Explaining Obamanomics

Obamanomics suffers from a misunderstanding of what the President is trying to achieve and what he’s up against. Into the breach come Republicans, Tea Partiers, nay-sayers, deficit vultures, and Raging-Dog Democrats, all viewing Obamanomics as more taxes and more spending. That’s nonsense. To see the big picture, keep your eye on three big things.

1. Government spending needed to offset the continued reluctance of consumers and businesses to spend. You don’t have to be an orthodox Keynesian to understand that as long as the private sector is deleveraging, the public sector has to borrow and spend in order to keep the economy moving forward.

The current stimulus will peak in a few months. Add in unemployment insurance payments and outlays for the jobs bill, and the stimulus will be about $90 billion larger. But this sum is not likely to be enough to make up for the shortfall in private spending. Consider also that state and local governments are also slashing jobs and services – and raising taxes about $350 billion over this year and next – and Obama needs to spend more.

Just look at projected unemployment. Since the start of the recession in December 2007, the labor market has shed 8.4 million payroll jobs. Add to these the number of new jobs needed to keep up with population growth and we’re about 11 million jobs behind the pre-recession unemployment rate. To fill the 11 million jobs gap, employment would have to increase by over 400,000 jobs every month for the next three years, starting now.

The Council of Economic Advisors foresees 10 percent unemployment through the rest of 2010, falling only to 9.2 percent in 2011. The result is a giant drag on the economy, not to mention pain for millions of American families. High unemployment also allows firms to keep wages low. That’s good for corporate profits but not for their customers, who are someone else’s employees. America can’t have a vigorous recovery when consumers are this anxious about their jobs and wages.

The federal budget deficit is a huge problem, to be sure. But you need to distinguish between deficits occurring this year and next when the economy is still trying to climb out of a hole, and deficits five to ten years from now. If government doesn’t spend enough in the short term to get jobs back, those out-year deficits will be even larger because tax revenues will be lower than otherwise and we’ll be spending more on unemployment benefits. The public doesn’t quite get this distinction, which is probably why the President thought it necessary to freeze discretionary nonmilitary spending.

2. The boomers now speeding toward retirement. Neither party wants to deal with the inevitable consequences for Medicare and Social Security. The President’s idea for a bi-partisan congressional commission on the deficit was too large and amorphous to gain the support it needed. He’d do better to try for a bi-partisan commission that focused just on these two giant entitlement programs. Social Security is an easier fix than Medicare, but the growth of both have to be tamed. In the 1980s, Alan Greenspan chaired a commission to deal with Social Security’s pending problems that came up with fixes Congress implemented.

Don’t get confused by the size of the numbers at stake. Pay attention to the ratio of cumulative debt to the size of the national economy. That will tell you how easily we can manage the debt. The debt-to-GDP ratio right now is close to 53 percent – still in the manageable zone. But after the boomers hit retirement, it will soar. One of the most telling figures in the President’s budget document is the Congressional Budget Office’s projection that by 2020 the debt-to-GDP ratio will be 77 percent, assuming no entitlement reforms. That’s bad news. The ratio is moving in the wrong direction. At some point, the dollar could tank and interest rates explode.