Rough Seas Ahead

By DAVID S. BERNSTEIN  |  July 14, 2010

As questions grow about the recovery, Obama needs some sector to increase spending.

Congress needs to help, but despite a growing chorus of economists calling for additional government stimulus, that doesn't look like it's going to happen. With midterm elections less than four months away, skittish and easily cowed lawmakers are terrified of adding to the national debt. Forget another stimulus package — which some economists are now prescribing — the Senate couldn't even pass a bill providing additional funds to states for unemployment and medical (FMAP) benefits.

Obama would almost certainly hold more sway over Congress if his approval numbers were solidly over 50 percent — and incumbents thought they were better off standing with the president than against him.

It's not just Capital Hill failing to respond. Obama went to the recent G20 Summit in Toronto practically begging foreign leaders to do more government spending, to keep priming the global economy. They declined. One result: other countries, growing slowly, have no money to buy our goods, which has now led to the largest monthly US trade deficit since 2008 — which is no help to our own recovery.

And businesses are also holding back. America's 500 largest non-financial companies are sitting on a staggering, and historic, $1.8 trillion in cash — yet US businesses are investing at their lowest level in more than 40 years. If they started putting that money to work, it would be like a targeted economic-stimulus package, potentially twice the size of the last year's federal Recovery Act.

CEOs and industry representatives are blaming the administration, in what Newsweek columnist Fareed Zakaria last week called "Obama's CEO problem." They complain that they are hampered by uncertainty over coming regulations — in the financial-industry bill, energy/climate-change legislation, and elsewhere — as well as expectations of tax increases to offset the rising federal deficit.

This is probably mostly bluster, to cover for their own "groupthink and herd behavior . . . with irrational exuberance now giving way to a period of equally irrational and widespread pessimism and caution," as Washington Post business columnist Steven Pearlstein wrote last week. But, Pearlstein and others warn, Obama needs to convince those businesses to start pumping those reserves into the economy — and the rift between Obama and the business community is clearly not helping him talk them into it.

Obama has also not been able to get the American people — in their role as consumer — to feel quite confident enough to increase spending. Consumer sentiment has climbed dramatically, personal income is back up, and mass layoffs have ceased, but rather than make the purchases they've been putting off for so long, families keep saving and paying down credit at historically high rates.

War president
In the first months of this year, the US (and what few allied forces are involved) made significant gains that seemed to justify Obama's December decision to send 30,000 additional troops to Afghanistan.

Most notably, troops freed Marjah, a major southern stronghold for the Taliban, and began the process of building up local governance and infrastructure. That is the heart of the new strategy: expend the force necessary to clear out insurgents, and then make the citizenry happy so they will cooperate in keeping the Taliban out.

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