The Post Election/Post Printing Honeymoon

Posted by Michael A. Kamperman on November 4, 2010

Honeymoon’s are meant to be fun, so enjoy this one.  It won’t last and reality will bite in a few months.  The Fed made the right call to print $600 billion more between now and next summer.  Importantly, they left the door wide open to keep right on printing if circumstances warrant.  Additionally, the President and the Republicans are playing nice in the same sand box for the time being with talk of extending the Bush tax cuts for all.  But euphoria will soon give way to reality.  Despite all the talk about giving everyone a tax cut, the truth is everyone’s tax rates will stay the same as they have been since 2003.  And, the Making Work Pay payroll tax cuts under the stimulus plan will end in 2010 unless extended.  There is an extension in the President’s proposed 2011 budget, but the House of Representatives failed to pass a budget and we are currently working under a continuing resolution.  If the budget doesn’t clear the Lame Duck session, then the President will be negotiating the 2011 budget with the Republicans despite having huge majorities in both houses of Congress prior to the election.  The Republicans want to roll non-defense discretionary spending back to 2008 levels.  The true extent of the state and municipal budget holes will be on full display in early 2011, no longer masked by the stimulus aid to the states.  The reality of austerity is about to bite hard.

Take Texas for example.  The state is now projected to have a $21 billion two year budget deficit when the legislature meets in January.  By law they must pass a balanced budget.  Governor Rick Perry has Presidential aspirations and ran for re-election vowing not to raise taxes, so savage spending cuts are about to hit the state.  Not exactly good for job creation.  And you can forget about the mess in Illinois, California, Nevada, Arizona, Florida, etc., etc., etc. 

Looking forward the key will be how the debate unfolds as the economy turns down.  The unemployment report is already reflecting the heavy job losses in state and local governments.  New homes sales set a multi-decade quarterly low in the third quarter and there is no reason to expect sales to turn-around soon with the foreclosure/mortgage mess.  Will cutting spending be seen as a solution a year from now, or a tragic mistake?  Here perception is what’s important, not reality.  Because if reality were important the country wouldn’t be flirting with austerity in the first place.  Hoover saw Republicans routed in mid-term elections in the early 1930′s taking severe heat for the depression.  But by 1938 FDR saw Democrats routed taking blame for attemtpting to balance the budget too soon thereby sending the economy into another tail-spin.  Most of the country is not with the Republicans, nor the Democrats, nor the Tea Party, nor Progressives.  The election was about the most recent perceptions.  What the country is with is turning around the economy and restoring jobs.  They want to restore opportunities for the young and dignity for the retired.  But most people simply don’t know how to get from here to there and don’t know whom to believe.  Becasue the Democrats failed to deliver the populace assumes the Republican message of less spending must be right.  Polls show over 60% believe cutting government spending increases private sector jobs.  The economy will turn lower despite quantitative easing, because the boost Bernanke is providing is not large enough to offset the drag coming from austerity.  How this is spun will go a long way in determining whether or not the country can get fiscal policy right to end the depression in 2012, or whether we will have to wait at least until 2016.  The President has shown he is not up to the task of defending Keynesean stimulus, so others will have to step forward before the 2012 die is cast.