimulus in the neighborhood of $100 billion was considered enormous (and still not considered doable by many) in the fall of 2008. And you don't have to be a conservative tea-bagger to realize that we do have a very serious long-term fiscal problem. Completely ignoring it is sheer lunacy and incredibly irresponsible - especially if you have kids. One should also remember that government spending will never solve all of our economic problems, even though it can provide critical help. Private sector is the engine that pulls us out of recessions. And recessions have consequences, including joblessness and foreclosures. Again, government can help, but only so much. Considering how Republicans and many voters feel about these issues, especially now, one must realize that the administration truly was pushing the limits what the country can handle re: government intervention. Yes, you can dream, bitch and moan. But there are realities one has to contend with.

    Of course, the Republicans are even more laughable. Had we followed in 2008-2009 what they are preaching now, we would be lucky to be below 25% unemployment. If what Obama & co. did was maybe too little, certainly doing even much less would have been disastrous.

    Having just finished Jean Edward Smith's "FDR," today's parallels to FDR and his times are rather striking. Obama should remember that the "Roosevelt Recession" was due to premature cuts in government spending. But, FDR did realize balancing the books was important. It's also good to remember that not all of FDR's initiatives were great and successful. Even the greatest presidents have hits and misses.

    I'm certainly not saying Obama hasn't made mistakes. But it would be good to keep things in perspective.

    • many economists

      were saying in early 2009 that the stimulus should be at least $1 trillion. Obama thought that if he threw out a "reasonable" number like $800 billion, Congress would add to that. Instead, $800 billion became the ceiling, and in the end about a third of that went toward tax cuts (many of them not stimulative at all).

      I don't accept any excuses for Treasury sitting on a huge pot of money intended to help people facing foreclosure. One or two foreclosed houses drive down property values in a whole neighborhood. Lots of people are great candidates for mortgage modifications (non-fraudulent borrowers who fell behind because of unemployment, health issues or divorce), but most haven't been able to get modifications. Surely the Obama administration could have done much, much more to help.

      Agree with this:

      Had we followed in 2008-2009 what they are preaching now, we would be lucky to be below 25% unemployment. If what Obama & co. did was maybe too little, certainly doing even much less would have been disastrous.

      But Obama isn't really able to make this argument, because instead of defending his stimulus, he brags about "government tightening its belt" and other nonsense. He has given legitimacy to the Republican talking points.

      • I hate to burst a bubble,

        but sometimes Republicans have a point in their talking points. They are not always wrong. We D's are sometimes wrong. Our fiscal condition is an extremely serious matter. Pretending it isn't so would be highly irresponsible. And pretending otherwise would be politically much worse than where Obama is now. If he were to follow the liberals on this, his approval rating would be surely in the 30's, the economy would likely be only marginally better (if at all), and there would be no point in him even thinking about running again.

        The bottom line is, the man was dealt a rotten hand. While it's useless speculation and impossible to prove, I have yet to hear anyone give a politically viable approach to dealing with the messes he inherited that I believe would have led to a significantly better outcome as of June 2011. Do you really believe $200 billion in more stimulus would have made the magical difference? For the most part the administration has done the big things most economists (liberal and conservative) were in agreement about.

  • I can't argue with your excellent critique of Obama's economic policy...

    ...but I also can't help but wonder about the discourse now if last fall Obama had gone ahead and expended a lot of political capital on keeping his promise to raise taxes on the $250K-and-up set.

    In all likelihood, the economic news would be just as bad today, and the GOP would have a ready-made reason why: Obama raised taxes. As it stands, raising taxes on the wealthy still polls well.

    I'm not going to guarantee that Obama will propose tax hikes on the wealthy, certainly not before the 2012 election.

    But he may have been wise to keep that particular arrow in his quiver for the time being, at least until the economy picks up.  

    • interesting point

      I am not sure how much political capital Obama would have needed to use, since not extending the top-bracket income tax cuts was the popular position. But if he'd gone to the brink and vetoed a bill extending all the cuts, you're right, that would have cost him some major political capital, and you're also right, Republicans would be blaming the tax increases for the weak economy.

      I would be shocked if Obama doesn't end up permanently extending all the Bush tax cuts. If there's a double-dip recession he will be trapped, since he said late last year he didn't want to hurt the recovery by raising taxes. Even if there's no double-dip, Obama will be under so much pressure before the election not to do anything to hurt the "fragile recovery." He's never made the case that the Bush tax cuts didn't promote economic growth, and he's not about to start in an election year.

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