Valliere: Fear in the Halls of Congress

The term schizophrenic apparently is passé; the preferred word now is bipolar. So let’s call the American public bipolar on the issue of jobs and government spending. The voters want more jobs but no new stimulus; it can’t be done.

Congress has reacted by trimming the jobs package now pending in the Senate; a new mood of austerity is taking hold in Washington – not because the politicians believe it’s the correct prescription for a weak economy, but because they are afraid of a voter backlash.

How angry are the voters? Just ask Sen. Bob Bennett of Utah and other Republicans who have lost their re-election bidsbecause they supported TARP. Voters are convinced that TARP was a wasteful failure – and that’s just plain wrong. The banks paid back the loans, with interest, and a potential Depression was averted, as former Fed Vice Chairman Alan Blinder argues in the June 16 Wall Street Journal.

The voters won’t listen to that argument, but – thankfully – the bond market understands. If deficit spending to avoid a Depression is such a bad idea, why are interest rates so low? Would an extra $20 billion for unemployment benefits really have an impact on yields? The Treasury 10-year bond yield has been around 3-1/4% lately – hardly a sign that the bond market cares about deficits right now. (Track all your bond moves here)

There are times when stimulus is the only way to go – as the Chinese clearly realized a year and a half ago. They stimulated their economy by about 2-1/2 times the amount that the U.S. stimulated, as a percentage of GDP. Now China has a strong economy and the U.S. is growing modestly – in part because we stimulated too timidly.

A decade ago, supply side conservatives argued that deficits don’t matter, and they were right. There’s absolutely no correlation between red ink and bond yields, as we see today. Obviously, big new spending on things like national health insurance is risky; I opposed the bill because we couldn’t afford it and the projected cost savings were illusory.

But if it’s a choice between spending $20 billion and saving a few hundred thousand jobs for teachers, firefighters and police, that’s a no-brainer. The states desperately need additional assistance, but the politicians are terrorized by voters who would flunk Econ 101 – you don’t apply leeches to a sick patient, but austerity is the preferred course right now. There are times for austerity, but this isn’t one of them; austerity now will simply make the economy weaker.

Greg Valliere is Chief Political Strategist at the Potomac Research Group, a Washington-based firm that advises institutional investors on how government policies affect the markets. Greg has covered Washington for over 30 years, starting his career as an intern at The Washington Post, then co-founding The Washington Forum in 1974 to bridge Wall Street and Washington. He has held several positions, including Director of Research, for Washington-based firms, including the Schwab Washington Research Group. Greg is an exclusive commentator for CNBC-TV, where he appears regularly on most of the network’s programs.