When Will It Turn?

I detect among some Democrats in Washington a palpable unease about the direction of the U.S. economy, and about the unemployment rate in particular. Notwithstanding hindsight bias, it is fair to say that the decline in the rate of the growth of the unemployment rate -- read that carefully a few times -- isn't responding as well as some Democrats had hoped to the $800 billion stimulus package that was sold as a jobs creator.

The realities of government and the economy are such that the UI rate -- an artificial, constructed, value-laden number, to be sure --  tend to lag behind economic growth; no matter how quickly the Obama administration wanted the stimulus money out of the door and into the hands of individuals and businesses, it just, darn it, takes time. (Rahm Emanuel worries about this problem more than many of his colleagues are aware.)

The truth, of course, is that the unemployment rate is a reflection of many things, aggregate demand being just one: confidence in the direction of the economy (which is rising), businesses beginning to add inventory again (not clear if this is happening yet), credit markets functioning normally (not yet, really), and jitters about inflation/deflation simmering down (not yet.)

The more important point question Democrats are asking themselves: when will the trend turn? When will Obama be able to argue that he has created jobs -- or a single job? 

The problem is that the unemployment rate is a big political number, and a rate that exceeds 10.0 -- another artificial level -- is tough. Democrats worry that if the UI rate isn't down substantially by the time voters make up their minds -- roughly, a year from now, mid-summer, 2010, their party will suffer. It's one thing to say that voters don't blame Democrats for the UI rate now -- they don't -- and it's entirely another to presume that voters won't be angrier at the slow pace of progress by this time next year. 

Would a second stimulus package help? That's for economists to say, although I presume that most would say, "not soon enough."  Politically, it's a non-starter. Democrats can't afford another fight about deficit spending, the White House has no desire to start one, and ideas that might attract GOP votes, like major tax cuts, are off the table.

The White House is putting its faith in the ability of the American people to accept a complicated argument about the state of the economy, one that allows for leading, coincident and lagging indicators. It's a gamble, but a reasonable one.

As usual, the politics and policy converge and then diverge. If, come this fall, the unemployment rate exceeds 10 percent and Congress demands a head from the administration, will they be given one?

True, the administration's top economic thinkers, like Jared Bernstein and Christina Romer,  projected a much different pathway for the unemployment rate.  But so did private forecasters, who are able to quietly revise their forecasts weekly.  It's clear that the Obama economic brain trust did not anticipate how bad January and February would be. Then again, few policy-makers, economists or otherwise, did.

If Democrats lose their cool and their patience, they could wind up hurting themselves even more. Democratic panic will turn the economy into a political weapon that Republicans can use against the Democrats.