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Obama's economic policies: Stay the course or change?

(MoneyWatch) With the economic recovery plodding along, and with signs of accelerating growth in recent months, the presidential candidates had reason to believe that economic conditions would improve steadily, and that whoever won would get credit for the change. Had Romney won, for example, he would have been able to claim that by changing the direction of economic policy, he had improved the economy -- even if it was really just the natural recovery taking hold. Obama, on the other hand, could claim vindication for his approach if the cycle turned.

Recent research, however, casts a cloud over the expectation that the economy will improve dramatically over the next year or two, and suggests that the recovery of employment in particular may be more troublesome than expected.

Now that we know it will be Obama on the economic tiller, it's worth considering what steps he's likely to take, and whether his approach will change in any fundamental way during his second term.

When Obama was elected to his first term, there were high expectations among his supporters that his economic policies would take a strong turn in a progressive direction. There would be a clear break from the Bush years. But disappointment came quickly when the administration gave up on the public option as part of health care reform, and failed to push forward on issues such as climate change, labor law reform and immigration. And when a dispute arose among his advisors over whether to push for additional stimulus or turn to deficit reduction, President Obama put budget issues rather than jobs at the forefront, even though the economy was still struggling to recover.

A question for Obama's second term is whether his apparent abandonment of issues important to his progressive base was a strategy for reelection, or reflected his true beliefs (I say apparent because of arguments such as the one made by Michael Grumwald in his recent book that Obama has been far more progressive than he's given credit for). Now that reelection pressure off, will Obama be free to openly push for more progressive ideas as some expect? Will his economic policies change? Will we see, for example, a renewed push for job creation programs, infrastructure construction to stimulate the economy, immigration reform, climate change legislation, relaxed rules on union organizing, and relief for underwater homeowners?

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I think it's unlikely we'll see a big difference in policy for two reasons. First, although Obama's acceptance speech gave me some pause in making this claim, Obama appears to be a centrist at heart. The Obama that progressives believed in prior to his first term was more likely the one constructed to get votes. Second, although Democrats made gains in the Senate that will push it toward a more progressive make-up, the filibuster is still alive and well and the House will still belong to the Republicans. To get anything done, Obama will have to bargain with centrist politicians on both sides of the political divide. So no matter what his true beliefs are, as a practical matter he will be forced to the center. Policy may be nudged in small ways toward progressive ideas, but on the whole there are not likely to be many changes. In addition, the "Grand Bargain" on the deficit that many Democrats fear -- will Obama cut Social Security and Medicare as part of the deal? -- is likely to proceed.

But the there is another important issue -- the cloud on the horizon alluded to above -- that may interfere with the push toward deficit reduction and may swing policy toward progressive ideas.

Recent academic research has bad news for working class households hoping for improved job prospects as the economy recovers. In the last three recoveries, job growth has lagged GDP growth, and many jobs lost during a recession never return. The evidence suggests that firms use recessions to let workers go, and instead of rehiring them when the economy improves, the company replaces those workers with machines. Jobs that involve routine tasks are particularly vulnerable, and this recession is no exception. Humans are being replaced by machines in large numbers, and the old jobs are not coming back. Thus, we are unlikley to see a reversal in this disturbing trend: An increasing job polarization into low and high-paying occupations, with a declining middle. Workers will struggle to find new jobs, and if they can find a job at all it is likely to be at reduced wages and benefits.

If unemployment does, in fact, remain persistently high -- even higher than expected given that recoveries from financial panics are generally slow -- there will be more and more calls for the administration and Congress to address the problem. One possibility for addressing persistently high unemployment, for example, is to initiate a large-scale program to repair neglected infrastructure and infrastructure damaged in recent natural disasters, and to make us less vulnerable in general to events such as hurricanes. Another possibility would be to help working class households struggling with their debt load, particularly relief for households having a hard time making mortgage payments. That would help households get back on their feet faster and speed the return to normal levels of spending, and the extra spending would boost the economy and employment. A third policy, one that would also help the unemployment problem by creating additional spending, would be a payroll tax cut for working class households. A fourth option is direct job creation -- creating government jobs for those who need work -- but infrastructure construction is a better and more politically palatable option.

All of these options will require additional spending or tax cuts, and that will make them a difficult sell politically. There's a good chance that these options will remain as out of reach as they were during the latter part of Obama's first term when Republicans blocked attempts to do more to help employment recover. 

But Hurricane Sandy may have changed some minds about the necessity of investing in infrastructure, and if unemployment does remain intolerably high, that will also increase the demand for action. If it appears the public believes dealing with the unemployment problem is more important than deficit reduction, and the sentiment is widely shared, politicians are likely to delay deficit reduction and acquiesce. So there's at least a chance that there could be more spending on infrastructure even if it slows longer-run deficit reduction.

And that may not be such a bad idea. Many economists argue that we need to give more help to the economy in the short-run, and deal with the longer run deficit problem when the economy is on better footing. Economists also argue that with interest rates and labor costs at rock-bottom levels, and with our needs for infrastructure as high as they are, the benefits of additional infrastructure exceed the cost. The politics may continue to stand in the way even if employment remains a problem, but there is certainly an economic case for additional infrastructure spending.