COVER STORY: INTERNATIONAL TRADEStill Strong On TradeAlthough some tea party-backed contenders attack trade deals, most GOP candidates are keeping their positions flexible.Peter CohnPresident Obama and Republican leaders in Congress don't see eye to eye on much. One point they do agree on is that free-trade pacts, such as a pending mega-deal with South Korea, can help get the economy back on track. [more...]

On a Wednesday afternoon in late September, Darius Johnson collected his wife and 5-year-old daughter and made his way to a community center in a middle-class neighborhood of Richmond, Va., where he waited more than three hours for a consolation prize from the president of the United States. Johnson, the head of a small community bank, had been asked several weeks earlier by White House officials if he would consider hosting President Obama at his home for a "backyard discussion" on the economy.

The Obama team ended up picking a different host family but invited the Johnsons to attend the community-center event. When the day arrived, Darius Johnson managed to score the final question of the president's two-day, swing-state economic tour.

After a brief windup, Johnson told Obama that he had read that consumer confidence and expectations were falling. "And I wonder," he asked the president, "if you think our nation is strong -- which I would hope you do -- the question is, what is the disconnect between consumers' perception of the nation, of our economy, and yours?"

White House officials -- along with Republican and Democratic leaders in Congress, economists, business owners, investors, and anxious American workers, among others -- have agonized over variations of that question for the past year. Simply put: Why isn't the economy recovering faster? To which the politicians add: And how can we change that?

Johnson has some theories of his own, born from running the sort of lending operation that funds the small businesses and start-up companies that many economists call linchpins of post-recession growth. Partly, he says, banks are reluctant to lend to new applicants -- and businesses are slow to hire -- because they are skeptical that the economy will keep growing. Also, Johnson says, businesses are struggling under an "increasingly difficult regulatory environment." No one knows what the federal rules to flesh out health care and financial reform will look like, how much they'll cost, or what it will take to comply with them. Consumer spending suffers as a result.

Those two theories just happen to mirror the diagnoses that Democrats and Republicans, respectively, have offered for the nation's core economic ailments. Obama and his Democratic colleagues say that concerns about demand have stalled recovery from the worst economic crisis since the Great Depression. Republicans say that the main culprits are uncertainty over pending regulations, ballooning government spending, and massive projected budget deficits.

From those diagnoses, each party has crafted an economic prescription that shapes its pitch to voters for the November midterm elections. Herein lies the problem, no matter which party or theory of stunted growth you believe: None of the proposed remedies would fully cure the maladies they target -- and whoever controls Congress in January appears set to leave major economic ailments untreated.

Slow Growth In Richmond

Some measures of the nation's economic health are indisputable. After a few strong months in the spring, employment growth has slowed to a trickle. The jobless rate hovers near 10 percent. Per capita personal income has barely ticked back to its prerecession peak. Corporate profits have soared to historic highs, although they're growing more slowly now than they did in the first quarter of this year. The nation's largest companies are sitting on nearly $2 trillion in unspent cash reserves -- money that could be brightening the hiring situation but isn't.

Richmond turns out to be a pretty good proxy for the national economy as a whole. Its unemployment rate sits at 7.9 percent, the same as it was a year ago and about double its average over the last decade. The city shed jobs during the recession in manufacturing and in the financial sector. The recession "took us down hard and even seemed to lag a little bit," said Ann Macheras, an economist who heads the regional research division at the Federal Reserve Bank of Richmond, "but now it seems we've bounced back, so that we're not really worse than the rest of the country in job creation -- which means it's slow." The last couple months of growth, she added, "have been a little softer. It's hard to know exactly why that is."

COVER STORY: INTERNATIONAL TRADEStill Strong On TradeAlthough some tea party-backed contenders attack trade deals, most GOP candidates are keeping their positions flexible.Peter CohnPresident Obama and Republican leaders in Congress don't see eye to eye on much. One point they do agree on is that free-trade pacts, such as a pending mega-deal with South Korea, can help get the economy back on track. [more...]

In an election season when voters are downright obsessed with the economy, party strategists have spent a lot of time building comprehensive theories for why, exactly, growth has softened. In some ways, it's an educated guessing game. The available data are far from conclusive, and they are sometimes contradictory.

Still, researchers and business leaders have more or less coalesced around three explanations. One of those has received little attention among candidates and top policymakers: the idea that most of the current unemployment situation is "structural" -- that is, unemployed workers lack the skills to do the jobs that American businesses are creating.

Lawmakers don't talk much about that problem, in part because recent research suggests that it can explain only half of the gap, at best, between historic levels of unemployment and what we're seeing today. Moreover, remedies for structural unemployment are long term and relatively unsexy, such as improving education and reforming worker-training programs. They also give rise to the argument that Congress and the president are fairly powerless to jump-start the economy.

Of course, "It doesn't matter what we do about the economy" doesn't make for a great midterm campaign slogan. It certainly doesn't fit well into the economic narratives that the parties have settled on this year, each of them rooted in one of the two other dominant explanations for the state of the economy.

