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State of the Union (2010)

Presented by Malcolm Robinson

Even though President Obama’s State of the Union address this year seemed to deal mainly with economic issues, they were economic issues explained as a smart politician would explain them.  Three of the high lights of the address for me included (1) Obama’s statement that “government can create the conditions necessary for business to expand and hire more workers.”  Doesn’t this clearly delineate the crucial difference on economics between the two parties?  (2)  He also pointed out that we shouldn’t repeat the economic mistakes that gave us the last decade’s stagnant real incomes: lost wealth and zero job gains.  “We can’t afford another so called economic expansion like the one from the last decade.” And (3) The President got the Republican Party to stand and applaud for a stimulus bill that they almost all voted against – that was pretty impressive.

Since this is the State of the Union, the President needs to be more positive and upbeat than I am.  We were told, “despite our hardships, our union is strong.”  The economist in me wanted to hear different emphases.

I wanted the President to talk about mass unemployment.  Over 8.5 million Americans have lost their jobs since the recession began in December of 2007, this is on top of the three million jobs the economy needed to create to absorb new entrant into the labor force.  Over 6 million Americans have been unemployed for 27 weeks or more; that’s 40% of the total number of unemployed workers and almost double the number of over a year ago.  Over 1 in 6 Americans are underemployed or marginally attached to the work force - - the U6 unemployment rate.  Last year, around this time, I suggested growth in 2010 would average less than 1% and the unemployment rate would hover at 10%.  With new information, I now think the US economy will grow at a still sluggish rate of growth of about 2.5%.  I’m still not confident that the unemployment rate will deviate much from 10% for the year.  The Obama administration predicts that job growth will average 95,000 per month - - well below the rate of job creation necessary to lower the unemployment rate and make it feel as if the economy is improving.  Why is mass unemployment the issue of this moment?

  1. The construction market may be improving but it’s still weak.  My favorite number of the moment is that an estimated 4.5 million American homes have dropped below 75% of their mortgage balance – that’s the magic number at which homeowners decide to walk away from their homes even if they can continue to make mortgage payments.  These numbers are projected to peak at 5.1 million by June – that’s about 1 in 10 of all current mortgages.  (Almost no homes were underwater in 2006 when the housing crisis started.)  Sixty-five percent (65%) of all Nevada mortgages are underwater, 48% in Arizona and 45% in Florida.  And commercial property values have fallen more than 40% since the start of 2007.  Almost $700 billion in commercial loans are set to come due between 2010 and 2014 on properties that are presently underwater.  It’s hard to imagine the construction sector as an engine of job creation given the present conditions.
  2.  One hundred forty (140) local banks failed in 2009.  Twenty (20) have failed so far this year and more will fail in 2010 due to real estate failures.  The Fed and the Treasury did prop up the commercial paper market.  So big companies that sell bonds have access to funding but consumers and small firms are starred for cash because banks aren’t lending to them.  Bank capital is still scarce.  Small businesses can’t expand without access to capital.  It’s hard to see how tax credits for hiring workers will entice firms to hire workers when the firms are frozen out of the credit markets.  What about automobiles?
  3. Americans purchased 6% more light vehicles in January of 2010 than in January of 2009.  But this is misleading information because January of 2009 was the worst month for auto sales out of the last 6 years and January of 2010 was the third worst month for auto sales in the last 6 years.
  4. Net exports (exports – imports) have been a relative strength and President Obama made it a goal for the US to increase our exports to the rest of the world.  But the problems now spreading from Greece, to Spain, to Portugal, to Ireland and beyond means, I believe, that there will be a weakening world trade market for our exports in the second half of 2010.
  5. Three last facts: consumer confidence is still low; consumer credit has fallen for the eleventh month and industry is operating at only 75% capacity – well below the historical norm of 81%.  Where does this leave us?

Last year, I called the government stimulus package too weak and too small.  I stand by that statement today.  Instead of focusing on the central role the government has played in muting the ongoing economic crisis, the President indulged in the politically popular happy talk of deficit reduction.  Luckily, his “budget slushie” as Brad Delong has dubbed it, seems to be mostly cosmetic; and a new jobs package is being considered by Congress which will extend components of the stimulus package stated for expiration.  Somehow, the meme of deficit reduction has crowded out the meme of mass unemployment in our political discourse.  This will handcuff what our government can do and could potentially lead to great damage to our economy.  The last time deficit reduction replaced mass unemployment as a policy concern in Washington was 1937.  Raising taxes and cutting spending because of deficit fears drove the unemployment rate from 14.3% in 1937 to 19% in 1938.  Karl Marx certainly got it correct when he said, “History repeats itself, first as a tragedy, second as a farce.” 

Can the nation simply ignore the problem of the budget deficit?  To this, the answer is, in the short run, yes, but not in the long run.  However, any serious analyst of the unsustainable future fiscal path for our economy will tell you the key to controlling future deficits is to control the rate of growth of health care spending.  I have been making this point repeatedly for the last 3 ½ years in every class I can bring it up in; I haven’t figured out how to fit it into Environmental Economics yet!  I’ve come to describe our potential future history as our “Ghost of Christmas Future” – it’s the future that doesn’t have to be if we change our ways for the better.

I am proud to say that President Obama has repeated his determination to see our health care system remade in a way that will leave fewer Americans without health insurance and can try to contain spiraling health costs.  Health care reform was the centerpiece of the Obama administration’s first legislative year precisely because he has come to believe that health care is the pre-eminent budget issue facing the nation.

There is also a moral imperative to increasing coverage.  Who among us would trade our health coverage for the dollars paid out in health insurance premiums?  In my First Year Seminar call, we’d call this a variation on the “You can have your money or you can have your life” problem.

I wish the President had more clearly explained the economic rationale of his policies to the American public.  A great opportunity was lost with this speech.