by Robert B. Reich

Washington's giant game of chicken turns deadly serious in a few weeks when the nation's debt ceiling has to be raised. If it's not, Social Security and Medicare checks won't go out and the United States will default on its debt.

That will make a government shutdown look like child's play.

Republicans vow they won't vote to raise the debt ceiling without far greater cuts in the federal budget for the rest of this year. But such cuts will imperil the fragile recovery.

President Obama should be doing everything he can to create jobs right now instead of cutting this year's budget. But will he go to battle? Don't count on it. He's more likely to "triangulate" like Bill Clinton.

President Obama's current aides -- many of whom worked for Bill Clinton and vividly recall Clinton's own midterm shellacking in 1994 and his re-election two years later -- think the president should follow Clinton's script. Obama should distance himself from congressional Democrats, embrace deficit reduction and seek guidance from big business. They assume that since triangulation worked for Clinton, it will work for Obama.

They're wrong. Clinton's shift to the right didn't win him re-election in 1996. He was re-elected because of the strength of the economic recovery.

By the spring of 1995, the American economy already had bounced back, averaging 200,000 new jobs per month. By early 1996, it was roaring -- creating 434,000 new jobs in February alone.

The recession of 1991-1992 had been relatively mild as recessions go. Like most recessions, it had been brought on by the Federal Reserve raising interest rates too high in response to fears of inflation. That made a subsequent recovery easy to arrange. The Fed simply reversed course and reduced short-term rates.

President Obama isn't as fortunate. The Great Recession followed the bursting of a giant debt bubble. Wall Street's irresponsible lending and speculating coupled with negligible oversight by federal regulators created a toxic mixture that exploded at the end of 2007.

We're still being rocked by it. The Fed has kept interest rates near zero for more than a year and has opened the spigots of its discount window, without much result. Unemployment continues to hover around 9 percent. Economic growth is pathetic.

Yes, corporate profits are up. But little of this is trickling down to the Main Streets of America. Jobs used to follow profits, but companies are now hiring at a snail's pace. That's because their profits are coming mainly from buoyant sales by their foreign operations -- especially in China and India -- combined with cuts in jobs, wages and benefits here in the U.S.

Yes, the stock market is up. But this hasn't translated into much growth.

The richest 10 percent of Americans, who own about 90 percent of all financial assets, are buying again (Neiman Marcus and Tiffany & Co. are doing well). But most Americans continue to have little purchasing power. They're still worried about their jobs and wages. Their major assets -- their homes -- continue to drop in value. And gas prices are heading upward. Small wonder consumer confidence is at a five-month low.

A strong recovery cannot be sustained by the richest 10 percent. Before the Great Recession, the top 10 percent received about half of total income, but they accounted for only about 40 percent of total spending. Forty percent of spending isn't enough to convince businesses to invest in new capacity and jobs, which is why corporations are still sitting on almost $2 trillion of cash.

So many jobs have been lost since Obama was elected and so many people have entered the workforce needing jobs that even if job growth were to match the extraordinary pace of the late 1990s, year after year, the unemployment rate wouldn't fall below 6 percent until 2016. That pace of job growth is unlikely, to say the least.

If Republicans manage to cut federal spending significantly between now and Election Day while state outlays continue to shrink and fuel prices rise, there won't be nearly enough demand for the goods and services the economy is capable of producing. That will mean continued high unemployment and anemic growth.

President Obama's challenge in 2012 has nothing to do with Bill Clinton's in 1996. If Obama wants Americans to feel optimistic about the economy by Election Day, he'll have to fight the Republican plans to slash the budget deficit between now and then. Triangulation won't work.

 

Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley and the author of the book Aftershock: The Next Economy and America's Future.

Federal Budget: Why Triangulation Won't Work