Republicans say the administration and its congressional allies have riddled the economy with uncertainty. They blame Democrats for failing to make permanent the Bush-era tax cuts that are scheduled to expire at year's end. They also say two of Obama's signature initiatives, the health care and financial-regulation packages passed this year, are unleashing a flurry of new and as-yet-unknown rules. (Both laws leave major details to be sorted out by executive-branch regulations.) Businesses small and large are thus left to guess on major costs down the road -- and hesitant to spend money before the picture clears up. Darius Johnson's representative in Congress, Republican Whip Eric Cantor, recently used a press conference to rattle off a list of Richmond-area businesses that have been forced to close or cut back because of the health care law or other federal regulations.

For business owners, "it's all uncertainty about costs," contends a senior Republican aide involved in crafting the party's economic policy for the midterms. "These guys are trying to figure out what their costs are going to be at the end of the day -- the tax side, the regulatory side. Uncertainty in that arena is what's making them sit on cash."

Another senior GOP economic aide adds that the federal budget deficit, as of now and in longer-term projections, has become a "pre-eminent concern" among businesses worried about whether government debt will trigger inflation or tax increases. "They see the spending going on in Washington," the second aide says, "and they see it's not sustainable."

The economic proposals that Republicans unveiled in their "Pledge to America" last month aim squarely at the certainty question. The pledge promises to make all the tax cuts passed under President Bush permanent; to curb major regulations; to repeal large chunks of the health care law; and to prune domestic discretionary spending back to 2008 levels. The section of the pledge detailing most of those provisions is called, not coincidentally, "Our plan to end the uncertainty and create incentives for job growth."

The Obama administration, by contrast, says that the biggest uncertainty facing businesses isn't tax rates or regulations. It's how many customers will appear in the months to come.

Obama's economic advisers blame the recession on unsustainable consumer spending and asset bubbles, the latter made possible by "trickle-down" tax cuts and other economic policies under Bush. Consumers are saving more and spending less in this recovery, making business owners reluctant to expand their operations and hire more workers. Gallup polling suggests that the situation is worsening, with consumer spending falling in August to trough-of-the-recession levels.

The solution, administration officials say, is to find ways to pump up demand by injecting more money into the economy. That was the idea behind 2009's $800 billion stimulus, which Democrats contend staved off a second Great Depression. The same philosophy drives the recently enacted law providing tax breaks for small business and the broader economic plan that Obama outlined in Ohio last month. That plan included tax incentives for investment and increased government spending on infrastructure. In each case, the goal is to rev up demand, which will drive growth and spur hiring.

"The primary uncertainty in business is wanting to know there's going to be demand. That's when it makes sense to expand your capacity," said Austan Goolsbee, the newly installed chairman of Obama's Council of Economic Advisers, in an interview. He added: "What we need is exactly what the president proposed: Let's have investment incentives, let's encourage research and development, let's do infrastructure investing. Those are issues on which there is now broad consensus among the American people, between business and government."

Holes In The Platforms

Evidence exists to support both theories, but a lot depends on how you spin the numbers. Take the most recent survey of small-business owners by the National Federation of Independent Business. About a third of small businesses identified "poor sales" as their No. 1 problem. A slightly higher number, 36 percent, called "taxes" or "government regulations and red tape" their top problem. Half of all respondents said that now is not a good time to expand and cited "economic conditions" -- whatever that might mean -- as the biggest reason.

A lot of evidence also suggests that whether certainty or demand is most responsible for dragging the economy down, the Democratic and Republican parties' policies on the table both fall short.

The Pledge to America omits any detailed discussion of slowing the enormous growth in social-safety-net spending that budget forecasters say will create huge deficits and long-term debt in the next couple of decades. Obama's investment and infrastructure plan would likely boost demand with only a fraction of the power of last year's stimulus bill. There's no guarantee that either party's course will clarify the regulatory environment any time soon -- in fact, they could both leave businesses with more uncertainty than ever.

So each prescription comes with significant caveats, even in the eyes of economists who generally support the policies in question. One of the first to endorse the GOP's approach was John Taylor, a Stanford University economist and a leading academic proponent of lower taxes and less regulation. In an interview, Taylor praised the pledge but also said that to solve the certainty problem, Republicans must "lay out a plan to reduce the deficit in a credible way," largely by reforming entitlements, particularly Medicare: "The sooner the better, and the more credible the better." But cuts to Medicare and Social Security poll poorly among elderly voters, a demographic group that the GOP is running well with this year.

Keynesian economists, notably Brad DeLong of the University of California (Berkeley) and New York Times columnist Paul Krugman, have consistently called for more federal spending to stimulate demand, far above the levels that Obama has proposed. In an appearance at a National Journal forum last week, Joseph Stiglitz, a Columbia University professor, said that the federal government "can't afford not to stimulate the economy in some way or another. If we spend money on investments, education, technology, and infrastructure," he continued, "that leads to faster economic growth in the short run, higher employment, higher tax revenues, and also to higher growth in the medium and long term." As with entitlement cuts, though, voters appear to be in no mood for a second stimulus.

