Going into next year’s election, President Obama is in a heap of trouble over the economy. Some evidence: in June, only 29 percent of the people who participated in a Wall Street Journal / NBC News poll thought the country was “headed in the right direction.” A full 62 percent, by contrast, thought America was “on the wrong track.” A clear majority, too — 41 to 54 percent — disapproved of the president’s economic performance. The numbers aren’t moving in Obama’s favor, either. Another problem for the White House: Unlike in 2007 and early 2008, this season’s crop of Republicans, flawed as they may be, grasp that the economy is what’s on voters’ minds, something Sen. John McCain didn’t figure out last time around until it was way too late.
At least, that’s the conventional wisdom that’s starting to congeal. For this election, though, conventional wisdom may work about as well as it has elsewhere over the past decade. Remember, home prices can never fall nationwide. The financial system can easily withstand what will be a “soft landing” in housing. After such a sudden, severe recession, job growth will be quick. That is, the conventional wisdom may be completely unreliable — including the notion that any president who can’t deliver on the economy will be, as Obama put it a month after taking office, a “one-term proposition.”
The GOP needs to keep this risk in mind — not just for its own prospects next November, but for the nation. After all, what the country needs is a real debate on the economic issues that are most tightly suffocating growth, and someone must credibly hold President Obama accountable for his failures, too. Instead, what we’re getting from the mainstream candidates is a throw-spaghetti-at the wall approach. They all hope that something — anything — will resonate with voters. But all we’re getting is an abstract mess.
Consider the first big debate of the primary election, CNN’s meet-up in New Hampshire on June 13. The candidates agreed on the problem. As former Massachusetts Gov. Mitt Romney put it, “we have more chronic long-term unemployment than this country has ever seen before.” Former Minnesota Gov. Tim Pawlenty chimed in: “The programs that President Obama has put forward haven’t really worked. They’ve been a failure. They’ve been slow.” Former House Speaker Newt Gingrich called it an “Obama depression.”
And they all have plenty of solutions, most of which they agree on. Romney and Pawlenty would both cut the business tax, for example. Romney said in his announcement speech that he’d “make business taxes competitive with other nations.” Pawlenty, who, among all the candidates, has announced the most specific tax plans, would cut business tax rates from 35 to 15 percent, cut taxes on small-business owners, and eliminate investment taxes. He’d target “subsidies and loopholes,” too, to simplify the individual tax code to just two rates.
Almost everyone agrees that regulations are too onerous. Minnesota Congresswoman Michele Bachman, a Tea Party favorite, has gone as far as to say she’d “repeal” the Environmental Protection Agency, the “job-killing organization of America.” And most agree that the president has supported private-sector labor unions at the expense of job creation, holding up the National Labor Relations Board’s complaint against Boeing for creating new jobs in South Carolina rather than in Washington state as illegal union punishment.
Bachman aside, these positions aren’t that extreme. They’re even moderate. Most economists across the board hold that the business tax rate is too high relative to the rest of the world. Economists agree, too, that the individual tax code is inscrutable and shot through with loopholes that favor special interests. It seems unproductive for the federal government to involve itself in Boeing’s labor spat; Boeing workers knew that their employer could hire people elsewhere to avoid strikes like the eight-week walkout in 2008. And reducing burdensome regulations is always sensible. The trick is figuring out which ones are superfluous and which ones are necessary to, say, keep the food supply safe, something that the top-tier GOP candidates agreed should be a government priority at the debate.
If this campaign were taking place in normal economic times, then — or even in slightly sluggish times — these proposals would be yeoman’s work, subject to quibbles about whether rhetoric is over-the-top and whether some candidates are too optimistic about making their numbers work.
But times like these make people really pay attention to this stuff — and notice that the candidates’ grab bags of proposals sound like they were plucked straight from the hands of a Beltway economist. Pawlenty may have thought that talking about how “small and medium size businesses” are typically structured in the tax code “as S corps or LLCs” would be an audience-pleaser in his kick-off speech, and Romney may have thought that his own audience knew the federal ledger in and out when he promised to “cap federal spending at 20% or less of the GDP.” But nobody seems to be feeling anyone’s pain on the one issue that still matters most: the housing bust.
Of course, the candidates nod to housing reality once in a while; they have to. House prices are one-third below their 2006 peaks, according to the S&P/Case-Shiller index. At least a quarter of homeowners are “underwater,” meaning they owe more than their homes are worth. Romney, then, duly noted at the Granite State debate that “we’ve got housing prices continuing to decline, and we have foreclosures at record levels.” Pawlenty, echoing Texas Congressman Ron Paul, noted that “we had politicians in Congress trying to micromanage the housing market, and they created a bubble and they created the mess. And now we have all these innocent bystanders … who’ve been devastated by this.” And Bachman said at her own inaugural campaign speech, “we can’t afford four more years of a housing crisis that is devaluing our homes.”
