The upcoming midterm elections are looming large over the Obama administration. In just two months’ time, voters’ discontent will reshape the Congress and alter the power structure in Washington for at least the next two years.
Many voters are very unhappy with how things are shaping up. Especially the economy is on everybody’s mind. 9.6% is the official unemployment rate but as many as about one in five Americans barely make ends meet, because they are either unemployed, underemployed, no longer counted as such because they gave up searching, or just barely eke out a living on food stamps (it’s too much of a handout to die on but too little to truly call it a hand up).
The latter is of real concern, because these 40 million Americans are merely kept from starving with food stamps and the longer they have to rely on government assistance (and thus burden everyone else) the less likely they are to be re-integrated into the job market. Ever. Without expensive re-training measures (again, to be paid by the government), many of the long-term unemployed aren’t likely to find a paying job anytime soon.
The Obama administration had a terrific start in the 1st quarter 2010 and they apparently shared the widespread anticipation of the repeat of the turnaround of the 90s. Obama’s advisors seemed to believe they had already fixed the economy for good. It’s was the “Mission-Accomplished” moment of the Obama Administration. Growth was reported at about 5.6% so everything seemed to be just shaping up perfectly. Then, after the “success” of the health care reform (a.k.a. the “Obama Care”) and the Financial Regulation Bill (“FinReg” for short, also known as the Frank-Dodd Act) you could almost hear Mr. Incredible asking: “We are Superheros, what can happen?” What can go wrong now? Well, the recovery wasn’t sustainable because after the Health Care Reform passed, businesses stopped hiring. For business owners it was more of a “Health Scare Reform” than a Health Care Reform. Additional thick layers of bureaucracy may not be felt by large corporations but they are certainly an overkill for small businesses all across America.
Now that the Obama Approval Index tanked (43% strongly disapprove and 55% of total disapprovement), the White House is mulling over a temporary payroll-tax holiday and a permanent extension of the now-expired research-and-development tax credit. The latter one rewards companies which conduct research into new technologies within the United States.
Without a convincing economic strategy, Democrats will have a hard time to blunt the impact of Republican gains in the House and the Senate. The losses will add up badly come November. While there is a consensus that Republicans will gain heavily in the House and in the Senate, it won’t just get bad, but it will most likely get almost as bad as it can get.
And if the economic malaise were not enough to shake up things in Washington, there also are voters disgruntled by the current administration’s response to the Deepwater Horizon oil spill and, at the same time, others dismayed by the drilling moratorium.
The Doomsday scenario for the Democrats would be a Congress totally controlled by Republicans. Too far fetched? It certainly has happened before. And you know what that means for economic policy.
The hallmark of the new Congress could be more tax cuts, more spending cuts plus another fight over privatizing Social Security and Medicare. In the short term, fanatical austerity begets deflation. In the long run, inflation will rear its ugly head.