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Rising Midterm Economic Pressures

Author: Roya Wolverson
September 16, 2010

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The U.S. Census Bureau's annual report on poverty and income may undermine the Obama administration's struggles to show its policies are the right ones to shore up a waning economic recovery. The Census data, which showed stagnant U.S. incomes and an increased poverty rate last year, comes amid continued high unemployment (Politico), slow business growth, and the threat of deflation (U.S.News) ahead of congressional midterm elections. The global unemployment picture looks nearly as dismal. The OECD reported the harmonized unemployment rates for twenty-eight economies in July remained steady at a worrisome 8.5 percent, while the IMF warns of the increased likelihood of slowed global growth (Reuters) into mid-2011.

In the United States, the question of why average household income (NYT) remained stagnant even during years when the U.S. economy was growing is particularly irksome. One explanation is that growth increases have gone disproportionately to top earners and corporate profits, which is not reflected in gross domestic product readings, as explained in this CFR Backgrounder. A recent Financial Times article posits that the income stagnation also relates to the rise of China, India, Brazil, and other emerging economies, where lower wages have forced U.S. workers out of jobs. New York Times columnist Paul Krugman has blamed Reagan-era politics, which sped up the decline of unions and reversed progressive elements of the U.S. tax code.

Tax policy and foreign competition both feature heavily in the midterm electoral debate about needed economic reforms to boost U.S. hiring. Democratic lawmakers on the Joint Economic Committee, who support eliminating the Bush-era tax cuts for the wealthy that expire at year-end, released a September 15 report blaming Bush-era policies for the expected rise in U.S. poverty during President Barack Obama's first year in office. The White House wants (TheHill) to extend middle-class tax cuts to stimulate the economy while letting tax breaks expire for those making more than $250,000 a year. Budget hawks, including former Federal Reserve chairman Alan Greenspan at this CFR event, have warned that an extension of any tax cuts would significantly damage the U.S. deficit.

Domestic political forces are more united on pushing China to reform its trade and currency policies, which U.S. officials argue hurts U.S. exports and labor. U.S. Treasury Secretary Timothy Geithner is expected to acknowledge (NYT) in September 16 congressional hearings that China has kept the value of its currency artificially low, impeding much-needed global rebalancing. The United States has also filed two cases to the World Trade Organization accusing China of improperly blocking imports of steel and blocking credit card companies access to its markets.

The increased pressure on Beijing may be working. China let its currency appreciate for five consecutive days (EconomicTimes) ahead of the congressional hearings, even though Chinese leaders have publicly stated they will not succumb to foreign pressure to adjust their exchange rate policy. Beijing may also be anticipating other governments (FT) championing the issue at the next G20 summit in November. The matter is complicated by Japan's decision to intervene in the currency market to combat rampant inflation and protect its exporters, which weakens arguments about China being the only major economy manipulating its currency. Japan's currency move may also compel other Asian economies (WSJ) to follow suit.

Additional Analysis:

The Center for American Progress' Eric Alterman says conservatives have derided the stimulus' impact, complained about out-of-control deficit spending, and yet they are "demanding the retention of the enormously costly Bush tax cuts aimed primarily at the extremely wealthy."

This Financial Times editorial says given that long-term interest rates and inflation expectations are "at rock bottom," the United States can afford a stimulus that extends the Bush-era tax cuts until 2013, combined with a payroll tax holiday.

In the Wall Street Journal, George P. Shultz, Michael J. Boskin, John F. Cogan, Allan Meltzer, and John B. Taylor outline a set of policies to guide economic policymakers back to rapid growth, including lowering taxes, balancing the budget, modifying Social Security and healthcare entitlements, and less discretionary monetary policy.

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