Sunday, March 20, 2011

Catching Up with the President's Numbers, Budget Malaise Continues, The Stimulus Winds Down, A US War in Libya?

The President's Numbers and the 2012 Race
As I've often said, the single most determining factor in a Presidential re-election is the incumbent President's approval. Therefore, while it's fun to watch the slow-motion race to the Republican nomination, it's probably far more relevant to look and see how the American public is judging President Obama's term in office.

Of course, that good old American public is fickle. Famously, President George Herbert-Walker Bush had a 91% approval (that was actually just in one poll, his average was something close to 80%, but you get the point) a year before one of the worst re-election showings in history, receiving a mere 38% of the popular vote. The thing that turns these numbers on a dime is the economy, and more specifically the 1.5% income growth rule...that is that President's that have the good fortune to see 1.5% income growth in the election year are generally re-elected, while those that see less are not.

Still, you have to know where you are before you can project where you are going.

So, let's look at the last 2 months of poll data. There is some noise along the way, but here is how I would generally explain the trend:
(1) The President CLEARLY got a real bump from his end of year legislative victories, including the ratification of the START treaty, the passage of the 9/11 first responders bill and the repeal of Don't Ask, Don't Tell (a policy change still mired in the pentagon maze, but that's another story for another day.) At the beginning of January (before the range on the chart), the President was average around -4%. By the end of January he was at around +7%, an 11% upswing - huge in the world of electoral politics.

(2) The bounce didn't last at those levels. As is often the case with big bumps like that, memories fade as time goes by. By the end of February, the President's averages were down to about +2.5%, still 6.5% better than where he was at the end of the year, but a 4.5% downgrade from his end of January numbers.

(3) He settled in at this higher level so far in March. So while the President has not maintained all of his bounce, he has certainly maintained at a higher level than he ended last year. This, in my opinion, is in large measure due to improving economic conditions.

Looking at his monthly numbers over his Presidency, we can February was the President's best numbers month since the first year of his Presidency, when there was a halo effect over his historic victory. The last 3 months have marked 3 months in a row in the black, following 6 straight months in the red.

So, what does all this mean for 2012? The President is back at an approval level where he could win, but it is far from a slam dunk. At number of +2.5%, he's right in the range where we could be in for a very competitive 2012 race. Of course, this could all change in either direction in a hurry.

Is This the Last CR?
It's amazing that the new Congress has been in session for nearly 3 months and with the exception of a few symbolic votes (the House voting to repeal Obamacare, for instance) and some non-controversial business, basically all it has done is to pass short-term extensions to the budget - 2 of them so far, but the 5th and 6th ones of a budget year that began October 1st and is almost half over. The latest, which extends government funding for 3 weeks, with $6B in domestic discretionary cuts, passed fairly easily with bi-partisan support, with opposition mostly coming from liberals who felt it went too far with the cuts and conservatives who felt it didn't go far enough with the cuts.

Both sides are saying this is the last one and the bi-partisan "gang of 6" is working towards a compromise, but it is very unclear still how exactly what the compromise they are driving towards will look like. Basically, with the 2 continuing resolutions passed so far, $10B of the $64B that the GOP sought to cut from the discretionary budget has already been passed. So the debate comes down to how much of the remaining $54B will be agreed to. I imagine that the final figure will be somewhere in the $30B range of additional cuts, but again, we are dealing with chump change, relative to the other aspects of the budget.

I continue to hold out hope that congress and the President will dispose of the domestic discretionary question relatively soon and have a real adult debate about entitlement spending, taxes and defense spending, the three levers that really matter when it comes to deficit reduction.

The Winding Down of the American Recovery and Reinvestment Act
Remember the stimulus? That $787B package of tax cuts, infrastructure investments and short-term entitlement enhancements that was more or less the first order of business when the President took office?

