Is Obama losing the economic argument?

The President's stimulus measures lost out at the G20, and are now in danger at home too. Stephen Foley reports

Barack Obama was in effect stretchered off the field at the G20, having failed to persuade fellow world leaders to sign up to a further round of economic stimulus. Instead, the final communiqué was an austere affair, promising efforts to curb government spending, reduce deficits and start reducing the mountains of debt. In the World Cup of Economics, it was Austerity 4, Stimulus 1.

And in the US? While the President has been admonishing others on the international stage, he appears also in danger of losing the same arguments at home. Congress has three times failed to pass a new mini-stimulus aimed at extending benefits for the long-term unemployed and, across the country, states are slashing spending in the teeth of a vicious budgetary crisis. The fear of sky-high deficits and the costs of servicing huge national debts have breathed life into an austerity movement in a country that is already instinctively sceptical of government spending.

For the gloomiest investors it is a worrying time: government cannot afford to stimulate their economies, and they cannot afford not to.

A new bout of nerves over the trajectory of the global economy sent shares plunging across the world yesterday. In Europe, the European Central Bank is about to end a year-long €442bn (£357bn) programme of lending to the financial markets, which has provided an important prop to the continent's banking system. In China, disappointing economic data suggested that its rate of GDP growth may be on the verge of slowing. And in the US, consumer confidence tumbled sharply in June, according to a survey by the Conference Board. The reading of 52.9 compared to 62.5 in May and was about 10 points below Wall Street forecasts, raising fears that the US consumer might pull back their spending and hamper the nascent recovery.

There was also a report on house prices which reminded economists once again that the US housing market, locus of the 2007-09 credit crisis, has been propped up by a government tax credit for homebuyers that has now expired and not been extended by Congress. By lunchtime in New York, the Dow Jones Industrial Average had fallen 2.3 per cent. Earlier, the London FTSE 100 closed 3.1 per cent lower.

Ben Bernanke, chairman of the Federal Reserve, was at the White House yesterday talking economic policy with the President, and both he and Mr Obama rehearsed an expansionary script in their post-game press conference. The recovery is progressing, the President said, and there must be further efforts to stimulate the job market and reduce stubbornly high unemployment. The official employment statistics for June are out on Friday morning, and are expected to show the unemployment rate back on an upward trajectory at 9.8 per cent.

Neither Mr Bernanke nor the President yesterday mentioned the elephant clomping around the room, namely the giant national debt. The current budget deficit, at 11 per cent of GDP, eclipses that of the UK and the eurozone as a whole, although at 66 per cent of GDP, the total debt is not at the levels of the so-called PIIGS of Europe (highly indebted Portugal, Italy, Ireland, Greece and Spain). These are historically high levels, nonetheless, and breach several economic rules of thumb. A deficit of 3 per cent of GDP is typically seen as the maximum sustainable rate, and the US does not manage to fall below that even in the best years of the projected economic rebound; Harvard professor Ken Rogoff has suggested that 80 per cent net debt to GDP rates are the maximum possible before sovereign debt crisis become likely, and the US comes close to reaching that later this decade as the rising healthcare and social security costs of the ageing population kick in.

Larry Kantor, head of research at Barclays Capital in New York, surveyed the scene in an investment note to clients. "The combination of a lack of fiscal discipline and the resulting build-up of debt levels over past decades, the sheer size of government spending relative to GDP, the impact on finances of the severe recession and policy response to it, and unfavourable demographic trends are challenging the fiscal capabilities of most developed countries," he said. "While the focus has been on Europe because of Greece, the severity of the problem and the extent of needed tightening are greater elsewhere, including the US, which has seen one of the sharpest deteriorations in fiscal position as it boosted its deficit aggressively to counter the recession."

These worrying forecasts for the US have emboldened critics not just of long-term government spending programmes – the "entitlements" to pensions and government health insurance for the elderly – but also of short-term stimulus measures.

Last week, a handful of moderate Democrats joined Republicans to defeat legislation that would have extended unemployment benefit for the long-term unemployed, for whom payments are coming to an end. The Bill had twice been watered down to try to ensure passage, but still proved unpalatable. The $85.5bn Bill was also going to send money to cash-strapped states to help pay for health benefits, and as many as 30 of the 50 states had already factored the money into their budgets. The loss of the cash will be another wrench as state governors fight to impose swingeing cuts in order to get budgets back into balance.

This is the unspoken austerity sweeping the US. Governor Edward Rendell of Pennsylvania called it "bloodletting". New Jersey, for example, yesterday passed a budget that cut hundreds of millions of dollars from education and added levies on businesses, students, the elderly and the disabled. Assembly budget officer Joe Malone said the decisions were "beyond difficult" but "New Jersey has experienced the greatest loss in revenue in state history. The end product is austere, honest and responsible for everyone in our state." Neighbouring New York, meanwhile, has failed to pass a new budget, three months after the end of the financial year, amid haggling over cuts and new taxes such as ones on soft drinks.

The local battles foreshadow a larger one looming on the national stage when Congress must decide whether to let the Bush-era tax cuts expire in part or in full. Barclays calculates that letting them expire in their entirety would amount to a 2 per cent fiscal tightening. The Obama administration is committed to keeping the cuts in place for all but the rich, but the debate will be a key test of how far Mr Obama has lost possession to Team Austerity.

