Will the Economy make President Obama a Single Term President?

Posted by PITHOCRATES - May 13th, 2011

Inflation is Up

The economic outlook is good.  Or bad.  Depending on the spin.  Crude oil prices fell recently.  That’s good.  But they fell on bad economic news.  Because of stubborn high unemployment people will not be hitting the roads this summer.  Just as they did not last summer.  Doing the staycation again.  So oil prices fell.  Because anticipated demand for summer gas was low.  So, gas prices may come down.  Which is good news.  But the reason they may come down is because of the continuing recession.  Which is bad news.

The Federal Reserve has been trying to kick start this economy out of recession for quite a while now.  They’ve done some quantitative easing (i.e., printing money).  But no one wants it.  Except investors speculating in commodities.  I mean, there’s nothing like investing with free money.  But no one was borrowing that free money to expand their business and hire people.  Why?  For the same reason oil prices came down.  Low demand.  Why expand business and build more stuff when no one is buying?  Or can buy because they’re still unemployed?

So the loose monetary policy has failed to create jobs.  But it has been successful in creating something.  Inflation (see Inflation hits 2-1/2 year high, seen peaking by Lucia Mutikani, Reuters, posted 5/13/2011 on Yahoo! News).

Inflation hit the highest level in 2-1/2 years as food and energy prices moved higher, but there was little sign of a broader pick-up in inflation that would trouble the Federal Reserve…

The rise, which was in line with economists’ expectations, took the year-on-year inflation reading to 3.2 percent, the highest since October 2008.

So prices are up.  That happens.  From time to time.  So it’s not in itself bad news.  The bad news is this is happening while there are no corresponding gains in wages.

The stiff gains in food and energy costs in recent months has squeezed consumers, who are enjoying only tepid wage gains.

The department said that when adjusted for inflation, average weekly earnings fell 0.3 percent in April after declining 0.4 percent in March.

So we’re earning less while prices are rising.  This is not the best combination.  And it kind of diminishes the recent good news of the latest unemployment numbers.

Unemployment is Up

So how were the April jobs numbers?  Pretty good according to a lot of people (see Unemployment Numbers, Gas Prices Ease Economic Pain by Jim Avila, Alice Maggin and Michael Murray posted 5/7/2011 on ABC News).

Americans have been delivered a steady stream of encouraging economic news. Private employers went on an April hiring spree, adding 260,000 jobs, the strongest gain in five years and the third month in a row of at least 200,000 new jobs.

The unemployment rate rose to 9 percent in April from 8.8 percent, but even that figure is considered a temporary quirk, according to The Associated Press.

So the good news is that we added 260,000 jobs.  The bad news is that the unemployment rate increased from 8.8% to 9%.  Interesting.  We added jobs.  Yet more people are unemployed.  Again, I guess it depends on the spin.  This was a pretty positive spin.  Now let’s look at a not so positive spin (see Jobs Numbers Explained: Employers Add 244,000, But Unemployment Ticks Up by Dan Arnall posted 5/6/2011 on ABC News).

The broader unemployment rate, which includes people who took part-time work when they wanted full-time or were just not looking because they didn’t believe there was a job out there is now at 15.9 percent (or 24 million). That’s actually pretty good as this measure – called the U-6 – was at 17 percent a year ago.

Actually, this is a pretty positive spin on some pretty bad news.  A more realistic unemployment number is 15.9% (the U-6), not the rosy 9% (U-3).  But U-6 fell from the higher rate of 17% a year ago.  Good news, yes?  Still, 15.9% is high.  But it is not Great Depression high.  When unemployment was at 25%.  So the 9% is rosy because it is only 36% of the Great Depression unemployment rate.  But the more realistic 15.9% is far less rosy considering it is 64% of the Great Depression rate.

Entitlement Programs are going Broke faster than Projected

The economic outlook isn’t very rosy right now.  So can the news be any worse?  Yes.  It can (see Social Security deficits now ‘permanent’ by Stephen Dinan posted 5/13/2011 on The Washington Times).

Social Security will run a permanent yearly deficit when looking at the program’s tax revenues compared to what it must pay out in benefits, the program’s trustees said Friday in a report that found both the outlook for Social Security and Medicare, the two major federal social safety-net programs, have worsened over the last year.

Medicare’s hospital insurance trust fund is now slated to run out of money in 2024, or five years earlier than last year’s projection, while Social Security’s trust fund will be exhausted by 2036, a year earlier than the prior projection.

The trustees stressed that exhaustion of the trust funds doesn’t mean the programs will stop paying all benefits. Social Security could fund about three-fourths of benefits past 2036, and Medicare could pay 90 percent of benefits past 2024 under current trends.

This can’t be good.  No matter how you spin it.  These programs have been rescued through the years because of a fundamental flaw.  People are living longer than ever imagined.  And we’ve been having fewer babies.  Put the two together and you have a growing number of old people being paid for by a shrinking number of younger people.  And the only way to fix these problems is with entitlement reform.  Which, of course, no one wants to do because too many seniors vote.  There’s a reason they call these programs ‘third rails’.  You cut them and you will likely cut your political career short.

To leave them as-is will require higher taxes.  Or higher tax receipts generated by a booming economy.  We don’t have the latter.  And if we do the former we’ll definitely not have the latter.  Which leaves entitlement reform.

It’s the Economy, Stupid

You put all this together and what do you get?  A bad time to run for reelection.  Jimmy Carter ran into the same problems.  High unemployment.  And high inflation.  Stagflation.  You add the two rates together and you get the misery index.  And if inflation trends higher, Obama could find himself in Carter’s shoes.  Add to that as being the president who cut entitlements.  Or exploded the deficit to pay for unreformed entitlements. 

It’s the economy, stupid.  Always.  It made George H.W. Bush a single term president.  As well as Jimmy Carter.  Will the worst economy since the Great Depression do the same to President Obama?  Guess we’ll soon find out.

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