Take a deep breath. The industrialised world, America included, seems stuck in one of those horror movies, where the monster, thought to be slain, morphs into something even more scary. The fear is that a double-dip, or worse, is now upon us. Those who might help us escape are now being held back by the anti-business policies of President Barack Obama.
Mr Obama’s administration predicted a V-shaped recovery, based on the historical experience of the 1970s and 1980s. Not this time. The $4,000bn of fiscal and monetary stimulus produced less than $1,000bn in growth. Gross domestic product is now running at about 1.8 per cent this year but two-thirds of this will come from growth in business inventories, not final sales.
Consumers are clearly not willing to generate these new sales. The University of Michigan’s confidence numbers have fallen to levels 20 per cent or more below earlier recessions. The numbers now match the drops seen after the Iran hostage crisis, Iraq’s invasion of Kuwait and the collapse of Lehman Brothers. No wonder that in the 14 quarters since the beginning of 2008, growth in consumption adjusted for inflation averaged just 0.5 per cent, the longest period of weakness since the end of the second world war.
This weak record on growth is proving disastrous for ordinary Americans. Per capita income remains below its 2006 level, while wage-based incomes are declining. It is little surprise, then, that adjusting for inflation, retail sales last month contracted at nearly a 5 per cent annual pace, while the proportion of Americans living in poverty soared. This is a modern day depression, only this time soup lines have been replaced by unemployment cheques.
Facing these challenges, businesses are trying to enhance productivity, not create jobs. Polls show that business leaders are growing increasingly pessimistic. In the past six months a third of companies have delayed or cancelled plans for capital spending.
Of course, none of this was helped by a government that lost credibility by predicting that its recovery programmes would bring the jobless rate down and growth up. This was the beginning of the yawning credibility gap between the Obama’s administration and business. The gap is being aggravated by Mr Obama’s recent sharp turn to the left.
This resort to divisive populism – laying the blame on “fat cats” and pillorying the president’s favourite villains – “millionaires and billionaires” – is exactly the wrong approach. It seeds the suspicion that the administration is more interested in campaigning and undermines the confidence that business needs if it is to invest in the face of new regulations, healthcare costs and an increased bureaucracy. Businesses sense that the administration no longer understands how this perceived hostility saps the animal spirits required for taking risks on expansions and start-ups.
When governments are shown to be powerless or incompetent, ordinary people suddenly realise that their elected officials have neither the understanding, the political power and sometimes not even the will to do what is necessary. In part this is because they are scared of voter backlash. At that point despair and alienation takes control of public opinion and they concentrate on preserving what little of their long-term prospects and savings they can.
This dismal point we have reached today. Confidence in the US government has fallen so far that a recent Gallup poll found only 26 per cent approving the president’s management of the economy. And there is a sense that there are not too many effective tools left in the toolbox of the government.
Many Americans are puzzled as to why hiring has remained so weak during what seemed to be a recovery. Now there is a national sense of anxiety over an economy that seems to be on the verge of another economic contraction and may send the unemployment rate to levels not seen since the 1930’s. What is to be done?
The most promising policy option and one that enjoys bipartisan support is to broaden the tax base by eliminating the special tax earmarks and provisions built in over time, and using the funds raised to lower tax rates for both businesses and individuals. This offers the best opportunity to rekindle economic confidence and growth as well as opening businesses to increased hiring without jeopardizing any further our fiscal imbalances.
Only a programme this dramatic would transform the current loss of confidence that has provoked conservative hiring practices by the American business community, who had not imagined a recession this severe was a realistic possibility.
This is perhaps the only programme the Republicans will buy into, for their focus is on reducing the national deficit. They are absolutely opposed to tax increases and without them the Democrats will never agree to any cost reductions in programmes. In other words, this is a formula for political gridlock.
Of course, it is the weak economy, very high unemployment rate and very low confidence in the administration that represent the most important political opportunity for the Republicans to drive the Democrats out of office next year.
The era of frugality is back. Today it is not a stock market crash or a crash in residential real estate but a crash in confidence that will constrain the effectiveness of public policy and have long-lasting impacts on the consumer and the economy. The historic American optimism has dramatically eroded. The great American dream is no longer a house in the suburbs. It is a secure job, but almost any job will do.
The writer is editor-in-chief of US News & World Report and chairman, chief executive and co-founder of Boston Properties