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The confluence of two forces will determine who prevails in the next election because together, they are the predicate for the success or failure of the Obama administration's efforts to restore our economy. The evidence to the effect that such is the case is as strong as anything in economics theory, but it is befuddlingly ignored by not just economists in the public sphere, but by everyone. The two countervailing, diametrically opposed forces of which I speak are the payroll tax cut, that is the reduction in Social Security withholding, and the effect of speculation on gasoline prices.
Your will recall that a "compromise" was reached last December in the lame duck session of the 111th congress. There were a raft of provisions in the resulting legislation, but there was only one that had any direct effect on our economy. The tax holiday in Social Security withholding is not an entirely good thing, but it was profound in its positive effect when it began to affect pay checks. Almost immediately, that is starting in its first month, January 2011, unemployment began to abate, albeit in small increments. But over the first three months of the year, the rate of unemployment fell from 9.1% to 8.8% by the end of March. That is when the Arab Spring purportedly began to affect oil supplies. The price of a barrel of oil skyrocketed, and the price of a gallon of gasoline paralleled that trajectory. Over the ensuing three months, the price of a gallon of gas rose to well over $4.00 per gallon-- near record levels-- from somewhere in the $3.00-$3.25 range as of January 1: a percentage increase approaching 25% over and above an already inflated price that had increased by a similar proportion in the last quarter of 2010 resulting in a spike in unemployment to 9.1% by May, the level at which unemployment had been as of the first of the year. It is true that unemployment had spiked to 9.7% the previous October while gasoline prices were also on the rise, and then fallen to 9.1% as they continued upward, but during that period there was a great deal of federal stimulus money being spent to offset the persistent price increases, which kept the cost to the consumer of gasoline to a lower proportion of average earnings.
The Social Security tax abatement began to extend the salubrious effects of the Obama stimulus package, but the rise in gasoline prices to levels above $4.00 was more than enough to offset the gain in consumer spending power that the tax cut represented, and the trend in unemployment reversed course. Unemployment began to climb again. Then it became clear that the projections of inadequate oil supply as a result of interdiction of Libyan production because of the civil war there would not materialize-- largely because demand abated sufficiently to offset the minimal reduction in world wide production of crude represented by the loss of Libyan production-- and crude oil prices began to stagnate, albeit at near record high levels. But then the world's oil consuming nations released 100 million barrels of oil from their strategic reserves causing a temporary glut of oil, and prices began to fall, gasoline prices not far behind, to the point that they are now, at levels just above where they were at the end of August 2010. And what happened last month? Unemployment dropped precipitously to 8.6%, I contend because oil prices had declined to the level that they had been at last Fall and they represented a manageable proportion of the household budget of the average American. Then we all began to spend for Christmas, retailers and manufacturers began to hire in response, and we started to climb out of the economic hole created during the Bush years. I would be surprised if that trend did not continue for the next two months while the Social Security tax burden continues at its reduced level, and presuming that agreement on an extension through the rest of the year is reached, that trend should continue through the entire year. And that explains the Republican intransigence on a tax cut for 160 million of us.
If unemployment continues to fall from now until November, the Republican claim that the Obama plan for economic recovery failed will be rebutted. Thus, when they go to the electorate to ask for their votes, they will be unable to say that the Democrats' policies, which they always characterize as excess spending and taxation, have failed but the Democrats will be able to say that they worked and continue to do so. The implications for the election are obvious. That is why the Republicans seized on a reduction in force for federal employees to pay for the Social Security tax cut. Such a decline in employment would reduce consumer spending by amounts in the tens of billions, which would have offset the positive effects of the tax cut for the rest of us. Come November, we would be stuck in the same place, and the Republicans would have an argument as long as no one pointed out that they had stifled economic growth with one hand while promoting it with the other. The minimal increase in taxes on the ultra-rich that the Democrats sought would have hurt no one as statistics demonstrated: only 1% of those people are small business people who produce jobs, and the effect of the tax increase on them could have been mitigated. So the Republican objection to that proposal rings hollow. And all of that was becoming apparent, which is why they capitulated in the end. But they will continue to fight for regressive policy in pursuit of political gain. And the extent to which the Democrats will hold their feet to the fire publicly is the extent to which both the party and the American people will succeed. So what the Democrats have gained in the aftermath of the recent battle for the hearts and minds of The People is not just tax relief for the middle class. They also accomplished this change: now their fate is in their own hands. All they have to do is fight for it...for us.
Your friend,
Mike

