Problem is, though, that when the candidates do mention housing, they don’t generally acknowledge the awful reality of the problem. The housing bubble was not like the tech bubble. People may have lost money in the earlier Nineties bubble, but at least they didn’t owe money. The nation’s housing debt, by contrast, is only 5 percent below its 2007 peak, after having doubled between 2000 and 2007.
Many Americans are just starting to come to terms with the fact that housing prices aren’t going up anytime soon to rescue them from this staggering debt — and that, in turn, has changed their thinking on everything else. Middle-class citizens, for example, depended on ever-rising house values not only for their regular consumer spending, but for their children’s educations and for their own retirements.
The housing bust, then, isn’t just a setback. It’s a traumatic change in psychology. The candidates glance over this, at best. Bachman said the problem is that Obama is “making home ownership impossible for many Americans.” Romney says that the goal is “getting this economy growing again, so that we can have rising housing prices again.” Only Pawlenty was brave enough to say that “the market is going to have to adjust,” again echoing Paul. But Pawlenty followed up only with a vague prescription that “the best thing that we can do is get the economy moving again.”
This is circular reasoning. The economy won’t “move” until federal elected officials and regulators honestly and competently address this debt overhang. On the commercial real-estate side, in many cases, lenders have taken the hit on their bad investments, writing down the amount owed when a building simply isn’t worth what people thought it was worth five years ago. On the single-family side, that’s not happening. Foreclosures drag on for years. People who aren’t in foreclosure half-heartedly make their bubble-era mortgage payments, with no hope of a reprieve on the amount they owe.
Why not? Well, for many reasons. Changes of ownership — the threat of which, at least, is often necessary to clear debt — are messier on the residential side than on the commercial side. Someone lives there, after all. Commercial borrowers, unlike homeowners, are often savvy financial folk or have them on their payrolls, and they know that both borrower and lender bear some responsibility for outlandish valuations when it comes to non-recourse lending.
And there’s the moral issue, too: Many Americans view renegotiating their outstanding debt not as a straightforward business strategy, but as evidence of a character defect and a personal failure — you made your bed, you lie in it, even at the cost of your own future and the nation’s as people throw money toward the bubble of the past rather than toward investments of the future.
It would take a courageous candidate to embrace this problem — and to offer some solutions. A Republican with financial experience — say Romney — should say that a principle of business is to cut your losses. Regular people, just like businesspeople, make mistakes. They should learn from them and move on, not be shackled by them through decades of painful deleveraging and low growth.
To that end, banks and other mortgage servicers should have to complete foreclosures quickly; if they can’t do so because the process is too complicated, they should write down the principal amount owed to end the uncertainty. Forcing quick foreclosures would start a cascade; other homeowners, too, would default. Only then would the equation change for banks and servicers. Proactive principal writedowns of people who weren’t in default would then mitigate losses, not exacerbate them, because such actions would keep more people from abandoning properties. What’s more, cutting mortgage losses sends a smart market signal: The only thing that will keep lenders from lending too much in the future is the real possibility that they won’t be repaid.
One big hindrance to speaking out on this topic, though, is the fragility of the financial system. Candidates who have done a little research know that more mortgage write-downs would mean more financial-industry instability and panic. And though the presidential field to date has unanimously settled its position on bank bailouts — they’re against — nobody wants to talk about Wall Street except as a historical curiosity of 2008. A new panic, after all, would remind voters that we really haven’t ended too-big-to-fail. It would remind them, too, that Republicans have been less than upfront about how allowing financial firms to fail means doing things like forcing big banks to hold hefty capital against, say, lucrative derivatives, something that Congressional Republicans have fought. Most important, it forces business-friendly politicians to admit that not all rules and regulations are bad. Some rules, like limits on financial-industry debt, are necessary, in fact, to allow the free market to work in allowing bad firms to fail without endangering the rest of the economy.
It’s a pity — because the housing hangover that dare not speak its name is President Obama’s real weakness. The president, really, is king of “extend and pretend.” His 2009 home buyers’ tax credit drafted taxpayer money into propping up house prices —when prices really needed to go down. His policy toward home modifications has encouraged lenders to tack on past-due mortgage payments, plus fees, to already bloated loans, and offer a few more years’ worth of “teaser” interest rates.
But the president’s would-be successors seem willing to overlook his biggest mistake — and it may hurt them. It’s going to be hard for a candidate who goes on about the business tax rate to connect with people at a time when voters feel trapped in houses made of debt.
This disconnect hurts Obama, too, of course. But that’s another strange thing about this election: Nearly three years into Obama’s term, 47 percent of poll respondents blame former President Bush for today’s economic woes, according to the Journal / NBC poll, against the 34 percent who blame Obama. This response, too, speaks to the trauma that people felt starting in 2008 — and are quietly still feeling, even if Washington and those who’d like to live there have moved on.
If voters want a president who willfully ignores housing reality, they may stick with the guy they have already.