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Doom for the Democrats as joblessness lingers

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By David Ignatius
Sunday, November 29, 2009

For a political horror show, fast-forward to the summer of 2010: The unemployment rate is stubbornly high, hovering between 9.3 and 9.7 percent. Companies are wary about hiring more workers because the economy remains soft. Small businesses, which normally power a recovery, are caught in a credit squeeze.

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In this scenario, the jobs outlook will remain bleak for another year. The unemployment rate will remain well above 8 percent in 2011. And the economy won't bounce back completely for five years after that.

The Democrats, in our scary 2010 movie, will be heading toward the midterm elections hoping to preserve their 81-seat margin in the House. Vulnerable incumbents will be clamoring for more economic stimulus, but the Obama administration will be constrained by the huge budget deficits needed to bail out the economy after the 2008 financial crisis.

I wish that this economic forecast were just a bad dream after too much Thanksgiving turkey. But it's drawn from the minutes of the Federal Reserve's Nov. 3-4 meeting, released last week. It's a genuinely troubling document, as much for its political implications as for its number-crunching. It draws a picture of a nation of unfair and unequal sacrifices, where Wall Street is recovering even as Main Street continues to pay the bills.

If the Fed's projections are right, the public is going to be very angry next year -- at big business and at the elected officials who have spent trillions of dollars without putting the country fully back to work. Lou Dobbs, the voice of populist anger, may become the nation's hottest politician. President Obama, who has struggled to find a centrist consensus for economic policies, may be tossed like a cork on a stormy sea.

The Fed struggled to answer the basic question that is haunting administration policymakers: Why has unemployment remained so high, even as the economy has started to grow again and the stock market has been on a tear? The Fed's answer is that businesses, having been burned by the recession, are wary about adding more workers or making new investments. Like consumers who have just discovered the virtues of saving, their prudence -- however sensible on an individual basis -- is a collective drag on the economy.

"Business contacts reported that they would be cautious in their hiring," the Fed minutes note. "Indeed, participants expected that businesses would be able to meet any increases in demand in the near term by raising their employees' hours and boosting productivity, thus delaying the need to add to their payrolls."

If hiring hasn't bounced back, neither has lending. "Bank loans continued to contract sharply in all categories," the Fed reports. Big businesses may be able to get money, but smaller firms "faced substantial constraints in their access to credit." This credit squeeze, in turn, will "restrain hiring at small businesses, which are normally a source of employment growth in recoveries."

Putting the numbers together, the Fed predicts that despite a growing economy, unemployment will be 8.2 to 8.6 percent during 2011, down only about a percentage point from 2010. And here's the scariest line of all in the Fed minutes: "Most participants anticipated that about five or six years would be needed for the economy to converge fully to a longer-run path" and a normal job market.

Looking toward next year's congressional elections, strategists will have to calibrate the politics of high unemployment. The four states with the highest jobless rates as of October are all Democratic strongholds: Michigan, at 15.1 percent; Nevada, at 13 percent; Rhode Island, at 12.9 percent; and California, at 12.5 percent. And if you look at the states where Democrats gained their 21 House seats last year, the list includes eight states where unemployment in October was above the national average of 10.2 percent.

The politics of rage aren't pretty. But in this case, it's hard to argue that the anger isn't justified. The Fed's analysis shows what we see in the daily stock market summaries. People on the top are recovering their losses; people on the bottom are out of work and out of luck.

I admire Obama's effort to make responsible economic choices in this environment and his refusal to demagogue issues such as financial reform. But he will need all the political genius he showed during the 2008 campaign -- and which he has displayed too little lately -- to handle what's coming at him next year.

davidignatius@washpost.com


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