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.

PROMOTED VIDEO
Extras
indybest
Arts and Entertainment
tv
Arts and Entertainment
Judi Dench appeared at the Hay Festival to perform excerpts from Shakespearean plays
tvJudi Dench and Hugh Bonneville join Benedict Cumberbatch in BBC Shakespeare adaptations
Arts and Entertainment
Exhibition at the Centre Pompidou in Metz - 23 May 2012
art
Sport
Is this how Mario Balotelli will cruise into Liverpool?
football
News
Ronahi Serhat, a PKK fighter, in the Qandil Mountains in Iraqi Kurdistan
i100
News
ebooksAn evocation of the conflict through the eyes of those who lived through it
Arts and Entertainment
Poet’s corner: Philip Larkin at the venetian window of his home in 1958
booksOr caring, playful man who lived for others? A new book has the answer
News
Matthew McConaughey and his son Levi at the game between the Boston Red Sox and the Houston Astros at Fenway Park on August 17, 2014 in Boston, Massachusetts.
advertisingOscar-winner’s Lincoln deal is latest in a lucrative ad production line
Arts and Entertainment
Alfred Molina, left, and John Lithgow in a scene from 'Love Is Strange'
film
News
A model of a Neanderthal man on display at the National Museum of Prehistory in Dordogne, France
science
News
i100
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

Junior Quant Analyst - C++, Boost, Data Mining

£25000 - £35000 per annum: Harrington Starr: Junior Quant Analyst - C++, Boost...

Service Desk Analyst- (Desktop Support, Help desk)

£25000 - £35000 per annum: Harrington Starr: Service Desk Analyst- (Desktop Su...

Junior Quant Analyst (Machine Learning, SQL, Brokerage)

£30000 - £50000 per annum: Harrington Starr: Junior Quant Analyst (Machine Lea...

UNIX Application Support Analyst- Support, UNIX, London

£45000 - £55000 per annum: Harrington Starr: UNIX Application Support Analyst-...

Day In a Page

Air strikes? Talk of God? Obama is following the jihadists’ script

Air strikes? Talk of God? Obama is following the jihadists’ script

The President came the nearest he has come yet to rivalling George W Bush’s gormless reaction to 9/11 , says Robert Fisk
Ebola outbreak: Billy Graham’s son declares righteous war on the virus

Billy Graham’s son declares righteous war on Ebola

A Christian charity’s efforts to save missionaries trapped in Africa by the crisis have been justifiably praised. But doubts remain about its evangelical motives
Jeremy Clarkson 'does not see a problem' with his racist language on Top Gear, says BBC

Not even Jeremy Clarkson is bigger than the BBC, says TV boss

Corporation’s head of television confirms ‘Top Gear’ host was warned about racist language
Nick Clegg the movie: Channel 4 to air Coalition drama showing Lib Dem leader's rise

Nick Clegg the movie

Channel 4 to air Coalition drama showing Lib Dem leader's rise
Philip Larkin: Misogynist, racist, miserable? Or caring, playful man who lived for others?

Philip Larkin: What will survive of him?

Larkin's reputation has taken a knocking. But a new book by James Booth argues that the poet was affectionate, witty, entertaining and kind, as hitherto unseen letters, sketches and 'selfies' reveal
Texas forensic astronomer finally pinpoints the exact birth of impressionism

Revealed (to the minute)

The precise time when impressionism was born
10 best men's skincare products

Face it: 10 best men's skincare products

Oscar Quine cleanses, tones and moisturises to find skin-savers blokes will be proud to display on the bathroom shelf
Middle East crisis: We know all too much about the cruelty of Isis – but all too little about who they are

We know all too much about the cruelty of Isis – but all too little about who they are

Now Obama has seen the next US reporter to be threatened with beheading, will he blink, asks Robert Fisk
Neanderthals lived alongside humans for centuries, latest study shows

Final resting place of our Neanderthal neighbours revealed

Bones dated to 40,000 years ago show species may have died out in Belgium species co-existed
Scottish independence: The new Scots who hold fate of the UK in their hands

The new Scots who hold fate of the UK in their hands

Scotland’s immigrants are as passionate about the future of their adopted nation as anyone else
Britain's ugliest buildings: Which monstrosities should be nominated for the Dead Prize?

Blight club: Britain's ugliest buildings

Following the architect Cameron Sinclair's introduction of the Dead Prize, an award for ugly buildings, John Rentoul reflects on some of the biggest blots on the UK landscape
eBay's enduring appeal: Online auction site is still the UK's most popular e-commerce retailer

eBay's enduring appeal

The online auction site is still the UK's most popular e-commerce site
Culture Minister Ed Vaizey: ‘lack of ethnic minority and black faces on TV is weird’

'Lack of ethnic minority and black faces on TV is weird'

Culture Minister Ed Vaizey calls for immediate action to address the problem
Artist Olafur Eliasson's latest large-scale works are inspired by the paintings of JMW Turner

Magic circles: Artist Olafur Eliasson

Eliasson's works will go alongside a new exhibition of JMW Turner at Tate Britain. He tells Jay Merrick why the paintings of his hero are ripe for reinvention
Josephine Dickinson: 'A cochlear implant helped me to discover a new world of sound'

Josephine Dickinson: 'How I discovered a new world of sound'

After going deaf as a child, musician and poet Josephine Dickinson made do with a hearing aid for five decades. Then she had a cochlear implant - and everything changed