The American Interest
Analysis by Walter Russell Mead & Staff
President Obama Hopes This Man Is Wrong

Edward Luce writes for the Financial Times, and he doesn’t like what sees when he looks at the US economy. The current recovery, writes Luce, is anemic and likely to stay that way; worse, for many households, the pain is increasing.

The median household income is considerably lower than it was in June 2009, when the recovery began. It is likely to be lower still in November when Barack Obama faces re-election.

It won’t be easy to convince a majority of American voters that they are better off or that the current policies are working if household incomes sink for another six months.

But Luce has a more troubling point to make as well: small business is ailing under this president.

According to the Bureau of Labour [sic] Statistics, US small business creation is in long-term secular decline. In 2010 it hit a historic low: just 8 per cent of all US businesses were less than a year old, against 13 per cent in the 1980s. Again, none of this should come as a surprise. Talk to any venture capitalist in Silicon Valley, and any small business outside Washington, and they say the same thing: risk capital is far harder to come by. With the exception of the social media, which has very low overheads, most start-ups find it hard to get credit from banks or investors.

Luce isn’t blaming Obama for this long term trend, but it is deeply worrisome — and offers an opportunity for Republican critics of the Administration to hammer the message that government regulations and bailouts that favor big business and Wall Street are killing the American dream.

Luce himself thinks that deficit spending on infrastructure would help jump start the economy and makes the point that borrowing right now (with real interest rates at or near zero) makes this a good time to get the work done. In the 2012 political atmosphere, however, it looks as if deficits will be poison and that President Obama will not want to ask for a lot more federal spending.

All told, the state of the economy looks problematic from the incumbent’s point of view. The President’s best hope to make his re-election a sure thing was for this year’s winter pick up to gain momentum rather than stall out as spring came into view. Luce thinks that hasn’t happened, and that we are back in the doldrums.

The White House desperately wants him to be wrong.

Published on May 7, 2012 3:10 pm
  • Wrecktafire

    The labor force participation rate is probably the best “explainer” of why Americans are depressed about their employment prospects.

    This far into the recovery, to be at a 30-year low (percentage-wise) is sobering.

    Nearly every young, college-educated adult I talk to finds it practically impossible to land a decent job.

  • Anthony

    “America’s presidential election is now just six months away. If history is a releable guide, the outcome will depend significantly on the economy’s performance between now and November 6, and on American’s perception of their future under two candidates.”

    President Obama has a slow growth and high employment economy encumbering options and from White House’s perspective the economy is definite liability – last week indicators do not help. So, Luce may be right.

  • Tim Routh

    So, lack of access to credit by small business calls for infrastructure spending and not a reduction (elimination!) of the captital gains tax (and for all, not just those <$250k, as per Romney)? Interesting.

  • thibaud

    “hammer the message that government regulations and bailouts that favor big business and Wall Street are killing the American dream.”

    Why would the party of big business and Wall Street push such a message?

    Or, if their 2-and-20 carried interest / self-dividending hero pushed this message, why would anyone believe him?

    “Luce himself thinks that deficit spending on infrastructure would help jump start the economy and makes the point that borrowing right now (with real interest rates at or near zero) makes this a good time to get the work done. In the 2012 political atmosphere, however, it looks as if deficits will be poison and that President Obama will not want to ask for a lot more federal spending”

    Which party is saying that deficits are “poison”?

    Which one opposed intelligent stimulus – roads and bridges and ports and airport renovation and infrastructure construction projects of all sorts – tooth and nail back in 2009?

    I’m not letting Obama off the hook for falling to put a stake in the zombie banks whose refusal to lend and do workouts are the biggest reason for low consumer demand and the 40% unemployment rate in construction.

    But the GOP shares the blame. Neither party has shown any real willingness to remove the dead weights on this economy and get capital flowing into stateside investment again.

    The GOP isn’t pro-market; they’re just pro-business.

    That is, Big Business: the sort of business that offers them 7- or 8-figure perches when they leave political office.

  • Jacksonian Libertarian

    “According to the Bureau of Labour [sic] Statistics, US small business creation is in long-term secular decline. In 2010 it hit a historic low: just 8 per cent of all US businesses were less than a year old, against 13 per cent in the 1980s.”

