In Las Vegas casinos, gamblers at the blackjack tables are allowed to “double down.” After drawing their two cards they are allowed to double the size of their bet if they will take only one more card in their quest to get closer to 21 than the dealer. It is a high-risk bet that should be made only if the player holds a very strong hand.
Faced with an easily panicked Wall Street, a catastrophic oil spill in the Gulf of Mexico, persistent unemployment, and increasing political backlash looming in the autumn congressional elections, President Barack Obama has made a double-down bet on the U.S. economy.
While America’s trading partners in Europe and Asia are attempting politically unpalatable and economically perilous efforts at fiscal retrenchment and social welfare cuts, the White House has served notice that it will continue to apply both monetary and fiscal stimulus through the rest of this year and possibly well into 2011 before it makes any serious effort to reduce its roughly $2 trillion yearly federal spending overruns.
The reasoning behind the gamble is somewhat startling. Obama has been persuaded by his main policy advisers at the Treasury and the Federal Reserve that the American recession is over, and that in fact it ended in June 2009. Slight revivals in existing home sales, in new car purchases, and some modest inventory buildups are evidence enough to the officials that they need to keep their feet firmly pressed on the accelerator.
At the end of May, Larry Summers, head of Obama’s economic advisory council, in a major policy address to the School of Advanced International Studies at Johns Hopkins, said he was “heartened by the fact that due in part to the strong fiscal actions taken through the Recovery Act, the American economy is growing and creating jobs once again. The combination of tax cuts, emergency support for the newly unemployed, fiscal support for states, and a range of catalyzing investments from infrastructure improvements to energy have played their intended role. The depression scenario that appeared a very real threat a year ago now appears remote. And by and large, forecasters debate the likely pace of recovery rather than the magnitude of double-dip risk.”
Now go back and read that sentence again. Better yet, go online to www.whitehouse.gov and pull up the entire Summers text to understand the full depths of his self-deception and estrangement from the reality overhanging this summer of discontent. It is as if this talented — no, brilliant — economic analyst has surveyed some mythical country and not here and now, where 80 percent of Americans who lost their jobs last year are still unemployed and those who have gone back to work have taken pay cuts, sacrificed benefits, and are now working hourly schedules that border on part-time. Coincidentally, the day after Summers spoke to the heavy thinkers at SAIS, the official federal government debt crossed over the $13 trillion line. That boosts the amount of debt as a percentage of our gross domestic product from 84 percent to 88 percent in one month as the GDP continues to fall while spending increases.
Summers hastened to reassure the credit markets that the Obama administration was concerned about the budget deficits and renewed the president’s pledge to cut the annual overrun in spending to a measly $500 billion in the next few years. Just not right now, please. But just so there was no misunderstanding, he emphasized he had little time for what he called “a largely sterile debate…about brakes versus accelerators or opening wallets versus tightening purse strings.” He means your wallets and Washington’s purse strings.
The windows on Summers’s limousine are not the only ones that are rose-tinted. The biggest U.S. corporations and Wall Street banks are enthusiastic supporters of the Obama plan for the “second stimulus” injection of $200 billion later this year, perhaps because they are the main beneficiaries. Two weeks before Summers’s speech, there was a cozy dinner in the White House state dining room where he, President Obama, Treasury Secretary Tim Geithner, and other administration strategists met with 13 of the nation’s most senior manufacturing and bank CEOs to lay out the new rosy scenario and ask for support.
Among the favored guests were Jamie Dimon, head of JPMorgan Chase & Co.; James Owens of Caterpillar; Rex Tillerson of ExxonMobil; Ronald A. Williams of Aetna; and Patricia Woertz of Archer Daniels Midland. The guests were officers of the prestigious Business Council of the giants of industry and finance, and the dinner was a preview of the next night’s appearance at a black-tie dinner for the full 150 Council chiefs, where the president repeated the pitch and got a standing ovation.
In timely fashion, Summers’s policy pronouncement came the same day as the staff economists for many of the Business Council membership issued a revised economic forecast that had to try very hard to be upbeat. The group nudged its February prediction that U.S. gross domestic product would rise by 3.1 percent to a new forecast of 3.2 percent growth. The analysis also agreed that the U.S. recession ended last year and said, “The economy is in reasonably good shape as the recovery approaches its first anniversary,” but the economists conceded they were “extremely concerned about the large federal budget deficits going forward.”
But even at a 3.2 percent GDP gain, America is hardly out of the woods, and a closer look at the report’s data shows it is based on the overall jobless rate remaining near the current 9.9 percent mark. About the best gloss the business economists could put on the situation was “the U.S. economy is faring much better than Europe.” Hardly a ringing vote of confidence.
But even the business economists may be too optimistic. One has to wonder why Mr. Summers was so confident when he was provided with a very sobering analysis by no less than the economists of the New York Federal Reserve Bank just the week before. The central bank economists said the recovery, if indeed it is a recovery, would be lucky to get above 3 percentage points this year.
The New York Fed analysis should have been a splash of cold water at the White House. It notes that up until the 1990s, the U.S. economy tended to bounce back “relatively briskly from downturns.” In the eight quarters after reaching the low point in the cycle, the revival averaged about 5.5 percent in GDP growth after inflation. But the recessions of 1990-1991 and 2001 saw revivals of growth of only 2.9 percent of GDP on average.
Three factors have to be in place for the U.S. (or any other) economy to snap back from a recession, the Fed economists state: a high degree of slack in the economy, monetary policy that is poised to stimulate, and a firm overall trend growth of economic activity. Yet today, consumer prices are slumping because of weak demand, the Fed interest rate push is at zero, and broad levels of economic activity are tentative at best.
And things may be worse than we know. First, there is good reason to worry that the federal government faces a far greater deficit burden than most Washington officials will admit to. As troubling as the $13 trillion/88 percent of GDP burden is, Washington faces debt obligations far greater than that. If one applies the generally accepted accounting principles that any business has to follow, the longer-term liabilities of the American Social Security and Medicare health insurance schemes (whose trust funds currently are empty) balloon that debt overhang to $70.7 trillion, close to five times GDP.
To be sure, not all that debt is coming due tomorrow. But the federal debt overhang is only one part of the American government’s addiction to overspending. More than 30 of the 50 state governments are in severe deficit. Three-quarters of the nation’s major city governments have cut services and employment because of sharply reduced tax revenues. A recent report by Stanford University says the California state pension schemes for teachers and government workers may be in deficit by another half trillion dollars all by itself.
There is another blackjack phrase that comes to mind. It’s when that next card drawn to your hand takes you over 21. You are “busted.”