The struggle over fiscal policy is likely to preoccupy official Washington for most of the 112th Congress. Although this fight is necessary and important, it should not divert our attention from fairly disturbing developments in the economy, where some key indicators are flashing warning signs. Consider the following.
Consumer prices rose 0.5 percent in February, and so-called “core” inflation (excluding food and energy) was up 0.2 percent. Although official statistics treat food and energy as non-core, ordinary Americans regard them as central. After all, these are the items that households purchase most frequently, and they shape public perceptions about changes in price levels. That’s the biggest reason why the Bloomberg Consumer Comfort Index dropped last week to its lowest level since last August.
Changes in food and energy prices are also influencing the public’s economic priorities. As recently as last December, Pew reports, 47 percent of Americans cited the job situation as their top economic concern, compared to only 15 percent who mentioned rising prices. By March, those most worried about jobs had fallen by 13 points to 34 percent, while those most concerned about inflation had nearly doubled, to 28 percent. And as more foreclosed homes are being thrown on the market, housing prices have resumed their decline, and housing starts fell sharply in February to their second-lowest level since 1946. Even more significant, permits for new construction in February fell 8.2 percent from January and were 20.5 percent below the already depressed level of a year ago.
Are these developments likely to be transitory? I think not, for two reasons. First, we are now competing for resources in a global market. As developing countries continue to grow strongly, their demand for food and fuel will only strengthen. Upward pressure on prices in these sectors can persist even if growth in the United States remains anemic.
Second, as I have argued repeatedly over the past year, the era of rapid increases in consumer spending has ended. Wages continue to stagnate, but households can no longer compensate by withdrawing equity from their homes. Understandably, they are trying to reduce their debt burdens, which peaked at unsustainable 136 percent of disposable income right before the crash. (Mortimer Zuckerman’s recent article usefully summarizes the evidence on this point.)
There are only two alternatives to growth led by domestic demand—rising exports and increased public and private investment. The administration has talked a good game about doubling exports over five years, but up to now it has been unwilling to bite the political bullet and send the long-stalled trio of trade agreements to the Congress for ratification. And as Bruce Stokes pointed out in a recent article, “U.S. exports have only doubled once in any five year period in modern history and that was when the dollar halved in value against both the Japanese yen and the German deutsche mark in the late 1970s.” Today the list of currencies against which the dollar must fall would have to include China, but the administration has been unwilling to force the issue.
The administration has also talked a good game about public investment but has yet to make a serious push for the promising vehicle it claims to support, a national infrastructure bank. Just last week, a bipartisan group of senators including John Kerry, Mark Warner, and Kay Bailey Hutchison introduced the BUILD Act to create a financing mechanism that could leverage up to $600 billion in new private investments. The Chamber of Commerce and the AFL-CIO both support the proposal. Maybe the administration favors it as well, but I have yet to find any public evidence to that effect.
The White House has clearly shifted into full reelection mode, and it has decided to position the president above the fray rather than push for more legislative action that could boost the economy. (Even legislation, as in the case of the free-trade agreements and the infrastructure bank, that could draw bipartisan support.) But by not pushing those policies—and letting the Congressional budget battle drag out in endless gridlock—Obama may be undermining the very economy that will determine his chances for reelection. What is he waiting for?
William Galston is a contributing editor at The New Republic and a current senior fellow at the Brookings Institution.