When it comes to regulations, certainty can prove elusive. The utility industry is a prime example. The lack of congressional action to effectively price carbon-dioxide emissions, and the court-challenged move by the Environmental Protection Agency to limit those emissions from large sources, have frozen many large power companies' plans to invest in new capacity -- and that means putting off construction that would create jobs.

Both parties defend their economic strategies against those intrasquad critiques. Asked about limiting entitlements to cut deficits, the first Republican aide said, "The key is that you have to show you're willing to begin by taking steps across the board. Part of this is economics; but to be fair, part of this is politics. We have to have credibility with the public, and you also have to have credibility with the markets."

White House officials say that Obama's proposals will be a good start to stimulating demand, and that the president is not satisfied with the slow-growth state of the economy and private-sector employment. In public and behind the scenes, administration officials have steered clear of any discussion of pushing a large, second stimulus package.

Why Not Both?

Plenty of people believe that Washington needs to do both -- boost demand while easing uncertainty. David Altig, senior vice president and director of research at the Federal Reserve Bank of Atlanta, surveys businesses about economic conditions. He hears frequently about both problems. "They'll tell you they'd like to have more customers. They'll also say they're hesitant to expand because of reservations about regulations, which usually means taxes and the health care bill." Crafting policy solutions to address both, Altig says, "becomes an exercise in risk management: Where are you likely to make the biggest mistake?"

If there's anything close to a plan that bridges both parties' theories, Douglas Elmendorf may have floated it late last month. Elmendorf heads the nonpartisan Congressional Budget Office, and on the day before the president headed to Richmond, Elmendorf trekked to Capitol Hill to give the Senate Budget Committee a lot of information that its members did not want to hear.

The topic was the economic effects of extending the Bush tax cuts, either temporarily or permanently, either for all taxpayers, or, as Obama favors, for all but the wealthiest Americans. First, Elmendorf repeated his office's long-standing analysis that income-tax cuts do less, per dollar, to stimulate growth than do measures such as extending unemployment benefits or reducing payroll taxes. Extending the Bush cuts, he said, would boost gross domestic product up to about 2 percentage points per year in the near term. But, he added, the debt incurred by those cuts would quickly begin to drag the economy backward, eventually wiping out the short-term gains.

The same would be true of any spending or tax-cut measures to boost demand: Benefits today incur costs tomorrow. Unless, that is, you tackle both problems at once -- with, say, a temporary payroll-tax cut linked to a phased-in tweak to safety-net benefits, such as raising the retirement age for Social Security. Such a deal would require both parties to play in the other's court, however, and to anger a core constituency or two. As Elmendorf dryly noted in his written testimony, "Developing such a combination would be feasible but not easy."

It's particularly difficult because neither the White House nor GOP leaders give much credence to the other side's economic plans. Republicans say the current unemployment rate shows that federal demand-focused responses, such as the 2009 stimulus, are destined to fail. Democrats "had all of the power; they have passed all their initiatives, and they lost jobs," the first Republican aide said.

Goolsbee says the Republican worldview that regulations inherently hurt business was "totally disproven in the last two years. It did not help the economy -- and it didn't even help the financial industry -- that they ripped up the rules of the road over the last 10 years."

The two parties can't even agree on whether stepped-up partisan clashes in Congress would help or hurt the economy. The Republican aides say that the market wants, first and foremost, for the GOP to put the brakes on the Democratic agenda, and that Democrats have shown little willingness to adopt their ideas thus far.

House Majority Leader Steny Hoyer, D-Md., recalls working with then-GOP Whip Roy Blunt, R-Mo., to craft the financial bailout in 2008. Since then, Hoyer lamented in an interview, "we've had great conflict in the Congress, where Republican opposition, and, frankly, Republican spin from its allies in the media -- talking heads -- have continued to create a sense of uncertainty in the country and have, frankly, masked the [economic] progress that we have been making, that would give that confidence to people."

"Confidence" is the word that Richmond bank President Darius Johnson settles on when summing up his personal diagnosis of America's economic ills. A psychology major in college and an Obama voter in 2008, Johnson says that consumers are suffering from the "discourse disconnect" they see in Washington among leaders who don't seem willing to work together to solve problems. "I feel, in my gut, that it is a confidence factor," Johnson said, adding later, "I honestly believe it would be the same with a Republican or a Democrat in office. And it makes people like me frustrated."

Obama went straight to that point when he fielded Johnson's question about economic confidence at the end of his Richmond appearance: "It seems like everybody is out there yelling at each other and angry, and so that kind of is disquieting." The president went on to acknowledge Americans' lingering pain from the prolonged recession and to praise the nation's "go-get-'em attitude to be able to climb out."

"We're just going to have to keep on pushing," Obama said, in closing. "And being with families like all of yours gives me great confidence in the future." In all, it was a nearly 900-word answer, which the questioner later said he appreciated for its humility. Long on hope, short on specifics. A confidence builder, for Darius Johnson at least.