Despite a series of potentially damaging scandals, President Barack Obama continues to enjoy a positive net approval rating for his overall job performance and is viewed more favorably than the leaders of the opposition Republican Party on his handling of most issues of greatest concern to voters. Approval of Obama’s management of the economy, although below 50 percent, is surprisingly high for two reasons.

President Obama is presiding over the weakest post-recession recovery in the country’s history. And secondly, he has failed to reach an agreement with his congressional opponents to prevent potentially damaging automatic cuts in federal spending that took effect in March.

President Obama’s comparatively stronger popularity does not appear to have weakened his inclination to make concessions to the Republicans in what appears to be the vain hope of achieving a middle ground on highly contentious economic-policy issues. The president’s proposed budget, announced in mid-April, includes changes to so-called entitlement programs, such as Social Security and Medicare, designed to reduce long-term public-sector costs.

Reform of entitlements has become a high priority for Republicans. But it is a non-starter for many Democrats, for both political and ideological reasons.

In the case of Social Security, Obama’s reform proposal involves changing the measure used to calculate cost-of-living increases in benefits payments, replacing inflation (i.e., the increase in the consumer price index or CPI) with “chained CPI,” which by taking into account substitution effects, is a more accurate gauge (or so its proponents argue) of the actual rise in the cost of living.

However, the president insists that the adoption of chained CPI must be accompanied by increases in taxes. Although the Republicans have been pushing for the use of chained CPI in determining increases in Social Security benefits for some time, they are unwilling to countenance higher taxes. As long as that remains the case, a major breakthrough on fiscal reform is highly unlikely.

Political polarization will preclude the achievement of a budget deal.

Although average Americans have yet to feel the effects of the automatic spending cuts that began in March, the most recent report from the Bureau of Labor Statistics suggests that the reduction in state expenditures and the expiration of a payroll tax cut in January 2013 are adversely affecting the already weak economic recovery.

With all signs suggesting that political polarization will preclude the achievement of a budget deal that eases fiscal constraints in the near term, the economy will continue to expand at a relatively sluggish pace. Real GDP growth is forecast to slow slightly to 2.1 percent in 2013, with downside risks stemming from the possibility of a worsening of the crisis in the euro zone or a setback for the Chinese economic recovery, neither of which can be discounted.

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The PRS Group
About The Author The PRS Group
The PRS Group is a leading global provider of political and country risk analysis and forecasts, covering 140 countries. Based on proprietary, quantitative risk models, the firm's clientele includes financial institutions, multilateral agencies, and trans-national firms.




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