Kudlow: Scandals, Jobs and the Economy

Barack Obama
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When President Richard Nixon collided with the Watergate scandal he was a very unpopular man. The nation at the time was suffering one of the worst recessions in history, and one of the highest inflation rates, too. So Watergate sunk Dick Nixon, but for good measure, the economy sunk him even more.

Roughly 25 years later, Bill Clinton was impeached because he lied about his affair with Monica Lewinsky. But despite his personal transgressions, he never really lost his popularity. Why? The economy was roaring.

So you might say scandals are less scandalous during prosperity, and more scandalous during recession.

As for the current president, he finds himself with a precariously thin margin. As yet, there is no clear and direct link between President Obama and a trove of political scandals. Not yet. And while he doesn't have a recession on his hands, not even the president's strongest supporter believes we're in some kind of Reagan-Clinton economic boom.

The failure to get to the bottom of Benghazi is a scandal. The issue of secret subpoenas of reporters is close to scandalous. The IRS targeting of conservative groups is most definitely a scandal. And most recently, the NSA's secret-data collection efforts smell of scandal. (One wonders if Obama shouldn't at least appoint a scandal czar to keep track of these front-page miscues.)

(Read More: Scandals Haven't Dented Obama's Job Approval Yet:Poll)

Meanwhile, it's a 2 percent economy with relatively high unemployment rates, such as the 7.6 percent rate for May. And a broader unemployment rate — including discouraged worker dropouts and underemployed labor — stands at 13.8 percent. Not good. Four years ago, the president's $1 trillion stimulus package was supposed to generate a 5.1 percent jobless rate. So much for Keynesian pump-priming.

Now, jobs are rising. That's a good thing for America. Inside the May employment report, nonfarm payrolls increased by 175,000. But over the last three months, payrolls have slowed to an average of 155,000, which is significantly slower than the 208,000 new-job average of the prior three months.

Looked at in the same way, 1.6 percent growth in hours worked for May is much below the 3.3 percent growth rate of the prior three months. And when you put wages and hours worked together as a proxy for middle-class labor income, the past three months generated only 2.8 percent growth compared to 5.1 percent in the earlier period.

In other words, though jobs are rising — a good thing — there are slowdown signs throughout the latest employment report.

Many economists have been talking about a second-half rebound in economic growth. But when you look at soft ISM reports and poor factory orders, you have to wonder where this rebound is coming from.

(Read More: Is Today's Job Number 'Too Good'?)

Housing is the best part of the picture. But that's a small fraction of GDP. The real story is that businesses flush with cash still don't want to invest in this economy. They have no confidence.

Why? Obamacare's tax, regulatory, and mandate burdens are on the way. The minimum wage is going up. And prospects for full-fledged tax reform don't look good.

All of which leads me to monetary policy, and the idea that the Fed is going to wind down its money-creating bond purchases.

Though I have never approved of the Fed's attempt to fix interest rates and bloat its balance sheet, the U.S. money supply — M2 — is nonetheless growing at a very slow 5 percent pace over the past six months. That's even while all those reserves the Fed is printing are not circulating through the economy. So the velocity of money is falling at 3 percent.

In round numbers, you have a scant 1 percent inflation rate and a 2 percent real GDP rate, which comes to an unacceptably low 3 percent increase in total spending, or nominal GDP. The Fed can't let that happen. It should be closer to 5 percent. Stocks don't want 3 percent to happen. But a fall in gold and a stronger King Dollar are signaling it could happen.

So even though the Fed's bond-buying policy has not worked well, as people hoard cash and avoid risk, the only thing left for better economic growth is a Fed that keeps on trying. Perhaps if the budget-cutting sequester lasts, and some miraculous pro-growth tax reform occurs, the Fed can taper down. But fiscal growth incentives are still pretty shaky, which is why Bernanke & Co. is the only growth lever left. This is no time to tighten policy.

Of course, with more of the same from Bernanke & Co., we're still looking at subpar jobs and economic growth. It's nothing to write home about. And it's nothing that's going to bail out President Obama if he's directly fingered in one of these brewing scandals.

It's closer to a Nixon scenario than a Clinton one.

—By CNBC's Larry Kudlow; Follow him on Twitter @larry_kudlow