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Poor Economic Performance the Major Obstacle to Re-Election for Obama

Mitt Romney is announcing for President at this hour, and like all of his public statements over the past several weeks, his speech is entirely focused on the economy and unemployment. This is his entire strategy for 2012. Check out this excerpt from his announcement speech and see if you can determine who said it if I made it a blind item:

I visited with a family, Kathy and Dave Tyler, who live in a suburb north of Las Vegas, Nevada. You probably know families just like them. They’re in their early forties, a couple who had worked hard, sacrificed to buy a home in a good neighborhood, the sort of place they wanted their daughter Allie to grow up. But now that neighborhood is being crushed by this Obama economy. First their neighbors started losing their jobs…and then their homes. And all around them now are abandoned houses… and abandoned dreams.

When the Tyler’s wake up in the morning and get Allie off to school and then go to work and do everything they can to make it to the end of the month and hold their lives together, it doesn’t matter if they are Republican or Democrat, Independent or…Libertarian. They’re just Americans. An American family.

And across the richest, greatest country on earth, there are millions of American families like the Tyler’s. Folks who grew up believing that if they played by the rules, worked hard, that they would have the chance to build a good life, with steady work and always that possibility to work a little harder and get ahead.

Bernie Sanders? George Miller? Elijah Cummings? Al Sharpton? No, Mitt Romney, who’s apparently running on the themes in John Edwards’ Two Americas speech.

Now there’s little question that Romney’s preferred policies for job growth are ill-suited, particularly to this economic moment. In fact, his policies didn’t work in Massachusetts even during a relative expansion in GDP growth nationally. But can anyone doubt the effectiveness of this strategy? Barack Obama came into office in the midst of a financial crisis and economic collapse. His stimulus package too small, his foreclosure mitigation policies ineffective if not actively harmful. Unemployment has lagged far behind GDP growth and now appears stuck at an unacceptable high level. An economic policy that has worked for banks and corporate CEOs has simply not worked for the average American. That couple in Nevada deserves to be upset and disappointed.

As Binyamin Applebaum notes today, the high unemployment rate is the single greatest impediment to the President’s re-election.

No American president since Franklin Delano Roosevelt has won a second term in office when the unemployment rate on Election Day topped 7.2 percent.

Seventeen months before the next election, it is increasingly clear that President Obama must defy that trend to keep his job.

Roughly 9 percent of Americans who want to go to work cannot find an employer. Companies are firing fewer people, but hiring remains anemic. And the vast majority of economic forecasters, including the president’s own advisers, predict only modest progress by November 2012.

Even if the President wanted to increase investment to spur job growth, Republicans in control of the House wouldn’t give it to him. But there’s no indication that the Administration wants to have that fight. They got a tax-based stimulus to accompany the end of the federal stimulus, and they were satisfied with that. They’ve been saying that the recovery is around the corner for close to 18 months. They affirmatively pivoted to the deficit from jobs at that time. They did not install new Federal Reserve governors who would push the organization toward more stimulative policies. In fact, the Fed is about to wrap up its quantitative easing program, and appears more concerned with inflation than employment. And of course, the conversation on fiscal policy has turned from whether to cut, to how much.

The New York Fed had a very good piece (!) about the 1937 trap that we appear to be falling into:

In 1937, on the eve of a major policy mistake, U.S. economic conditions were surprisingly similar to those in the nation today. Consider, for example, the following summary of economic conditions: (1) Signs indicate that the recession is finally over. (2) Short-term interest rates have been close to zero for years but are now expected to rise. (3) Some are concerned about excessive inflation. (4) Inflation concerns are partly driven by a large expansion in the monetary base in recent years and by banks’ massive holding of excess reserves. (5) Furthermore, some are worried that the recent rally in commodity prices threatens to ignite an inflation spiral.

While this summary arguably describes current trends, it is taken from an account of conditions in 1937 that appears in “The Mistake of 1937: A General Equilibrium Analysis,” an article I coauthored with Benjamin Pugsley. What we call “the Mistake of 1937” was, in broad terms, a decision by the Fed and the administration to implement a series of contractionary policies that choked off the recovery of 1933-37 and brought on the recession of 1937-38, one of the worst on record. What is particularly noteworthy is that the inflation fears that triggered the Mistake of 1937 were largely driven by a rally in commodity prices. These circumstances invite direct comparison with our own time, when a substantial recent rise in commodity prices (which now seems to be abating somewhat) stoked inflation fears and led some commentators to call for an increase in the federal funds rate.

This specifically covers monetary policy, but you can easily apply it to fiscal policy. And the difference is this. By 1937, Roosevelt had already improved the economy enough to get re-elected in a landslide. And 1937 was the first year after a general election. Roosevelt reversed the mistake in time for 1940. In 2011, it’s the year before the general election. Barack Obama does not have the goodwill of a re-election behind him. Republicans are showing their inability to govern and their desire to pursue deeply unpopular policies. But Democrats cannot rely on that. For better or worse, Obama will have been President for four years by Election Day. He can try to “relitigate 2008” but if people’s tangible reality is worse, he will have a hard time succeeding. This is true even if his opponent’s ideas are unpopular.

So Mitt Romney has precisely the right strategy for winning the election. I don’t know if he’ll get out of his own primaries, but the only way to beat Obama in 2012 is to have him collapse under the weight of a bad economy.

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David Dayen

David Dayen