The Obama Recovery: A Failed Faustian Bargain

The Obama Recovery is, largely, a failure and no one but the President can be held accountable.  Despite the well-articulated, well-oiled nonsense that flowed from the Democratic convention two weeks ago, President Obama has wasted nearly 175 continuous weeks of very slow economic recovery by scuttling desperately needed pro-growth opportunities ever since the recession ended 16 weeks after he assumed office.  He likes to take credit for ending the recession.  He didn’t. All recessions end and the emergency measures Bush and Paulson put into effect, which Obama expanded upon, stopped the financial meltdown and the recession ended sixteen weeks later in June of 2009.

Obama’s Faustian bargain has been to pursue populist re-election strategies at the expense of pro-economic-growth policies, which the country desperately needs.  His decisions and priorities have resulted in one of the weakest economic recoveries in history.  It didn’t have to be this way.

Deep recessions are invariably followed by steep, robust recoveries.  Not this one.  That’s because the President ignored opportunities and recommendations to unleash economic growth and, instead, turned his attention to his redistributive, transformative agenda that has only succeeded in spooking the economy into a perpetual crawl.

Not once since he has been in office has Congress passed a budget, as law requires it to.  This has not been the result of political partisanship.  His own party refused to pass his recommended budgets when he controlled both houses of Congress, and the US Senate, which he still controls, has refused to take up a budget, even though the US House of Representatives keeps sending it one.

So in the absence of a budget, the Administration has run up trillion dollar deficits every year Obama has been in office, and has pushed the nation’s debt to over 16 trillion dollars, more than all the Presidents combined from Washington to Reagan.  He had already increased the nation’s debt more in three-and-a-half years than Bush had in eight years and Bush was, in our judgment, a very profligate president.

Obama has unleashed a torrent of new regulations on business and devoted most of his presidency to saddling the nation with a hastily drafted, largely unpopular, ill-conceived and extremely expensive healthcare program.

He has been content to have America boast the highest corporate tax rates in the industrialized world, which encumbers our international competitiveness. He has refused to broaden or to simplify our tax base at home. The top 2% of taxpayers pay nearly 50% of all federal income taxes; the top 5% pay nearly 60% of all federal income taxes and the top 10% pay 70% of all federal income taxes while 50 % of tax filers pay no federal income taxes whatsoever.  Yet the President and his minions endlessly recite the campaign mantra that the millionaires and billionaires, that is, any family earning $250,000 or more, aren’t paying their fair share.  Never mind that they are paying almost all of the freight.

Under Obama, America is not currently a land full of promise, notwithstanding the high-octane, over-the-top campaign oratory that would make Professor Harold Hill and his 76-trombone players blush.  Last month four unemployed workers gave up looking for work (368,000 of them in total) for every one new job that was created, to which President Obama lamely proclaimed, “We know that’s not good enough.” Really?

One wonders whether the glittering verbosity of the Obama Administration, i.e. the summer of recovery, we’ve turned the corner, our policies are working, we’re on the right path really can convince the public that Obama has turned our economic sow’s ear into a silk purse.  No matter how high the Obama cheerleaders jump, and no matter how loud they shout into their megaphones, the score is what it is. There are 4.8 million fewer total non-farm jobs than there were before the recession started. Factory employment sank last month to levels not seen in 24 months.  Even temporary help companies are letting people go according to the latest Bloomberg survey and that hasn’t happened since last winter.  Ominously, the share of the working-age population represented in the labor market has sagged to the lowest level in thirty years, and the American auto industry which the President’s campaign features as the Poster Child for economic recovery shed 7500 jobs in August.  President Obama tells us, “it’s not good enough.”  Federal Reserve Chairman Bernanke more accurately refers to the situation simply as “grave.”

Which brings us to the just launched third round of Chairman Bernanke’s “quantitative easing” or QE 3.  For those who reside beyond (and free of) the newspeak of the Washington Beltway, quantitative easing refers to the Federal Reserve’s periodic creation of a pseudo market for government debt wherein the Fed prints money and buys Treasuries or, in this case, mortgage-related bonds in order to artificially drive down (or keep a lid on) interest rates.  The Fed will now begin open-ended buying (buying until further notice) $40 billion a month of long-term bonds.  The yield on 10-year maturities immediately fell to 1.71% as we were completing this essay. This forces ordinary investors (and savers) out of Treasuries and into riskier investments such as stocks, which causes their price to rise, creating an aura of new wealth.  This is supposed to increase the velocity of money (the rate at which cash changes hands) thereby increasing investment and consumer demand and the jobs to service that demand.

Makes sense, except if QE 1 worked so well, why was there a need for QE 2 and if QE 2 worked so well why is there a need for QE 3?  Well, here’s one reason: every 1% increase in federal borrowing costs will add $100 billion to our annual deficit.  So, if interest rates for ten-year Treasuries were to increase to historically normal levels, say, to what they were January 2001 when Bush 43 was inaugurated (5.16%) the government’s interest on its public debt would exceed half a trillion dollars.  Or what about when Clinton was inaugurated in January 1993 (6.60%) or when Bush 41 was inaugurated in1989 (9.9%) or when Ronald Reagan was inaugurated in 1981 (12.57%)? Okay, we won’t go there, but you get the picture.  The United States can’t afford to bear the cost of historically normal interest rates.

Ratings agency firm Egan-Jones on Friday downgraded the U.S.’s credit rating to “AA-“ from ”AA,” citing the Federal Reserve’s decision to go through with a third round of quantitative easing. Egan-Jones is less well known, but was first to recognize and quantify the diminution of America’s credit worthiness. The agency claims QE3, which is open-ended and unlimited, will drive down the value of the dollar, raise commodity prices, and do little to increase real gross domestic product. Here’s how they explained their well-reasoned decision.

“… the FED’s QE3 will stoke the stock market and commodity prices, but in our opinion will hurt the US economy and, by extension, credit quality. Issuing additional currency and depressing interest rates via the purchasing of MBS (mortgage backed securities) does little to raise the real GDP of the US, but does reduce the value of the dollar (because of the increase in money supply), and in turn increase the cost of commodities (see the recent rise in the prices of energy, gold, and other commodities).

The increased cost of commodities will pressure profitability of businesses, and increase the costs of consumers thereby reducing consumer purchasing power.

Hence, in our opinion QE3 will be detrimental to credit quality for the US.

“From 2006 to present, the US’s debt to GDP rose from 66% to 104% (90% being the tipping point at which many economists believe economies begin to contract) and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%. In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%.

We are therefore downgrading the US country rating from “AA” to “AA-”.

“Hope and Change” has morphed into “Keep Hoping and Maybe Things Will Change.”  Obama periodically likes to quote Ronald Reagan in a not-too-subtle effort to woo undecided and independent voters to his corner.  But thinking people who tune out the blare of political bluster will realize that Obama’s vision for America is far more Orwellian ordeal than Reagan recovery.