The Economy, Stupid

by Pejman Yousefzadeh on June 18, 2011

Alternatively titled, “Why Barack Obama Is Vulnerable In 2012.” Link:

The International Monetary Fund cut its forecast for U.S. economic growth on Friday and warned Washington and debt-ridden European countries that they are “playing with fire” unless they take immediate steps to reduce their budget deficits.

The IMF, in its regular assessment of global economic prospects, said bigger threats to growth had emerged since its previous report in April, citing the euro zone debt crisis and signs of overheating in emerging market economies.

The Washington-based global lender forecast that U.S. gross domestic product would grow a tepid 2.5 percent this year and 2.7 percent in 2012. In its forecast just two months ago, it had expected 2.8 percent and 2.9 percent growth, respectively.

With regard to the global economy overall, the IMF struck a measured tone, saying the slowdown of recent months should be “temporary.” It trimmed its forecast for global growth this year only slightly, to 4.3 percent from 4.4 percent, and maintained its estimate for robust Chinese growth of 9.6 percent despite recent signs of a slowdown there.

Yet that relatively benign global outlook could quickly fall apart if politicians in the United States and Europe do not start showing more leadership in addressing their countries’ debt problems, the fund warned.

“You cannot afford to have a world economy where these important decisions are postponed, because you’re really playing with fire,” said Jose Vinals, director of the IMF’s monetary and capital markets department.

“We have now entered very clearly into a new phase of the (global) crisis, which is, I would say, the political phase of the crisis,” he said in an interview in Sao Paulo, where the updates to the IMF’s World Economic Outlook and Global Financial Stability Report were published.

Notice that the IMF emphasis is on deficit-cutting. Of course, the new “deficits don’t matter” crowd has been telling us for quite a while that we shouldn’t worry about our parlous fiscal situation. Can we now conclude that they should no longer be taken seriously?

More:

When it comes to measuring the combination of unemployment and inflation, it doesn’t get much more miserable than this.

In fact, misery, as measured in the unofficial Misery Index that simply totals the unemployment and inflation rates, is at a 28-year high, reflective of how weak the economic recovery has been and how far there is to go.

The index, first compiled during the soaring inflation days of the 1970s by economist Arthur Okun, is registering a nausea-inducing 12.7—9.1 percent for unemployment and 3.6 percent for annualized inflation—a number not seen since 1983. The index has been above 10 since November 2009 and had been under double-digits from June 1993 through May 2008.

The good news, of course, is that the Fed-led Paul Volcker embarked on a highly successful inflation-slaying campaign that brought the level of misery down sharply through the rest of the ’80s recovery decade.

The bad news, of course, is all the bad news.

Of course, inflation is not as serious as unemployment at this stage, but inflation will become a very serious problem if we fail to get our fiscal house in order.

And yes, the Obama Administration is in a bad political spot now:

White House Chief of Staff Bill Daley took heat from business executives Thursday for the Obama administration’s regulatory expansions. Daley also said he didn’t have any good answers for some of what President Obama is doing and expressed frustration about the “bureaucratic stuff that’s hard to defend.”

“Sometimes you can’t defend the indefensible,” Daley said at a National Association of Manufacturers (NAM) meeting.

Daley couldn’t answer basic questions and continually faced criticism from the executives in the room. The business leaders even applauded each other’s criticism of the administration. “At one point, the room erupted in applause when Massachusetts utility executive Doug Starrett, his voice shaking with emotion, accused the administration of blocking construction on one of his facilities to protect fish, saying government ‘throws sand into the gears of progress,’” wrote Peter Wallsten and Jia Lynn Yang in the Washington Post.

I don’t think all that much of many of the Republicans vying for Barack Obama’s job. That they have a chance, however, is explained by the still-awful state of the economy, and the fact that nothing the Administration has done has caused Americans to believe that good times are anywhere near to being around the corner. About the only reasonably competent actor in this entire mess has been the Federal Reserve, with its quantitative easing measures. Too bad they weren’t tried earlier.

Previous post:

Next post: