The Case for the Recovery (Jun. 3)

Mike & Co.,

President Obama took Donald Trump’s proposals to weaken Wall Street reforms to task and defended his own economic record in a speech Wednesday in Elkhart, Indiana — RV capital of the world and the first city he visited as president in 2009

The speech is notable as roadmap for Democrats touting the recovery and defending Dodd-Frank.  It marks the President’s most pointed rebuke of the Republican nominee’s policies this year.

The BLS report out this morning — the U.S. added a surprising and disappointing 38,000 net jobs in May — makes it less likely we’ll see a speed bump on the recovery road in the form of a Fed rate hike, at least this month. It had previously been nearly universally expected.  No Fed action would make Obama’s case easier, today’s numbers aside.

More on the speech and Fed policy below.




 Two Views of the Economy

The speech served two purposes -– to act as a victory lap for Obama’s economic policies and to explain increasing middle-class economic anxiety in the context of an economy currently enjoying the longest streak of consecutive months of job growth in history.

For Democrats, the President has succeeded in making great strides toward ensuring that America keeps moving  toward sustainable economic growth.  Unemployment, wages, and the stock market have all improved markedly since he took office.   Although recovery has been slow, it has been happening steadily and the reasons for its slow speed is not a reflection of policy.

On Congress and the Republican Party in general, President Obama bemoaned that “instead of telling you what they’re for, they’ve defined their economic agenda by what they’re against — and that’s mainly being against me.  And their basic message is anti-government, anti-immigrant, anti-trade, and, let’s face it, it’s anti-change.”

The President also touched on Trump’s plans for deregulation: “How it is that somebody would propose that we weaken regulations on Wall Street?  Have we really forgotten what just happened eight years ago?  The notion that you would vote for anybody who would now allow them to go back to doing the same stuff that almost broke our economy’s back makes no sense. I don’t care whether you are a Republican, or a Democrat or an independent, why would you do that?”

Recovery’s Speed Bumps 

Obama sought to bust the myth of America as a global loser, with data showing the U.S. economy is the biggest and most dynamic in the world.  But the recovery is not felt equally and everywhere because of a few roadblocks along the way.

The President said that the first of these roadblocks has been Congress itself — Congress has been close to uesless as far as economic stimulus post-2009 is concerned.  As Obama explained, this is because of the pervasive (and false) belief in the Republican community that government spending has a negative effect on economic growth.  Both history and economic research have proved that is not the case.

Another roadblock may be the Fed.  Since the recession, it has kept interest rates historically low, but the time has come to raise them again and that has some people worried.  The Fed is its own entity – it does not operate under the influence of the executive branch and it is not skewed or even meaningful in standard partisan terms.

Defense of DFA 

 No defense of the President’s economic legacy would be complete without a ringing endorsement of Dodd-Frank and that’s exactly what he offered in Elkhart.  Following his section on “three myths” about the economy, Obama lauded his administration’s passage of “the toughest Wall Street reforms in history.”

The President also pointed out that the money given to banks during TARP has been paid back, “with interest,” and that banks are now carrying twice the operating capital as they did during pre-crisis years.  President then laid out how financial regulations protect the middle-class, despite cries from the right that working families are struggling as a result: “Letting credit card companies write their own rules — that’s only going to hurt working families.  It sure as heck wouldn’t make the middle class more secure.  How can you say you’re for the middle class and then you want to tear down these rules?”

The President’s speech comes as a potential speed bump approaches — despite the jobs news today, the Fed is almost certain to raise rates before the election.  If that happens, then we may see a market contraction, similar to the “taper tantrum” in 2013 or the tumble after last December’s decision to set the Federal Funds rate at 0.25-0.50 percent.

A June rate hike could hear hurt the  Democrats’ case on the economy.  Turmoil in the markets might remind Americans just how uncertain the path to fuller economic recovery is.  The other side of that coin is that a rate hike this month, after so much lead-up and consensus that it will happen, may not spark the kind of market backlash that we’re used to seeing.

At Least it’s June

June is, at least, a better time to raise rates than later in the year and closer to the election.  For the sake of argument, if the choices are between a June rate hike and one later in the year, then Democrats can hope the FMOC doesn’t delay the inevitable, preferring to have the Band-Aid ripped off in June and avoiding having to run against the wind of a short-term market contraction in the home stretch.

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