As I said at the time, it was really more a 3-year package of economic policy than a short-term shot in the arm to the economy. And, after over 2 years, it is reaching the end of its implementation. And while the GOP has talked tough about repealing its elements, it has more or less run according to its original plan. The latest numbers show the following dispersement of stimulus funds:

Tax Cuts: $260B out of $288B spent (90% spent)
Spending: $368B out of $499B spent (74% spent)
Overall: $628B out of $787B spent (80% spent)

The stimulus was really one of several pieces of key economic policy over the past 2+ years. Let's review all of them and their effectiveness:
(1) The Troubled Asset Relief Program
The $700B package of funding that was used to recapitalize banks, fund the transformation and bankruptcy of GM and Chrysler, bail out AIG and manage the massive losses at Fannie Mae and Freddie Mac was originally passed in the final days of the George W. Bush administration, but largely implemented during the Obama administration. Despite lots of, frankly very fair, criticism at the time, about the lack of limits on executive pay and the lack of help for the borrowers while lenders were being bailed out, the program has, in essence, been a pretty unqualified success.

The bank bailouts will turn a healthy profit and the auto bailout will likely yield only a small loss. With more substantial losses surrounding AIG and Fannie and Freddie, the total net tab for TARP is now estimated at $25B...a pittance to save our financial system.

Of course, neither TARP nor the Dodd-Frank financial reform bill that followed truly addressed the problem of banks getting too big to fail so the systematic risk still exists, but as a stabilization program, TARP worked exactly excellently.

(2) The American Recovery and Reinvestment Act
As discussed above, the stimulus dealt both a series of tax breaks and credits (think Cash for Clunkers and Energy Efficient Home Tax Credits), short-term expansions to unemployment and social welfare programs and infrastructure investments.

The success of the program is obviously the subject of a lot of debate and it is very hard to parse apart the impact of this program relative to other things happening in the macro-economy.

What I will say is that aspects of the program definitely contributed to the recovery. Cash for Clunkers provided a spike in auto sales that stabilized the auto industry and made the non-bankruptcy survival of Ford and the successful emergence from bankruptcy of GM possible. The energy efficient home tax credits have led to a boom in investments in windows, doors and insulation -- if you don't believe me, ask a contractor.

The bill was sold as preventing unemployment from exceeding 8%. It clearly did not do that. But, on balance, the country is better off with it than without it, in my opinion.

(3) The Obama Tax Cuts
Lost in all the debate over extending the Bush Tax Cuts (which I think we can now safely drop the Bush moniker from) was the fact that it's cost, over the next two years, actually exceeds the cost of the stimulus. The economic impact of extending the rate reductions passed during the Bush administration, along with the newly minted short-term reductions in Social Security taxes is yet to be determined. The deficit impact is obvious.

(4) The Federal Reserve
The role of the Federal Reserve in fiscal policy cannot be understated. In many ways, it's policy decisions have more significant impacts on the economy than any stimulus or tax package passed by our elected officials. The fed's policy over the past several years has been to maintain short-term interest rates near zero, indeed the short-term rate has been in the range of 0 to 0.25% since December of 2008.

The Federal Reserve has also embarked upon two rounds of what it has termed "Quantitative Easing". The program works pretty simply, the Federal Reserve buys US Treasuries, effectively printing money and using Treasuries as a mechanism to inject liquidity into the monetary system. The effect of these buys is to artificially suppress interest rates on treasuries and put more money into the system.

Both moves are basically designed with the same purpose...increase economic activity by making money cheap. It also has the side-effect of amping up inflation and reducing the relative value of the US Dollar.

Up to this point, overall inflation has been very tame during the recession, with the economy showing tons of available capacity in the labor market that might help to avert big inflation. But the dollar has been dropping and core commodities such as oil and grains have been spiking, yielding a concern that inflation may soon rise. The short-term impact of the Fed's actions have been positive to the economy - the long-term is a lot more questionable. I would hope the Fed will back off any further QE and consider raising rates in the not-to-distant future.

Airstrikes in Libya
Backed by French support and a UN resolution, the US is participating in Tomahawk launches and air patrols to enforce a no fly zone over Libya and offer support to rebel fighters. This action is in stark contrast to our actions in Iraq, where we went in alone and sent ground forces. This intervention is more akin to our actions in the former Yugoslavia during the 1990s, where we were able to support political and human rights interests with no American casualties by using our superior technology and air strength.

This is exactly the sort of military intervention that we should be leading - one where the free world is united and where our involvement can yield a large reward at a relatively lower cost.

Meanwhile, we are still trying to wind down Iraq and Afghanistan remains a massive cost both in financial and human terms, with no clear long term strategy in the region.

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