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Obama's Search for the Holy Grail

Irwin M. Stelzer

The president used the occasion of his address to a joint session of Congress to propose $450 billion in spending and tax cuts, 3 percent of GDP, to bring down the 9.1 percent unemployment rate that threatens his reelection chances. Supporters say the proposals—some new, some a continuation of existing policies due to expire—would create 4 million jobs; opponents note the president hasn’t said how he will pay for all of this, and that past such packages have proved a waste of taxpayer money. No matter: There is little chance that the Republican-controlled House of Representatives will pass most of this package.

And Democrats believe this gives them a stick with which to beat Republicans, the real purpose of the president’s speech, according to his critics and, indeed, many neutral observers. To which Republicans respond: If the president wants to reduce unemployment, he should abandon the policies that are destroying jobs. Summoning their inner Churchill, Tea Partiers are prepared to fight the president’s plan for more spending on the beaches of Florida, the hills of crucial Rocky Mountain states, and in the streets of cities in key electoral states.

First among these job destroyers is his pandering to the trade unions. Although union members account for less than 8 percent of the work force, the unions have money and foot soldiers that will be essential to a president who is trying to persuade voters to reelect him in the face of low ratings for economic competence. The Labor Department is investigating home builders to see if they are violating the law regulating hours and pay: most use contractors who employ non-union electricians, carpenters, and plumbers. Nothing like a government investigation to put a CEO in an optimistic, hiring frame of mind.

In further deference to the unions, the president has declined to send three trade agreements to Congress for approval, although most analysts say these deals would create tens of thousands of export-related jobs, although not necessarily in heavily unionized industries. The president is holding the treaties on his desk until Republicans agree to approve spending to compensate any workers who lose their jobs due to these trade agreements—a policy that requires a vast amount of complicated paperwork that most workers have found impossible to cope with.     

Then there is Obama’s need to placate his left, which is insisting that he resist Tea Party demands for substantial cuts in spending, and instead raise taxes on “the rich,” something Republicans feel is foolish on the edge of another recession. Even Paul Ryan, the Wisconsin Republican whom even the strongly partisan president classifies as reasonable, is unwilling to go along with the White House proposals for temporary tax cuts, pointing out that most academic studies show they are ineffective in boosting demand. Result: gridlock.

The president is also limited in what he can do to create jobs by his longer-range vision of an America in need of what he calls “transformation.” He has over 4,000 new regulations already in the pipeline, with thousands more to come as regulators put flesh on the bare bones of his financial and health care legislation. These will raise the cost of doing business, with his health care plan the major culprit, and are creating job-killing uncertainty among small businessmen. Or so the president’s critics contend.

The president’s drive to transform the energy sector by restraining the development of oil, gas, and coal resources in favor of greener energy sources is also costing jobs. Despite the bankruptcy of Solyndra, a manufacturer of solar panels who has shed over 1,000 jobs and blown a $535 million federal loan guarantee, the Department of Energy has announced $445 million in new guarantees to two other solar companies. Solyndra, a company well connected to the president and the vice president, was raided earlier in the week by the FBI at the request of the Department of Energy.

Critics say that Obama’s trade union and energy policies reflect his ideological rigidity; the president’s supporters say it is an admirable refusal to allow his desire for a second term to trump a needed remaking of the American economy.

Obama’s room for maneuver is also restricted by the fact that Federal Reserve Board chairman Ben Bernanke has done about all he can, despite last week’s speech in which he repeated that he still has “a range of tool” available to reduce the probability of a double-dip recession, now put by many analysts at 50 percent. But most agree that he has few arrows left in his quiver, or rabbits in his hat, or any silver bullets—choose your own cliché from among those echoing around Wall Street.

Bernanke will gather his colleagues later this month to persuade a fractured monetary policy committee to do a central banker’s version of the 1960s dance the twist: reduce the Fed’s holding of short-term government IOUs, and increase purchases of longer-term treasuries in order to lower long-term interest rates and encourage investment. He might also stop paying interest (0.25 percent) on banks’ deposits, reducing their incentive to leave cash with the Fed and encouraging them to lend it to businesses and consumers. Few believe these moves can have much of an impact on job growth, least of all in the short-term.

Stimulative fiscal policy is also effectively unavailable to boost employment. With the deficit in double digits, the national debt approaching 100 percent of GDP, and the last stimulus deemed a failure, the electorate finds the spend-our-way-to-prosperity approach unacceptable, no matter its theoretical attractiveness to Keynesian Democrats.      

Most important of all, the changing structure of the labor market reduces the ability of short-term fixes to make a significant dent in the unemployment rate. There are 3.2 million job vacancies in the U.S., down from 4.4 million at the beginning of the recession, but up by 1.1 million from last year. At the same time, there are 14 million unemployed workers actively seeking work.

These figures are not directly comparable, but they suggest that Maria Canon and Mingyu Chen, economists at the Federal Reserve Bank of St. Louis are on to something when they say that there is “a poor match” between the skills employers want, and the skills the unemployed possess. Over 50 percent of the jobs lost during the recession were in manufacturing and construction, while more than 90 percent of new positions were in other industries.

Which might account for what Bloomberg Businessweek headlines, “The Slow Disappearance of the American Working Man.” The portion of men between 25 and 54 years, the prime working age, holding any job is now 81 percent, down from 95 percent in 1969. The newer jobs rely less on brawn, and women now make up 57 percent of college students. Brawny men are losing out to better educated brainy women in many occupations.

The solutions are obvious: retraining, better education, and increased incentives to move from unemployment and disability benefits to pay checks. None of those is cheap, and none can be put in place in time to improve the president’s shriveled reputation for economic competence. So, like politicians on both sides of the aisle, Obama continues to search for that political Holy Grail—a short-term fix. So far, he has been no more successful than were King Arthur’s knights in their earlier quest.  

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