Wednesday, September 09, 2009

Obama faces backlash from middle classes left behind

Business Times - 10 Sep 2009

Obama faces backlash from middle classes left behind


AS Americans were preparing to start their long Labor Day weekend last Friday, they might have been cheered by new data showing that job losses had slowed down in August. But slowing job losses is not recovery: unemployment surged higher than expected in August to 9.7 per cent, the worst in 26 years.

Overall, there are 14.9 million Americans out of work. The US economy has lost a net total of nearly seven million jobs since the recession began in late 2007, with some of those losses coming in August, as employers shed 216,000 jobs. So the only good news was that America experienced the smallest total loss since August last year.

Clearly, notwithstanding the less bearish mood in Wall Street, no one will be popping the champagne corks in Washington this week, as President Barack Obama and lawmakers return after a summer recess that was dominated by the nasty political fight over the plan to reform the health care system and by reports from around the country about Americans experiencing job losses and home foreclosures.

Moreover, economists stress that if we look at the fraction of Americans who are in part-time employment because their employers cut their hours, or those who have simply given up work because they are discouraged about any job opportunities, and we add them to the officially unemployed, the rate of underemployment is 16.8 per cent.

Indeed, there is a growing sense in the US that while the economic policies adopted by Washington - and in particular, by the central bank - may have averted a financial meltdown that could have devastated the American and global economies, it is Wall Street - and not Main Street - that has been the main beneficiary of the loosening monetary policies aka printing money.

There is also a growing belief that the impact of the expansive fiscal policies of the Obama administration may be actually creating an added economic burden on the American people, in the form of rising budget deficits.

In fact, while many pundits are suggesting that the global economic crisis is coming to an end, in reality what happened was that Ben Bernanke and the Fed have succeeded in preventing an immediate economic collapse. They have bought more time for the political leaders to promote long-term solutions to the structural problems facing the American economy.

These could get even worse in the coming years, especially if the current account deficit with China continues to grow as America becomes more dependent on the infusion of Chinese money to finance its deficit, and the Chinese become reluctant to carry on doing that. With the growing uncertainty about the future of the American economy, it is not surprising that the political and economic elites (including professional economists) in the US remain insecure and confused.

In circumstances like these, we can expect more protectionist pressures in Washington. Indeed, President Obama is facing that kind of pressure now in the form of a Sept 17 deadline to determine whether to go along with the International Trade Commission's (ITC) recommendation to impose 55 per cent tariff on 'low end' Chinese tyres, a move that is backed by powerful trade unions which had provided Mr Obama with enormous political and financial support during the 2008 presidential race.

The US has the authority to impose these tariffs under China's World Trade Organization accession agreement. Mr Obama's predecessor decided to shoot down similar ITC's recommendations to punish China, and observers in Washington are anxious to find out how Mr Obama will play this out.

He needs to avoid antagonising the Chinese on the eve of the Sept 20 G-20 meeting and before his November visit to China, while also trying to appease the unions.

In a way, as this case demonstrates, Mr Obama and the Democrats - not unlike other liberal and social democratic leaders and parties in the West - will be confronting a difficult dilemma in the coming months and years.

On the one hand, the pressure to sustain economic growth is forcing them to maintain and even strengthen the foundations of the free market system, including the need to stay on good terms with Wall Street and to refrain from antagonising investors by pursuing more government spending and regulations or by restricting free trade and investment.

On the other hand, Mr Obama and other left-centre politicians are facing the growing resentment of members of the middle class who are feeling being left behind as the elites reap the benefits of a jobless economic recovery. The middle classes could punish Mr Obama on election day.

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