Voices
voicesGood for Lana Del Rey for helping kill that myth, writes Grace Dent
Sport
The Pipes and Drums of The Scottish Regiments perform during the Opening Ceremony for the Glasgow 2014 Commonwealth Games at Celtic Park on July 23, 2014 in Glasgow, Scotland.
Commonwealth GamesThe actor encouraged the one billion viewers of the event to donate to the children's charity
Sport
Karen Dunbar performs
Entertainers showcase local wit, talent and irrepressible spirit
Sport
Members of the Scotland deleagtion walk past during the opening ceremony of the 2014 Commonwealth Games at Celtic Park in Glasgow on July 23, 2014.
PROMOTED VIDEO
Arts and Entertainment
The Tour de France peloton rides over a bridge on the Grinton Moor, Yorkshire, earlier this month
film
Life and Style
fashion Designs are part of feminist art project by a British student
News
Very tasty: Vladimir Putin dining alone, perhaps sensibly
news
Life and Style
Listen here: Apple EarPods offer an alternative
techAre custom, 3D printed earbuds the solution?
Arts and Entertainment
Top guns: Cole advised the makers of Second World War film Fury, starring Brad Pitt
filmLt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a uniform
News
The University of California study monitored the reaction of 36 dogs
sciencePets' range of emotions revealed
News
Snoop Dogg pictured at The Hollywood Reporter Nominees' Night in February, 2013
people... says Snoop Dogg
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Arts and Entertainment
A scene from Shakespeare in Love at the Noel Coward Theatre
theatreReview: Shakespeare in Love has moments of sheer stage poetry mixed with effervescent fun
News
Joining forces: young British men feature in an Isis video in which they urge Islamists in the West to join them in Iraq and Syria
newsWill the young Britons fighting in Syria be allowed to return home and resume their lives?
Arts and Entertainment
The nomination of 'The Wake' by Paul Kingsnorth has caused a stir
books
News
i100
Life and Style
food + drinkZebra meat is exotic and lean - but does it taste good?
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

PMO Analyst - London - Banking - £350 - £400

£350 - £400 per day: Orgtel: PMO Analyst - Banking - London - £350 -£400 per d...

Cost Reporting-MI Packs-Edinburgh-Bank-£350/day

£300 - £350 per day + competitive: Orgtel: Cost Reporting Manager - MI Packs -...

Insight Analyst – Permanent – Up to £40k – North London

£35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

Test Lead - London - Investment Banking

£475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

Day In a Page

Screwing your way to the top? Good for Lana Del Rey for helping kill that myth

Screwing your way to the top?

Good for Lana Del Rey for helping kill that myth, says Grace Dent
Will the young Britons fighting in Syria be allowed to return home and resume their lives?

Will Britons fighting in Syria be able to resume their lives?

Tony Blair's Terrorism Act 2006 has made it an offence to take part in military action abroad with a "political, ideological, religious or racial motive"
Beyoncé poses as Rosie the Riveter, the wartime poster girl who became a feminist pin-up

Beyoncé poses as Rosie the Riveter

The wartime poster girl became the ultimate American symbol of female empowerment
The quest to find the perfect pair of earphones: Are custom, 3D printed earbuds the solution?

The quest to find the perfect pair of earphones

Earphones don't fit properly, offer mediocre audio quality and can even be painful. So the quest to design the perfect pair is music to Seth Stevenson's ears
US Army's shooting star: Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform

Meet the US Army's shooting star

Lt-Col Steven Cole is the man Hollywood calls when it wants to borrow a tank or check a military uniform
Climate change threatens to make the antarctic fur seal extinct

Take a good look while you can

How climate change could wipe out this seal
Should emergency hospital weddings be made easier for the terminally ill?

Farewell, my lovely

Should emergency hospital weddings be made easier?
Man Booker Prize 2014 longlist: Crowdfunded novel nominated for first time

Crowdfunded novel nominated for Booker Prize

Paul Kingsnorth's 'The Wake' is in contention for the prestigious award
Vladimir Putin employs a full-time food taster to ensure his meals aren't poisoned

Vladimir Putin employs a full-time food taster

John Walsh salutes those brave souls who have, throughout history, put their knives on the line
Tour de France effect brings Hollywood blockbusters to Yorkshire

Tour de France effect brings Hollywood blockbusters to Yorkshire

A $25m thriller starring Sam Worthington to be made in God's Own Country
Will The Minerva Project - the first 'elite' American university to be launched in a century - change the face of higher learning?

Will The Minerva Project change the face of higher learning?

The university has no lecture halls, no debating societies, no sports teams and no fraternities. Instead, the 33 students who have made the cut at Minerva, will travel the world and change the face of higher learning
The 10 best pedicure products

Feet treat: 10 best pedicure products

Bags packed and all prepped for holidays, but feet in a state? Get them flip-flop-ready with our pick of the items for a DIY treatment
Commonwealth Games 2014: Great Scots! Planes and pipers welcome in Glasgow's Games

Commonwealth Games 2014

Great Scots! Planes and pipers welcome in Glasgow's Games
Jack Pitt-Brooke: Manchester City and Patrick Vieira make the right stand on racism

Jack Pitt-Brooke

Manchester City and Patrick Vieira make the right stand on racism
How Terry Newton tragedy made iron men seek help to tackle their psychological demons

How Newton tragedy made iron men seek help to tackle their psychological demons

Over a hundred rugby league players have contacted clinic to deal with mental challenges of game