Obama between a rock and a hard place on the economy

Obama between a rock and a hard place on the economy

- in Progressive Voices

The Obama Administration already has a remarkably full plate – health care reform, cap-and-trade climate legislation, financial regulation, immigration policy, et cetera, et cetera. And that's just on the domestic policy front.

But foremost on their and the American people's domestic agenda is the issue of jobs. How the President and his team perform on this marker will likely determine their fate.

The Administration already faces a variety of difficulties on this front. First, it will be difficult to prove to skeptical independent and swing voters that Obama policies kept the economy from entering a complete Depression-level meltdown. Though clearly true and an important accomplishment, it is a bit abstract.

Second, the fact that the President inherited such enormous economic challenges from the Bush Administration will not cut him much long-term slack. The Obama Administration's role in recovery will be its ultimate pass-fail test.

Third, the American electorate does not generally understand Keynesian economics and its paradoxical, but compelling arguments. 

Fourth, there is a toxic populist rage out there that could poison the Administration attempts to "right" the economy. Many in this group are far from convinced that government can be their friend. 

Fifth, unemployment numbers will be last to improve. Indeed, the definition of a recession-free economy is based on output, not jobs. These problems are compounded by the staggered implementation of the stimulus package.

Sixth, the Federal Reserve and the Obama Administration could easily time their deficit reduction wrongly and send the economy into another recession, as Roosevelt did in 1937.
Seventh, if it does move too slowly on deficit reduction, federal policymakers could spark an inflationary surge. 

Succeeding will require lots of good luck, some art, superb intuitions, and a great deal of communication that finds a way to treat the populace as adults rather than children. Indeed, Obama, our market doctor, must perform the mean feat of encouraging contingency thinking and action regarding employment and inflationary policies.

So, since it's never too late to begin getting suited up for the big game that has to be fought between a rock and a hard place. What specifically should be done? 

First of all, the Administration should follow-through on the advice of Timothy Bartik and John Bishop, two ace economists, by establishing a temporary job-hiring tax credit, aimed at small business. Their proposal will generate a lot of visible jobs – a few million – among an important constituency.

Next, if inflation starts to take off and the Administration does not want to apply the "Paul Volker macroeconomic medicine," as was done during the Carter and Reagan Presidencies, it must take the offensive. To remind you, Volker, in an effort to curb "stagflation," raised interest rates sky-high and sent the economy back into recession. Obama can avoid this scenario by being prepared to act fast on significant tax hikes and spending cuts. The latter measures will probably only happen, however, if President Obama pursues the creation of a commission similar to the one that was used so successfully to close a number of obsolete military bases, i.e.,  a decision-making body that requires an up-and-down vote for an entire package.

Finally, he must find solutions that do not require minorities, the poor, and working people to be conscripted into an anti-inflation "army," which deflates the economy by cutting their wages and terminating their employment. This is the usual prescription.

In short, it's an incredibly difficult, uphill tightrope that the President must scale. It's in all of our best interests to hope fervently that he succeeds.

William Schweke is a Senior Fellow at the economic development think tank, CFED.