Analysis: Obama, Bernanke out of ammo to boost jobs, growth

WASHINGTON/NEW YORK Wed Aug 3, 2011 5:07pm EDT

President Barack Obama meets with Chairman of the Federal Reserve Ben Bernanke in the Oval Office of the White House in Washington, June 29, 2010. REUTERS/Larry Downing

President Barack Obama meets with Chairman of the Federal Reserve Ben Bernanke in the Oval Office of the White House in Washington, June 29, 2010.

Credit: Reuters/Larry Downing

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WASHINGTON/NEW YORK (Reuters) - The United States has a jobs problem and there's not a lot President Barack Obama or Federal Reserve Chairman Ben Bernanke can do about it.

In the face of rising risks of a recession that could imperil his re-election chances next year, Democrat Obama wants Congress to extend a payroll tax cut and emergency unemployment benefits that are due to expire in December.

But the Republican-controlled House of Representatives is emboldened by budget concessions it made Obama swallow to lift the country's debt limit this week and he has little political leverage to win significant fresh spending to aid growth.

"Obama does not have much presidential persuasion left. He is running out of capital," said James Thurber, of American University's Center for Congressional and Presidential Studies.

Obama's political opponents have been openly scornful of the impact of two previous stimulus packages, which were accompanied by extraordinary measures by the Federal Reserve to kick-start the U.S. economy.

"It seems we've thrown everything at it. We've had QE1 and QE2, Stimulus 1 and Stimulus 2, and the unemployment rate is still 9.2 percent," said John Makin, an economist at the American Enterprise Institute in Washington. "Maybe there are just not many options here at this point," he said.

World stock markets shuddered after disappointing U.S. growth and manufacturing numbers and investors rushed to buy long-dated U.S. Treasury bonds in a move that suggests deep concerns about the economic outlook.

Data on Friday is expected to confirm the U.S. unemployment rate remained stuck at 9.2 percent in July.

Lawrence Summers, a top Obama adviser until last year, wrote in a Reuters column on Tuesday the odds of another U.S. recession were 1 in 3. Goldman Sachs has said a slight tick up in the unemployment rate could provide a strong recession signal.


Obama signed a hard-won compromise on Tuesday to raise the $14.3 trillion U.S. debt limit in return for measures that will reduce deficits by at least $2.1 trillion over 10 years.

Joel Prakken of the forecasting firm Macroeconomic Advisers estimates an extension of the payroll tax cut could add about 0.25 percentage points to U.S. growth next year.

Republicans fought hard to cut spending but are open to tax cuts, and the White House expects bipartisan support when Obama advances the idea in the coming months.

But analysts are skeptical it will make much difference for an economy that is having trouble gaining traction.

"A major option is extending the payroll tax cut. We did that in December, and the economy grew at a 0.6 percent annual rate over the first half of the year," said Makin.

But the economic benefit of extending the payroll tax cut will be curbed by the government spending cuts agreed to Obama, and a weak economy will make hitting deficit-reduction targets that much more difficult.

JPMorgan's Michael Feroli estimates fiscal policy will subtract about 1-3/4 percentage points from growth next year as spending cuts kick in, if the earlier payroll tax cut and unemployment insurance extensions expire on schedule.

"Given that GDP growth has been 1.6 percent over the past four quarters when fiscal policy has been much less of a drag, this doesn't bode well for next year," he said.

JPMorgan has cut its first half 2012 growth forecast to 2 percent from 2.5 pct due to fiscal drag.

Bernanke also seems to have few options at his disposal.

The Fed is not expected to announce an extension of its so-called quantitative easing, or QE, measures to stimulate economic activity at a policy meeting on Tuesday, despite the sense of gloom descending on the economy.

If push comes to shove, the Fed would likely look to cement its promise of keeping in place a loose monetary policy for a long period. It might even consider shifting the composition of its Treasury note holdings toward longer maturities, an option Bernanke has raised as a way to give the economy some relief.

"Someone should do something. Given that the Congress has declared itself unwilling to provide support for the economy, the Fed will feel pressure to try to do what it can," said Barry Eichengreen, an economics professor at the University of California, Berkeley.


However, the Fed's options hardly add up to a game-changing play to dramatically improve the U.S. outlook.

"Everyone is really looking to the Fed to support the economy, and I think (Bernanke) would realize that you could only do so much with monetary policy," said Mike Knebel at Portland, Oregon-based Ferguson Wellman Capital Management.

The Fed's scope for more easing of monetary policy has been narrowed by a rise in core inflation, which bottomed at 0.9 percent in December but has since hit 1.3 percent.

As Obama signed the debt deal, which averted a devastating default and reduced the risk to the country's AAA credit rating, he promised more ideas to boost hiring soon.

The White House declined to say what he had in mind or when he would lay out suggestions. But Treasury Secretary Timothy Geithner said in an opinion piece in the Washington Post that Congress could make space to fund a payroll tax cut extension by "locking in" long-term budget savings.

With lawmakers out of town for a summer recess, no major initiative is likely before September, although Obama does plan a Midwestern bus tour from August 15 to August 17 to talk up jobs.

When it comes, the odds favor small steps that allow Obama to show he is taking action, without disturbing investors.

"There is a good case to be made for additional stimulus, but given our fiscal situation it has to be targeted to create more jobs," said Karen Dynan, a scholar at the Brookings Institution in Washington.

(Additional reporting by Ann Saphir in Chicago and Tim Reid in Washington; Writing by Alister Bull; editing by Vicki Allen and Christopher Wilson)

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Comments (172)
people who refer to the tea party as “tea baggers” are the real problem with america.
please, nukerdoggie, explain how the tea party has locked the economy down?
by getting 200billion in imaginary cuts in spending?
by not raising taxes on a select few?

really, how would either of those change the economy?

you really gotta wonder if these infantile attacks on fiscal responsibility will go away once elementary school starts again.

Aug 03, 2011 4:01pm EDT  --  Report as abuse
Larryld wrote:
Look. The way i see it, the Stimuli that Bush and Obama passed and QE1 and QE2 have not worked. If they had, trillion plus dollars and super easy monetary policy would have lifted us out of the recession. This is something different. There is no reason to continue adding to these policies. we need to try something different. But i have the feeling it is going to be a very long time till we success again.

Aug 03, 2011 4:05pm EDT  --  Report as abuse
Chazz wrote:
I think we should have kept on raising the debt limit so we could keep funding the programs that mean so very much to all of us. Everyone keeps pointing out how many times we’ve doing it in the past why did we have to stop NOW???

I mean come’on….no one has actually seen a trillion dollars let alone 14 trillion and who’s gonna call us out to make us pay? We’re the U. S. of A.

NOW is not the time to get things fixed. That should happen sometime in the future when it won’t have any effect on ME any more. THAT’S the sensible solution. I mean, I’m trying to figure out what’s in it for me….

Aug 03, 2011 4:05pm EDT  --  Report as abuse
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