Obama's Next Problem: Economic Woes

May 6, 2011 -- Okay, he's dead. What now? With Osama bin Laden gone, a phalanx of other foes confront the president, and many of the mightiest are economic: Gas is $4 a gallon and rising; the price of groceries is going up; wages remain stagnant; the deficit continues to balloon; and trading in derivatives—to the tune of $4 trillion a day—remains unregulated. The Federal Reserve, meanwhile, continues to paper the hillsides with $100 bills, reducing the value of the dollar.

What ought the president to tackle first, and how should he go about it? We asked economists and other experts.

Jobs, Jobs, Jobs.

The Labor Department reported Friday that non-farm employers added 244,000 jobs in April, the third straight month of strong gains. But the unemployment rate rose to 9 perent as more people entered the workforce. The bottom line is that the economy still isn't creating enough jobs, a major challenge -- and task No. 1 for the administration.

"I think first, it's jobs," says David I. Levine, chairman of the Economic Analysis and Policy Group at U.C. Berkeley's Haas School of Business. "More than a tenth of our potential work force remains unemployed. There's been a spike in oil, it's true; but we don't have signs of serious inflation." What should Obama do? "The textbooks all say expand monetary policy—and that's what he should do. What you don't want to do is cut spending or raise taxes or both. That will only make the recession worse."

Referring to tight-fisted, budget-cutting governors such as Chris Christy in New Jersey and Scott Walker in Wisconsin, Levine says: "Right now, you've got 50 little Herbert Hoovers. For Obama to make himself the 51st Hoover would be really a mistake. You'd turn what's already the worst postwar recession into something worse than it has to be. The president ought to be helping states minimize teacher layoffs and not raise taxes, at least for this year."

Long-Term Deficit Reduction.

"This is the really huge one," says Diane Lim Rogers, chief economist for The Concord Coalition, a deficit watchdog group. "It's all-encompassing. The president needs to deal with it, and if he can take leadership the rest will fall into place: It would strengthen the dollar, keep interest rates low. It would send a signal to the people who buy our treasuries that we're serious about getting our financial house in order."

How we chose to get there, she says, matters profoundly. "We can do it in a smart or stupid way." While deficit reduction should be the nation's long-term goal, it's ill-advised for the short-term. The economy, she contends, is still too fragile to permit big spending cuts or big tax increases. "It's not strong enough, and we're not close enough to full employment, to think about balancing the budget and running a zero deficit."

The president, she adds, should focus his efforts on promoting any program that increases the demand for goods and services. That's the only form of stimulus she endorses. Further extension of the Bush tax cuts, for example, would be a mistake: "When you give cuts to the rich, most of the money winds up being saved rather than spent. That's not consistent with efforts to stimulate demand. Frankly, even the middle-class tax cuts aren't the most productive way. Let them expire and don't renew them."

The president ought to follow the advice of his own appointed deficit reduction committee: "Not just jack up taxes on the rich, but level the playing field, when it comes to taxes: broaden the tax base; plug the holes in the system." The problem, however, is that, "The Republicans have pledged themselves to no new taxes--not any, ever," and the Democrats have balked at ever increasing taxes on the middle class. Both are necessary. "The president has to take this moment, when he's getting more respect for his national security accomplishments, to make the case for bipartisan reform."

Gas Prices.

According to information supplied by AAA, the gas price in five states stands at a record high; in 22 states it's within $0.15 of the record. Oil industry expert Andrew Lipow, president of Lipow Oil Associates in Houston, thinks prices nationally will stay at $4 a gallon over the next couple of weeks, then slowly work their way down. Barring further turmoil in producing nations, he predicts that, "by the end of the year it might come down 25 cents a gallon -- but you really would need today's turmoil to resolve itself."

Short term, says Lipow, there is little President Obama can do to reign in gas prices. "The issue he's facing, as well as the consumer, is that world demand for petroleum products is growing at a time when it is becoming more expensive to find additional supplies. It's why you see oil companies exploring in the deep waters off the Gulf of Mexico, Brazil and West Africa."

The president, he says, should do more to encourage drilling in the U.S. "But even if we increased domestic oil production to the peak level reached in 1970, we still would need to import about 33 percent of our total crude oil." How about promoting use of electric cars? That would help some, says Lipow. But from what source would we get the additional electricity? "If you think there's enough electrical capacity now, ask yourself why cities have brown outs on hot days."

Regulation of Derivatives.

Treasury Secretary Tim Geithner wants to exempt from regulatory scrutiny some $4 trillion a day's worth of trading in foreign exchange derivatives. Should the president allow him to do that? Absolutely not, says Levine. Trading in these derivatives, which he calls "a mighty big market," is, he says, "only a small part of a more general problem--an example of the way we have our incentives wrong."

Firms trading derivatives take big risks, and, "if their luck is good, their executives and salespeople pocket big profits." But if their information or their luck is bad, and they lose, they're considered too big to fail and the government bails them out. "They can walk away and never fear collapse." What's needed, he says, is twofold: The notion of "too big to fail" needs to be retired. And there needs to be greater transparency, plainer acknowledgement of risk, and more accurate pricing. All of these would be the fruit of closer regulation. The president, says Levine, should be promoting regulation, not allowing Treasury to turn a blind eye to Wall Street's shenanigans.

The Debt Ceiling.

No question here, says Levine: The U.S. debt ceiling should be allowed to rise. "We have a constitutional requirement to pay our debts. " Journalists do a disservice to the public, he contends, when they present the alternative—not raising the ceiling—as a credible option, even though some politicians argue the case for not allowing it to rise. "There are people in the world," shrugs Levine, "advocating many things. But it's political theatre, not serious economic debate."