By Thomas I. Palley

TO: President Obama
FROM: Thomas I. Palley
RE: How to avoid stagnation and restore shared prosperity
DATE: Labor Day, 2010

Mr President,

With hopes of a V- or U-shaped recovery fading, there is the increasing prospect of an L-shaped future of long stagnation, or even a W-shaped future in which W stands for something worse.

The reason for this dismal outlook is economic policy is trapped by failed conventional thinking that can only deliver wage stagnation and prolonged mass unemployment.

Your administration’s current economic recovery programme has been marked by four major failings:

1. Inadequate fiscal stimulus.
2. Failure to cauterise the housing market
3. Failure to neutralise the trade deficit
4. Failure to restore the link between wage and productivity growth

Just over 18 months ago, Barack Obama became the first African-American man to be sworn in as president of the US, after having won the Democratic party’s nomination in June 2008 and then having convincingly defeated his Republican opponent, John McCain, in the November elections.

In the early months of his presidency, Obama’s approval rating in the Gallup polls was well above 60 per cent (65 per cent in May 2009). Since then it has dropped steadily, to 46 per cent by July 2010. Interestingly, the ratings among African Americans has held up close to 90 per cent throughout the past 18 months, while among Hispanics it has dropped by 20 percentage points and among whites by an even larger 24 points, from 62 per cent in January 2009 to 38 per cent in July 2010.