Republicans trap Obama on economy

Congressional Republicans are running economic policy these days, but President Obama owns the results.

That puts the president in a bind, as the GOP proposals he signed into law are arguably slowing economic growth.

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The two most significant pieces of legislation approved this year both bear more of the imprint of the Tea Party movement than the White House.

The first was the bill to fund the government through fiscal 2011, which cut about $40 billion from federal spending. Obama’s opening position in that debate was to freeze spending in place.

The second was the debt-ceiling deal, which will add about $2.1 trillion in spending cuts over the next decade. Obama initially had hoped to win a “clean” increase to the debt limit without any cuts at all.

Obama signed both bills, taking co-ownership of the policies with the GOP.

Moody’s Analytics Chief Economist Mark Zandi projects that the spending cuts in the two deals will shave gross domestic product real growth by one percentage point in 2012.

Yet the deal does not include large enough cuts to the federal budget to impress U.S. creditors, Wall Street traders or many lawmakers who are demanding more.

While Obama’s call for a clean debt-ceiling increase was only an opening position, the administration pressed for revenue to be included in a final deal up until to the last weekend of talks. The White House backed away when the House GOP conference refused to budge.

House Republicans have been waving the victory flag ever since.

House Budget Committee Chairman Paul Ryan (R-Wis.) had a front-row seat this spring for an Obama speech in which the president trashed his GOP budget. On Wednesday, Ryan extracted a measure of revenge, bragging that the GOP had “called President Obama’s bluff” by sending the White House a bill without tax increases.

“Republicans won the policy debate by securing the first of many spending restraints we need to avoid a debt-driven economic calamity,” Ryan wrote.

Obama accepted a deal he didn’t like because it allowed the U.S. borrowing limit to be raised, preventing what his administration said would have been an economic catastrophe.

Yet the president is now saddled with a deal that offers no immediate spark to the economy and will likely hold back growth in the coming year.

Many in Washington thought markets would reward policymakers for agreeing to a debt-ceiling deal. Instead, the Dow Jones Industrial Average had one of its worst days of the year on Tuesday, falling 266 points the day the president signed the bill into law. The Dow rose nearly 30 points Wednesday, but it was another volatile day of trading.

Obama showed frustration over his predicament on Tuesday, and sought to blame Congress for the “manufactured crisis.”

“It’s pretty likely that the uncertainty surrounding the raising of the debt ceiling … has been unsettling, and just one more impediment to the full recovery that we need,” Obama said. “And it was something that we could have avoided entirely.”

Dan Alpert, managing partner of Westwood Capitol, said Wall Street’s indifference to the debt deal reflects the fact that the debt-ceiling crisis “wasn’t really a crisis in anyone’s mind.”

“There is nothing here other than an absence of demand,” he said of the drop in equities over the past two weeks.

Reports of weak consumer spending and slow economic growth have spooked New York and Washington.

Alpert said too many have been comparing the prevailing economic environment to past cyclical downturns, expecting a change in the business cycle. He argues what is happening now is “a secular problem” arising from new competition from emerging markets and past efforts to solve what was seen as a business cycle problem through extraordinary monetary, fiscal and regulatory policies.

 One victory for Obama in the debt package is that most of the spending cuts are put off until 2013 and beyond.

While fiscal policy is a strong drag on the economy, according to Zandi, the backloading of cuts means the debt deal won’t have more than a percentage-point impact on GDP if there are no further changes in policy.

 Nonetheless, Zandi argues, policymakers could help the economy by extending the payroll tax reduction and federal unemployment benefits, two policies backed by Obama. But Republicans have been cool to moving either.

 Job growth will probably be the biggest factor in determining whether those policies are extended, and Congress and the White House will have a new labor report to chew on come Friday.

A report from payroll processor ADP on Wednesday predicted the economy would add 114,000 private-sector jobs in July. That would be welcome news, though it would do little to change the 9.2 percent unemployment rate.