Belfast Telegraph

He’s down but Obama is very far from out

By Hamish McRae

The politics for President Barack Obama look pretty dreadful, with the predictions for the mid-term elections somewhere between dire and catastrophic.

But the economy? Well, the economy is the principal reason for the President's unpopularity and the recovery from recession has certainly been muted and uneven.

But the US economy is growing. Figures out on Friday showed third-quarter growth running at an annual rate of 2%, quite a bit slower than the long-term trend. True, consumption was not too bad, up by an annualised 2.6%, but while exports did well enough, imports shot up, which will reinforce the calls in the new Congress for some sort of import controls.

There is the further problem that the impetus for growth this year has come to some extent from the stimulus from the federal government, and this runs out in 2011. The ending of one particular initiative, tax rebates on home purchases, ran out in April, and already the housing market may be heading down — figures vary from location to location but for the past two months the tiny housing recovery seems to have stalled.

A further boost from the Federal Reserve is widely expected, with an announcement of another bout of quantitative easing this week, so the monetary accelerator pedal will continue to be pressed to the floor. How effective that will be is unclear.

The consensus view of the US business community was reflected at The Economist's Buttonwood conference in New York, that there will not be another leg to the recession but that the recovery will continue to be sub-standard. The conference brought together business leaders, bankers, economists and officials in an informal, none-too-earnest way. The lead speaker was the former treasury secretary, Robert Rubin, who headed a simulation, with a pretend White House economics team, as to what they would do if an imaginary US state, New Jefferson, was about to default on its bonds. As they debated, various bits of news came in on the wires, including concerns from China about US debt. Their conclusion was reluctantly to bail it out, setting various fierce conditions on the loan. A touch of the eurozone and Greece, you might think.

So, a slow recovery and a jobless one, a stalled housing market, rising fears of protectionism and fears that a state might default. What rational reasons are there to be even cautiously optimistic?

The principal one — and I suppose I feel this whenever I am in the States — is that the natural condition of the US economy is growth. There is population growth, and there is the space to accommodate this. There is also an ability to adapt, to create new business models and new applications for the technology the country develops. That is why the US is not the new Japan.

Think two years down the line, when Mr Obama comes up for re-election. By then, there will have been three years of growth. The housing market will have had two years of price stability, maybe even some gains. The federal government will be showing a profit on its investments in the motor industry rescues and maybe on its banking interventions too. At the very least, that cost will be capped and clear.

There may well have been some further bail-outs, on the New Jefferson model, but the US will be through that by then. Given the inheritance, it won't be a bad record.

Divergent fiscal paths have been taken by the US and its northern neighbour, Canada. Only three years ago, the stock of public debt in Canada, relative to GDP, was higher than that in the US. But Canada ran surpluses during the boom and now looks like seeing a return to fiscal balance within five years. The US, by contrast, not only added to its debts during the boom years (as indeed did the UK, so we can't talk) but is projected by the IMF to keep adding to its debt mountain right through to 2015. Even more alarming, by then the running deficit will be rising again.

At some stage, and no one can predict when, the US becomes not the new Japan but New Jefferson — unless, that is, Mr Obama carries through the plan that he is talking about, which is to bring the deficit back under control.

That cannot be done in the next two years but has to be done in the next six.

The machinations of American politics are hard for any European to understand but fiscal mathematics is ultimately the same on both sides of the Atlantic.

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