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The End Of Obama's Honeymoon

Irwin M. Stelzer is a contributing editor to The Weekly Standard, director of economic policy studies at the Hudson Institute, and a columnist for the Sunday Times



"It started out like a song we knew we had a good thing going. And if I wanted too much, was that such a mistake?" President Obama's answer to composer Stephen Sondheim's question would be "yes," were he not a president who rarely admits error.

We are six months into the Obama reign, and he surely did have a good thing going until very recently. He pushed through what voters thought was a stimulus bill. He held numerous press conferences at which an adoring media allowed him to display his rhetorical skills. No mumbling George W. Bush, he. He toured the world, to the applause of adoring masses from London to Paris to Cairo. He fulfilled a campaign promise to tackle perceived global warming and lead the world to a cooler, greener future by urging Congress to pass a cap-and-trade bill aimed at cutting CO2 emissions. He bailed out General Motors and Chrysler, rewarding the United Auto Workers for delivering key states to him in last year's election.

Then he made the mistake about which Sondheim wrote and Sinatra sang -- he wanted too much. He attempted to push through Congress a so-called reform of the nation's health care industry -- a $1 trillion restructuring that would turn effective control of one-sixth of the economy over to government regulators and bureaucrats. Not a good idea: some 90 percent of Americans are satisfied with their health care, a majority think that the burgeoning deficit is more of a problem than health care, and 42 percent think his plan is a bad idea, while only 36 percent say it is a good idea (22 percent have no opinion).

It is too early to say that the presidential agenda is dead in the water. But it is not too early to say that he made some serious errors.

The stimulus not only failed to keep the unemployment rate to 8 percent, as Obama promised (it is now 9.5 percent). It also unleashed a flood of red ink that shifted voters' attention to the implications of the deficit for their children's and grandchildren's standard of living. So when the president insisted that Congress pass a cap-and-trade program that will drive up energy costs, and a health care plan that will add more than a trillion dollars to the deficit or the tax burden over the next decade, Congress heard from unhappy constituents (39 percent strongly oppose his health plan while only 25 percent strongly support it), and momentum shifted from the president to more centrist congressional Democrats, who are doing what Republicans don't have the votes to do: preventing the liberal Democratic leadership from taking a giant step to a government-controlled health care system.

The President has a 78-seat majority in the House of Representatives, and a filibuster-proof majority in the Senate. He does not need a single Republican vote to pass any bill he sends to Congress. Still, he could not have his way with the Congress, and it now looks likely that he will have to trim his health-care program to get anything in the fall that he can declare a victory, which he will have to do if he is to avoid acute political embarrassment. Equally important, the president's difficulty with Democratic centrists will inevitably slow the pace of his efforts to "transform" the entire American economy.

But slowing is not the same thing as derailing. The president remains popular, more popular than his policies. He is articulate, assured and, more important, not George W. Bush. No Republican has his communications skills, although he is subject to some ridicule for his ever-present teleprompters. And if the economy continues to recover, all will be forgiven.

Share prices are about 20 percent higher than when Obama took the oath of office. The index of leading economic indicators is up. Some banks -- most notably Goldman Sachs and JPMorgan Chase -- are profitable enough to repay the bailout moneys meted out to them when it looked as if the financial system would collapse. Inventory liquidation is slowing and manufacturing activity seems to be recovering. Business investment is up, and Federal Reserve Board Chairman reports that the Fed's support for the commercial paper market has fallen to one-third of crisis levels.

Perhaps most important, the housing sector might, only might, be "finding a bottom," to use Wall Street lingo. Sales of existing homes are at their highest level since October 2008, and sales of new homes rose 11 percent in June. The much-watched Standard & Poor's Case-Schiller index of house prices rose in May from the previous month for the first time in three years. Vacancy rates are down, as is the supply of unsold homes, now at its lowest level since October 2007. Housing starts rose 3.6 percent in June, and I am told that some builders in the hard-hit southwest have begun buying up land in anticipation of again constructing new homes. There is even talk of the "exit strategy" the Fed will adopt to reduce the money supply when the recovery proves durable.

Against that voters will have to weigh the fact that the unemployment rate has risen from 7.6 percent to 9.5 percent since Obama took office -- some three million more people are out of work than early in the year. Perhaps even more crucially, there is the troubling, soaring deficit and the prospect of large tax increases or future inflation.

And the president cannot be certain that the economy has finally turned around. The banks still have an estimated $30 billion in commercial property loans to write off this year. Government efforts to modify mortgages so as to reduce foreclosures are floundering. Consumer sentiment fell in June, as consumers decided that the jobs market will not soon improve and "see little reason to believe that the economic stimulus package will improve their finances any time soon," says Richard Curtin, director of the Reuters / University of Michigan survey.

So Obama has much to think about as he tallies his successes and failures. Other than the stimulus package, passed during the euphoria following his inauguration, his legislative program is stalled, and by members of his own party. The economy is doing better, but the indicator that most matters to voters -- the unemployment rate -- is headed up, rather than down. And the market sent a powerful signal this week: The auction of government bonds did not go well, forcing the Treasury to pay higher interest rates than in the recent past. That is a bad sign for a president who needs low rates to encourage business investment and sustain the fragile green shoots that must flower if the Democrats are to hold their gains in next November's election.

It just might be that Obama had "a good thing going, going, gone."

By Irwin M. Stelzer
Reprinted with permission from The Weekly Standard

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