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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

November 6, 2009 at 10:20 AM

Obama evoked the ghost of Reagan but only gets his unemployment nightmare

Top of the News: During last year’s campaign, Barack Obama angered Democrats by implying he wanted to be a transformative president like Ronald Reagan. Now he has one thing in common with Dutch: An unemployment rate of 10.2 percent. The last time we saw that was during the first Reagan term, when he urged the nation to “stay the course.”

The course back then was the war Paul Volcker’s Federal Reserve was waging — ultimately successfully — to kill the inflation that had been building in the economy since the 1960s and had helped make the 1970s economy so volatile. It also included big tax cuts and other measures to encourage capital formation and risk-taking. It took awhile, but these measures created a vibrant economy with 16 million net new jobs.

Reagan had things going for him that Obama lacks: An American industrial base that was still the world’s strongest. America was the world’s leading exporter, too. In the Reagan years, industry would be re-engineered onto a much more competitive footing, as well as become a highly profitable plaything for the leveraged buyout boyz. A Cold War buildup invigorated the defense industries at a time when the national debt was relatively light and the nation was not embroiled in hot wars.

Reagan was lucky, too. The high-tech industry was just getting started in the shape we know it today (Microsoft went public in 1986). Thanks to decades of American dominance in education and research, this growth engine would be centered in the U.S. Oil prices collapsed, hurting energy states, but giving most citizens relief. And Reagan led a nation with a solid and still mostly secure middle class. Its erosion began then, and arguably because of Reagan policies, but the foundation was still strong at the time. Also, middle-class debt was low.

President Obama’s situation is considerably different. Tax rates now are lower than they were under Reagan, so all the benefits have been wrung from that hat trick while the costs keep mounting. The tax-cutting religion has helped make states fiscal wrecks. America’s manufacturing economy has been devastated, with two automakers becoming hopeless wards of the government. Inflation is no problem and the Fed has rates at essentially zero, so Bernanke won’t give Obama a gift that Reagan received.

Meanwhile, the rise of financial plays, lack of antitrust enforcement and deregulated industries that characterized the dark side of the Reagan years is the chief economic force pushing the president’s bobsled. In 1983, the U.S. was a major world maker of automobiles, steel, computers, the list goes on and on. Today, we have Goldman Sachs — and Boeing’s big-ticket deals to conceal the cratering of manufacturing. High-tech has matured and spread overseas, including the R&D. Trade has turned against us, creating large numbers of net losers and jobless.

Of course, in 1983 Reagan was pilloried and it seemed to many things could only get worse. But it’s hard to imagine how President Obama can bring down today’s high unemployment rate — the real number is 17.5 percent — anytime soon. He carried on the Bush policy of socializing losses and privatizing profits on Wall Street. His stimulus is a Frankenstein monster sewn together to attract political support rather than create jobs.

Why, for example, are we not actually building high-speed rail to compete with the Europeans and Chinese — and create real, sustainable jobs in large numbers? Denver’s visionary rail system is stymied by the state’s fiscal crisis. Here’s an opportunity for a big FDR-like federal infusion. Instead, Obama plays small ball.

In one of history’s rhymes, Volcker, now an Obama adviser, has urged the president to deal with the too-big-to-fail financial institutions, already bailed out at huge peril to the Treasury, yet so dangerous they could bring on another crash. Obama ignores him.

Nor does he have the Reagan luck: He inherited two wars that are fiscally unsustainable. The costs and destabilization of climate change and peak oil are here, now. Globalization, industry consolidation, surplus labor and technology all will make companies slow to hire again. Long-term unemployment and job cuts rather than temporary layoffs now are much higher than in the worst of Reagan’s recession — a sign of this tectonic shift.

The economy lost 190,000 jobs last month. It needs 125,000 net new jobs just to keep up with the natural growth of the labor force. Obama said he “will not rest until all Americans who want work can find work.” I hope he has lots of NoDoz. Pretty soon, an impatient America will be saying, “There you go again.”

Today’s Econ Haiku:

AIG’s profit

It’s a mystery to me

Taxpayers got killed

Comments | More in Jobs/Unemployment


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