How Obama is mishandling the economy.

“There are always going to be bumps on the road to recovery,” Barack Obama declared this month, on the day the Bureau of Labor Statistics announced that unemployment had climbed back to 9.1 percent. The president acknowledged that “we still face some challenges”; but, as the sheer complacency of his remarks suggest, the administration has not been prepared to meet them.

The United States is still in the throes of an economic slump that more closely resembles the Great Depression of the 1930s than it does other post-World War II recessions. Like the Great Depression, a financial crisis came on top of a slowdown in private industry, creating a backlog of consumer and business debt—which in turn held down the demand for new goods, including housing, that has customarily sparked the recovery from recessions. And, like the Great Depression, the slowdown in the United States has spread to many of our trading partners, making a recovery through export demand difficult, if not impossible.

Faced with this kind of challenge, government spending has a critical role to play in sustaining consumer demand and business investment. Otherwise, the slump will persist. If the government actually reduces deficit-spending, as the U.S. government did in 1937, or as Japan’s government did in 1997, it risks putting the recovery in reverse. Unfortunately, that is exactly what the Obama administration has agreed to do. And the latest employment figures are the result.

The administration, whether from conviction or out of a desire to avoid conflict, has consistently balked at spending enough to revive the economy. In 2009, it rejected a $1.2 trillion proposal put forward by Christina Romer, then chair of the Council of Economic Advisers, and instead opted for a more modest stimulus of $787 billion. In the summer of 2010, the White House had to be badgered by congressional Democrats into backing even a watered-down $26 billion bill for aiding the states. And, this February, Obama proposed a 2012 budget that included a 7 percent reduction in aid to state and local governments—even though hundreds of thousands of state and local government jobs have been lost over the past few years.

Then, in April, the White House agreed to $78.5 billion in cuts from the prior 2011 budget request. The White House didn’t assent to the cuts under protest. Instead, Obama boasted that they were “the largest annual spending cut in our history.” Currently, the White House has warned Senate Democrats not to draw “lines in the sand” in their talks with recalcitrant Republicans who insist on more spending cuts as a condition of their support for raising the debt limit.

The administration’s failure to meet the economic challenge will have profound consequences. Among the unemployed, 45 percent have been out of work for more than six months. (By comparison, at the peak of the last downturn in 2003, 22 percent were unemployed for more than six months.) Long-term unemployment makes workers less employable in the future. It also contributes to the ranks of the politically alienated. This slump has already fueled a far-right movement that promotes a deep distrust of government and a neo-populist resentment of underclasses, immigrants, and elites. If unemployment continues to hover at 9 or 10 percent, it is very likely that much of the country will turn rightward. And this could happen even if Obama, facing a weak opponent, is reelected.

What should Obama do? The pundits and pollsters advise him that the politically wise move is to accept at face value public concerns about the debt and deficit. But someone needs to tell the administration that no election in the last century has been decided on the basis of public opposition to deficits and debt. Candidates who have promised fiscal restraint—such as Walter Mondale in 1984 or Al Gore in 2000—have lost to candidates who promised to do everything they could to create jobs. And no recent president has been reelected who cannot claim to have brought unemployment down.

Those latest unemployment figures could be a welcome opportunity for the administration to change course: to declare finally that the path of fiscal retrenchment has not worked and to promote policies that will spur consumer demand and business investment. For starters, the administration could propose aid to hard-pressed states and towns, as well as a payroll tax holiday.

It’s not too late to do this. Franklin Roosevelt changed course abruptly in April 1938 when it became clear that his strategy of fiscal restraint wasn’t working; Harry Truman did so in June 1947 after recognizing that it was fruitless to compromise with a conservative Republican Congress. Obama should now take the same approach. And, if the Republicans, led by John Boehner and Mitch McConnell, resist any new effort to create jobs? Then Obama and the Democrats can blame them for driving the country not merely over a bump in the road, but into a ditch. 

This article originally ran in the June 30, 2011, issue of the magazine.