This is the time that tries economists’ models. It has become the fashion at this time of year for forecasters to opine on the growth of GDP, the level of unemployment, the inflation rate next year—to at least one decimal place. I respect those who consult their models and intuition to come up with forecasts, but have neither the wit nor the courage to attempt such an exercise. Instead, I offer a comment on one aspect of 2013 that is often overlooked: the state of our political economy. The coming year will see a war between politics and economics, between a political class bent on transferring resources from the private to the less productive public sector, and an entrepreneurial class that, uninhibited by policy errors, can power growth at a rate most forecasters do not see in their crystal balls. That war will be waged whatever the result of negotiations, underway as I write, to prevent a leap off the fiscal cliff.
Most of the news in the closing days of 2012 has not been good. Holiday spending grew at the anemic rate of 0.7 percent according to one source (other surveys disagree), consumer confidence and share prices dipped, activity slowed in some regions, and negotiations over the cliff made clear that President Obama feels no need to compromise with a fractured and inept Republican House, over this or any of the issues faced in 2013.
The so-called fiscal cliff was a sideshow, distracting attention from two key and unresolved political issues that will play out in decisions about economic policy. The first is the rancorous tone of political life, due less to personality clashes than to profound differences in ideology. The president wants the “rich” subjected to higher tax rates to fund an expansion of government—a comparable increase in the tax take by closing loopholes will not do, for reasons that mystify those who don’t understand that one of the president’s goals is to fracture the Republican Party, as Charles Krauthammer has pointed out in his columns and on Fox. And he has no intention of reining in spending. On the other side of the political divide are many Republicans, with a majority in the House, who believe any tax increases provide revenues that feed a freedom-threatening growth of government, and stifle incentives for private-sector actors to invest and create jobs. In addition there are practical politics: The president wants to keep his left on his side, and congressional Republicans believe a vote for an increase in tax rates is a vote to join the unemployment queue. Those competing views foretell a year of battles over spending and tax policy—uncertainty, as market watchers like to call it.
Unfortunately, early in 2013 this market-rattling rancor will have multiple platforms on which it can be displayed. On January 29 the president delivers his State of the Union Address, his favored platform from which to attack his opponents. The televised meeting of both Houses of Congress provides a huge audience, and his targets, arrayed before him in the audience, have no prospect of responding before an audience of comparable size, as the members of the Supreme Court have learned. If you want to see good manners, don’t look to the president, who plans to let the country know just what he thinks of the Republican opposition, which isn’t very much. Not designed to smooth the path to compromise.
Then, there is the small matter of the debt ceiling. Monday the government reaches the limit of what it can lawfully borrow, but Treasury Secretary Tim Geithner can get by until February by juggling accounts—a juggling act that might put corporate treasurers behind bars if they emulated the keeper of our nation’s books. If Republicans somewhere along the line waive their right to hold out for spending cuts in return for raising the debt ceiling, they will have surrendered their last chance to rein in Obama’s spending. The last time congressional Republicans unholstered this weapon America lost its triple-A debt rating. But Republicans feel they are in the last-chance saloon, with the debt ceiling negotiations their only weapon to force Obama to trade spending cuts for an increase in the ceiling.
This is a good time to see where we have come during the year now coming to a close. Some things haven’t changed very much, or so it might seem. When the year began, households reported that 142 million Americans held jobs; right now, 143 million are in work. The labor force participation rate—the portion of workers in the labor market—was 63.7 percent when we (or some of us) were sleeping off New Year’s Eve hangovers, and now stands at 63.6 percent.
As we wait to see the extent and duration of Barack Obama’s post-convention bounce, it makes sense to do a little analytical house cleaning. In particular, a meme developed over the summer that Barack Obama was a strong favorite to win reelection, thanks to a sustained and substantial lead over his Republican challenger, Mitt Romney, particularly in the swing states.
They had me at “street theater.” Last week at the GOP convention, the AFL-CIO sponsored a “Mitt Romney’s America” protest. It wasn’t just an ordinary march, though. It was billed as a “parade.” In addition to consciousness raising and “making their voices heard,” the union press release promised there would be “street theater.”
With just over two months until Election Day, Barack Obama holds a narrow lead over Mitt Romney in the race for the presidency. The lead is shallow, however, and a careful look at the landscape reveals significant weaknesses for the president. The key question remains whether Romney can capitalize on them.
The end of Medicare and Medicaid as we know them—through reform, the Ryan way, or -bankruptcy, the Obama way. The direction of the country—via the Romney-Ryan right track, or the Obama-Biden wrong track. Those are the choices, made stark by the addition of Paul Ryan to the Republican ticket.
There is something very strange about the 2012 presidential race so far. The election comes at a time of extraordinary public unease, which clearly demands some response from the political system, and especially from the men running for the highest office in the land. But the two presidential candidates are both running campaigns oddly detached from what is rightly worrying voters.
Now that Mitt Romney has sewn up the Republican presidential nomination, the general election battle has begun. Team Obama obviously recognizes this; since Romney basically sealed the deal after the Wisconsin primary in April, the president and his team have launched a series of attacks designed to distract the country from the real stakes of this election.
The Obama campaign has released a new web ad that lists every apparent accomplishment of the president's three years in office. The seven minute spot begins by showing how bad the economy was when the president took office, and suggests that President Obama saved America with the stimulus, the auto bailout, guaranteed contraception, the Lilly Ledbetter Act, Obamacare, killing Osama bin Laden, and more:
"If I don’t have this done in three years, then there’s going to be a one-term proposition," President Obama said shortly after taking office on February 2, 2009. He was then referring to the economic recovery but, over three years later, the president's words seem prescient.