5 Economic Flubs That Will Cost Democrats Most

Stimulus spending and bank bailouts aren’t the real problem.

By + More

Get ready to rumble. The fall elections are going to be a shouting match over President Obama's first two years in office, with the Democrats likely to lose no matter how loudly they bellow. In addition to battling the usual midterm snapback, Democrats must explain a slip-sliding economy that's not responding the way it's supposed to after more than $3 trillion worth of government aid. Finally, an issue that makes politicians run from TV cameras.

[See how to plan for a double-dip recession.]

Since there's no rational middle ground in politics any more, the arguments will be extreme and ludicrous. The 2009 stimulus plan created somewhere between 0 and 5 million jobs. Pick your number. The bank bailouts were either a shrewd government investment or a Goldman Sachs conspiracy. The Federal Reserve either saved western capitalism or socialized it.

Here's a one-paragraph cheat sheet that will let you tune all that out: The $800 billion stimulus plan prevented a bad recession from being worse, and saved some jobs. Nobody knows for sure how many. The bank bailouts were a necessary evil that helped stabilize the financial system, which helped everybody indirectly, but they have not directly benefited ordinary borrowers the way politicians hoped. So they reek of elitism. The Federal Reserve, regardless of past mistakes that contributed to the housing bubble, has probably done more to prevent a depression than any other part of government. The recession turned out to be worse than most forecasters thought, but overall, government aid helped considerably.

Still, the Democrats who control Congress and the White House have made some serious mistakes on the economy that leave them in political peril as the elections approach. Here's how they really screwed up:

Creating overblown expectations. In early 2009, the Obama White House made a notorious economic projection: The unemployment rate would top out at about 8 percent, as long as Obama's stimulus plan passed. The stimulus passed, of course, but unemployment rocketed up to 10.1 percent by October 2009, and has only fallen back to 9.5 percent, about where it's likely to be on election day. Obama and his economic team made the same mistake as many mainstream forecasters who underestimated the severity of the recession. No harm in that.

[Bookmark the U.S. News Business & Economy site for more insight and advice.]

But politically, Obama and Congressional leaders should have been smarter. Democratic pollster Bernard Whitman says Obama could have sold the stimulus quite differently, telling the public that unemployment could hit 12 percent without it. Sure, that's Monday morning quarterbacking, but both the Bush and Obama administrations—plus the Federal Reserve—had very dire private estimates for a worst-case economic scenario if big banks failed, the automakers went bust, financial markets panicked, and the government sat on the sidelines. Obama could have sketched a scary future without the stimulus, and been more or less right.

Instead, he latched onto a squishy prediction that would end up impossible to verify, claiming from the start that the stimulus plan would create 3 to 4 million jobs. Then the language morphed into 3 to 4 million jobs not necessarily created, but "saved." Now, Obama must explain how the stimulus plan worked even though things ended up a lot worse than he said. It would be easier to sell encyclopedias to the Jersey Shore cast.

Putting healthcare reform above all. Obama likes to point out that the government can do more than one thing at once, but the huge battle over healthcare reform knocked many other items off the agenda. After the stimulus plan passed in February 2009, Democrats assumed it would proceed on a kind of autopilot, stoking the economy as the money flowed out of Washington. So it seemed safe to tackle a massive issue like healthcare reform that would devour a lot of political oxygen. But there still was—and is—a lot of unfinished business on the economy. Washington still hasn't come up with credible help for small businesses, for example. The housing bust is turning out to be more severe than once thought, threatening a double-dip recession. And joblessness is obviously a chronic problem. Even if healthcare reform does turn out to be a historic Obama accomplishment, it came at the expense of present needs.

[Find out if you are a "zombie consumer."]

Phony stimulus. Subsidies for car and home sales got a lot of attention because they affected consumers directly and put free money into people's pockets. Economically, however, the Cash for Clunkers rebates and the first-time home buyer tax credits were dubious. They created a flurry of car and home sales at given points in time, but didn't necessarily generate more overall sales. Instead, they seem to have merely accelerated sales that probably would have happened anyway. They also created a false impression of recovery, particularly in housing, followed by a manic plunge in sales once the subsidies ended. One irony for Democrats: A steep summer drop-off in home sales, thanks to the expiration of the home buyer tax credits, could make the housing market seem even worse than it is come election day. Had there been no tax credits, housing might have bottomed out sooner, leaving less bad news to explain this fall.

[See why voters will get a lot angrier.]

Ignoring the national debt. Political leaders don't need to pay down the $14 trillion national debt tomorrow. What they need to do is develop a concrete plan to deal with it, showing some backbone and responsibility. For the most part, voters aren't upset because the debt is so big. They're upset because Washington seems spasmodic and dysfunctional, with none of the spending discipline ordinary people must have. President Obama has set up his own debt-reduction commission, which will issue recommendations after the election. But Democrats in Congress barely acknowledge that the debt exists. One of the few lawmakers talking about the debt is Republic Rep. Paul Ryan of Wisconsin. His "roadmap for America's future" has plenty of holes, but it's helping Republicans earn credit for at least putting a starter plan on the table.

[See how to tell if your company's a loser.]

Putting off action on the Bush tax cuts. It is simply unbelievable that in the midst of a woeful economy, millions of Americans don't know how much they'll owe in taxes next year. The real blame for this goes to President Bush and Congressional Republicans who passed the "temporary" tax cuts in 2001 and 2003, without cutting spending or accounting for the lost government revenue at all. Leaving that fiscal time bomb to explode at the end of 2010 was one of the most craven political acts in memory. Yet Obama and the Democratic Congress have known that taxes will "rise" on most Americans at the end of 2010, unless they extend the cuts. And they've done nothing. Obama wants to extend the middle-income tax cuts while eliminating them for higher earners, but that will be a huge, ugly battle in Congress. So Democratic leaders have put it off, as if tax hikes (or cuts) are no big deal. Voters will probably correct that misimpression in November.