A Democratic Panic Attack?

By Lawrence Kudlow (Archive) · Sunday, August 8, 2010

With the disappointingly soft jobs report for July and a faltering recovery overall, is Team Obama getting ready for some sort of new, liberal-left, Keynesian, big-bang stimulus package? Will it be desperate to "do something"?

Already there are rumors of an August surprise (to use the phrase of business columnist Jimmy Pethokoukis) in which Fannie Mae and Freddie Mac forgive underwater mortgages held by millions of Americans. And with state and local government jobs having fallen 169,000 so far this year, perhaps the Democratic Congress and the White House will seek an even bigger spending plan for teachers and Medicaid workers -- on top of the $26 billion plan that just passed the Senate.

Or maybe the Democrats will come up with a new infrastructure-spending bill, perhaps for green technologies and whatnot. Or maybe they'll extend unemployment benefits even more. My liberal friend Robert Reich is even talking up the New Deal's Works Progress Administration, where the government employed millions during the 1930s.

With the announcement this week that Council of Economic Advisers Chairwoman Christy Romer will leave the White House to go back to teach at Berkeley, it looks as if the center of economic gravity will shift leftward inside the West Wing.

Meanwhile, over at the Fed, it seems ever likelier that the Federal Open Market Committee meeting next week will produce a much more dovish policy statement, one that will lengthen the "extended period" near-zero-interest-rate language and hint at new cash purchases of Treasury and mortgage bonds to increase the central bank's balance sheet and expand the basic money supply. Already, in recent weeks, the dollar has been plunging.

Of course, Republicans will push harder to keep the Bush tax cuts for the wealthy -- as they should. But Democrats are now trapped by Treasury man Tim Geithner's statements that extending low tax rates for successful earners, investors and small businesses would actually imperil economic recovery. This is his war against investment and capital formation.

Maybe the Democratic revolt in favor of keeping all the Bush tax cuts will gather steam. But Democrats are likelier to push for greater spending than they are for investment tax incentives. They'd rather take your money than let you keep it.

The GOP also should call for lower corporate tax rates, including full cash expensing for businesses. But so far, Republicans haven't made much noise on this, despite the fact that cash-rich businesses are mostly avoiding new hires in the face of the Obamacare regulatory threats and the uncertainty about future tax burdens.

The bottom line? Panic over this stalled economy may be setting in.

The unemployment rate is hanging stubbornly at 9.5 percent, and economic growth looks to be slipping to only 2 to 3 percent. In order to get unemployment down significantly, the economy has to grow by at least 4 percent.

Inside July's jobs report, small-business household employment dropped by 159,000 jobs -- a very bad sign. In the three months to April, this survey produced 417,000 new jobs. In the three months to July, it fell by 151,000.

At the same time, private payrolls in the corporate survey rose by only 71,000 in July, compared with an expected gain of 100,000. In the three months to April, payrolls gained by 154,000. Over the past three months, payrolls have increased only 51,000. They need to grow at a pace of more than 200,000 per month in order to reduce joblessness.

So just like the overall economy, the jobs recovery is faltering. It isn't a double-dip recession. But the story is moving in the wrong direction. And if the Democrats in power push for a big-bang summer surprise that seeks even more failed stimulus spending, they will do much more harm than good.

The Intrade pay-to-play investment parlor already shows a 60 percent likelihood of a GOP House takeover this November. That's the ultimate silver lining in this story.

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