Tuesday, December 8, 2009

Obama's Problem

President Obama has a problem. Some of his predecessors had the same problem. It was a major factor in George H.W. Bush's failure to win a second term in 1992. It made John Kennedy fearful about his chances for reelection, around the time that he made his ill-fated campaign trip to Texas in November of 1963.

In economist-speak the problem is that unemployment is a lagging indicator. In other words, as the economy recovers from recession, decreases in the unemployment rate happen more slowly than increases in gross domestic product and other indicators of growth.

While many employers cut their work force during a recession, they're reluctant to cut too much, because they will need those workers again when growth resumes, and there are costs related to laying off workers, and hiring new ones. So, there is typically some slack in an employer's work force, and the first increases in work brought on by renewed growth can be handled without new hiring.

Eventually, if growth continues, the economy will return to full employment. Economists who are not paid to say otherwise will tell you that the best prescription is for government to step back and allow markets to work.

But, in the meantime, those looking for work are impatient. And, rightly or wrongly (to a great extent, wrongly), the bulk of that impatience always gets aimed at the president.

Early indications are that Obama's party will suffer significant reverses in the 2010 congressional elections. I assume that he and his advisers are fully aware of the economic facts I've recounted above. But he needs to at least be perceived to be trying to do something about lingering high unemployment, in order to keep those electoral losses from getting out of control.

Therefore, he has proposed new federal spending that will purportedly add (or in that marvelously unquantifiable formula that his administration has invented, "save") jobs.

Instead of pandering in that manner, I would rather see him explain the economic facts to the people, and counsel them to be patient. Maybe he's not the great communicator I made him out to be in this post?

When GDP and the federal debt are both growing, as they now are, I think he should be more concerned about the effect on interest rates and inflation in the near-to-medium term. But that would be tougher to sell on the campaign trail.

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