    I posted about this yesterday, in reference to Home Ownership. And YES Obama and the Democrats are responsible for the problem, as they are the ones taking $1.3 Trillion a year from the capital markets and thereby raising the cost and availability of capital for small businesses. Previous post follows:

    ““There’s a reason it’s called Capitalism; it’s because Capital is what fuels it.” Jacksonian Libertarian

    Up until a few years ago, 60% of American Family net worth was held as equity in their home. Economists are always harping on how important a nation’s savings rate is to its economic growth, at the same time they deplore the lack of saving by Americans. But, we can see where Americans have been saving their money, it has been in their homes, in a form of enforced savings by paying off their mortgage, which the stupid economists ignore.

    In a normal recovery, the vast majority of new jobs are created by small business start ups and expansions. The primary source of capital for those small business start ups and expansions has traditionally come from home equity.

    The functions of home ownership in the American Economy cannot be replaced. It is the location of the American Family nest egg, and the source of funding for American Growth.

    The US government is sucking $1.3+ Trillion per year from the supply of capital available to Consumers and Businesses. This both reduces employment and increases the cost of money, the two most critical components of Home Value.

    If you have been wondering why we are in Great Depression 2.0, it is because the US Government has sucked $6+ Trillion from the capital markets since the Democrats took control in 2007. This despicable behavior has killed the Housing market, looted the American family nest egg, and destroyed jobs and lives across the US.

    So, No America will NOT be better off with reduced Home Ownership. It will in fact cripple our flexibility by removing the primary source of funding, saving, and growth in the American economy.”

  • SC Mike

    No matter who’s elected in November, deficit spending will continue for some decades. Even Paul Ryan’s budget establishes a glide path to get the budget under control. So a stimulus of sorts will be with us for as long as folks will lend us money.

    What’s stupid is that despite the presence of a smart cookie like Christina Romer, the Obama administration directed its stimulus to programs that didn’t stimulate. Even though she’s a Keynesian, Romer, along with her husband, conducted research that showed two things: $1 in stimulus to individuals generated $3 in growth, while $1 in aid to government generated less than $0.9 in growth, i.e., a negative return. Perhaps her ideas had little effect because she’s was the girl in that den of frat boys, but it’s more likely that Obama’s ideology drove him to construct a really silly stimulus. His infrastructure spending sent money to the states who ended up using federal money to replace local funds, allowing them to forego bond issues and the like; little ended up getting spent on infrastructure. The massive loan guarantees and grants for energy savings came not with strings, but stout ropes attached, mandates like Davis-Bacon, that increased costs while providing little infrastructure.

    I could go on about the silliness of the spending, but my real point is that the economic situation will not improve until the threat of Taxageddon is dealt with. Those who believe that Congress will tame this $5T monster during a lame-duck session ignore the reality that businesses of all sizes are paralyzed for the time being and will limit investment and hiring until they get a better idea of what’s coming.

    The lobbyists are standing by, ready to help during the lame-duck session, but there’s so much uncertainty, and the instinct for self-preservation is so strong, that anyone who controls a business will seek security. And that means hoarding cash and maintaining or shrinking to a lean staff to assure the enterprise’s survival.

  • Leon Haller

    There is too much deadweight in the US- too few people are real, net producers. Given this, one would expect even a socialist like Obama (yes, he is a socialist -how else to describe him? he’s not a communist, however) to press for massive deregulation and tax simplification (as well as extensive privatizations) to generate the economic growth to pay for all the parasites (the sell-offs of govt assets could be used to retire national debt). Instead, he wants to jack up marginal tax rates, thereby showing that he learned nothing from the 80s.

    Real productivity growth is imperative. It does not come from spending, especially wasteful spending on anti-economic govt programs. All this was explained decades ago by Ludwig von Mises. We have only one choice: restore something like laissez-faire capitalism, or face economic (and then civic) armageddon.

    Only Romney will come close to doing what needs to be done re rooting out govt waste, and deregulation.

  • Ma

    How close Romney comes to solving these problems is an open question provided he gets elected. He also needs a cooperative Congress to do it and that also is not a sure thing. We need a current ten year tax policy like those old evil Bush tax policies that were left alone by DC and extended for 2 more years to eliminate some of the uncertainty.