Newsweek’s chief foreign correspondent Fareed Zakaria wrote a very interesting column recently. He said, “The American economy is sputtering and we are running out of options…Can anything protect us from the dangers of stagnation or a double dip?”
Well yes. Bring back another “Give ‘em hell” Harry Truman, or have President Obama choose him as a model for how to weather the next year during an election season. President Truman was given that nickname for a reason. The post-WWII economy was going through the same malaise as today. Federal debt had ballooned to 120 percent of GDP to pay for war (vs. 80 percent today), unemployment was high, and Republicans crying deficit reduction had triumphed in the 1946 Congress.
Truman and the Democrats were alone in trying to keep the U.S. economy afloat, in other words. What was his response? Instead of compromising with deficit hawks by cutting spending, he blasted the “do nothing 80th Congress of that time”, advocating Universal Health Care and extension of unemployment benefits. So when the deficit hawks in Congress voted down those benefits—both ‘blue dog’ Democrats and Republicans, we might add—he was able to blame them for the continuing malaise. Then he upset heavily favored New York Governor Thomas Dewey in 1948—it was one of the most famous comebacks in Presidential history.
Why is this malaise dragging on so long? With some $1.8 trillion in cash sitting on S&P 500 corporations’ balance sheets, and profit margins the highest since WWII, employers are refusing to hire more workers. Overall payroll jobs in June fell back 125,000 after spiking a revised 433,000 in May and after a 313,000 jump in April. The net revision to combined April and May was up 25,000.
Zakaria maintains this is because of too much economic uncertainty. “"Almost every agency we deal with has announced some expansion of its authority, which naturally makes me concerned about what's in store for us for the future," said one CEO he interviewed. “Another pointed out that between the health-care bill, financial reform and possibly cap-and-trade, his company had lawyers working day and night to figure out the implications of all these new regulations,” said Zakaria.
But that is not the real reason for the reluctance of businesses to hire. They are flush with cash, and demand is growing, after all. It’s because businesses have been living in a bubble they are reluctant to leave. It is called supply-side economics, because of a succession of business-friendly administrations that believed the bulk of government benefits should be directed to business, rather than consumers. This was mainly in the form of tax breaks, which are of little benefit to consumers—most of whom pay a payroll tax that has never been cut. Business tax breaks are an indirect form of government support, but nevertheless result in reduced revenues.
Yet consumers have been spending more as wages and salaries—80 percent of the workforce—are rising; have been rising in fact since July 2009, the nominal end of the Great Recession.
Even home prices are increasing. Seasonally adjusted, the Case-Shiller Home Price Index 10-city composite advanced 0.3 percent, as we said last week, after rising 0.1 percent in March. The year-on-year rate, a comparison less exposed to seasonal variation than the month-on-month comparison, is at plus 4.6 percent on the unadjusted side and at plus 4.7 percent when adjusted, up 1-1/2 percentage points from March on both scores. Yet with the tax credits expired, price gains are likely to soften in the near term or even turn a little negative.
So what is the lesson from “give ‘em hell, Harry”? Truman was not afraid to take on those who wanted to reduce government, when government was the only support for both businesses and consumers during tough times. Zakaria also admits as much: “The economic crisis forced the government to expand its authority in dozens of areas, from finance to automobiles,” he said.
Businesses and consumers are saying they have lost confidence—in both government and private business to lead us out of this recession. Businesses will begin to hire when such confidence is restored, which means financial regulations are in place they can count on. Real estate prices must continue to rise, as well, before homeowners regain their confidence. So the Obama administration must send out strong signals that such stimulus will continue, until business hiring kicks in.
Harlan Green © 2010
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