Politico reports this morning citing unnamed top aides that the Administration plans plans to announce in next year's State of the Union address a greater focus  on cutting the federal deficit extensively in 2010. The Administration will seek to cut new domestic spending other than jobs programs. The decision is being driven by political calculations.

The president's plan, which the officials said was under discussion before this month's Democratic election setbacks, represents both a practical and a political calculation by this White House.

On the practical side, Obama has spent more money on new programs in nine months than Bill Clinton did in eight years, pushing the annual deficit to $1.4 trillion. This leaves little room for big spending initiatives.

On the political side, Obama can help moderate Democrats avoid some tough votes in an election year and, perhaps more importantly, calm the nerves of independent voters who are voicing big concerns with the big spending and deficits.

With the President in Japan today mending a frayed relationship, he might ask Prime Minister Yukio Hatoyama about a former Japanese Prime Minister Ryutaro Hashimoto and how Hashimoto's decision to tackle Japan's budget deficit before fully restoring growth plunged the Japanese further into recession. Tackling the budget deficit may be good politics now but it is bad economics and ultimately then poor politics.

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Last Thursday, the Bureau of Economic Analysis at Department of Commerce released preliminary Third Quarter GDP figures. Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 3.5 percent in the third quarter of 2009, the first sequential growth in four quarters. The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment.

The figures released also mark the strongest growth rate in two years and a pause in the economy's dark slide. Over the past 12 months, the US economy  had contracted 2.3 percent. In 2008, the American economy grew a scant 1.1 percent shedding 2.6 million jobs, a number equal to the number of jobs found in states such as Wisconsin, Missouri or Maryland. And throughout 2009, the US economy has continued to shed jobs. Since the start of the recession in December 2007, the number of unemployed has increased by 7.6 million to 15.1 million, and the unemployment rate has doubled to 9.8 percent. The job losses have been particularly brutal in a number of sectors. Employment in manufacturing has contracted by 2.1 million since the onset of the recession while the construction industry has lost another 1.5 million jobs. So in looking at this recovery, one must ask for whom.

Nearly 63 percent, or 2.2 percent, of the 3.5 percent increase in GDP was due to temporary government tax credits to consumers that have either expired or are set to expire before the end of the year. For example, durable goods spending surged 22.3 percent boosted by the Federal government's "cash-for-clunkers" program. Federal spending outlays added another 0.6 percent to growth. But for the fiscal stimulus, we would be looking at an essentially flat-lined third quarter.

Furthermore though corporate profits - 81 percent of the S&P 500 topped expectations - rebounded, most of the increase in profit, however, came from cost cutting rather than from robust sales, which should raise concerns about the sustainability of the nascent economic recovery. And corporate cost cutting was achieved largely by depressing wages and cutting employees' hours. The Obama recovery, such as it is, is little more than another vast redistribution of wealth from the bottom to the top. Wall Street gains mask Main Street pain. The players may be different, but this is still a neo-liberal game being played.

On Meet the Press, Secretary Geithner described the growth in the economy as "broad based." He must have a rather narrow definition of "broad based." This is a recovery that is leaving millions of Americans further behind and eroding living standards. While corporate profits rise, real average weekly earnings continue to fall. Average weekly earnings in the manufacturing sector rose by only 0.7 percent in September, as the average number of weekly hours worked fell to a record low of 33 hours. That's the lowest annualized weekly earnings growth since such data began to be tracked in 1964. Overall, the BLS reports that average weekly earnings have fallen by 1.9 percent since the beginning of the year with disposable income decreasing 3.4 percent in the quarter. It is simply incumbent upon the Administration to do more for the average American worker. The budget was a start but the Administration needs to address the structural unemployment problem and fully commit to broad redistributive policies that will create truly broad-based prosperity and not just one for investment bankers.

The economy has still has some major hurdles to confront. In February I began harping on the coming crash in commercial real estate. US commercial property sales are forecast to fall to the lowest in almost two decades as the industry endures its worst slump since the savings and loan crisis of the early 1990s, according to property research firm Real Capital Analytics Inc. Thankfully, this is beginning to get some press as billionaire investors Wilbur Ross and George Soros "freak out."

There continue to be deflationary pressures in a wide range of asset classes: housing and rents being the most noticeable. But there are also inflationary pressures in the commodities markets. Since the start of the year, oil prices have more than doubled, copper is up more than 120 percent and gold has gained more than 10 percent. Zinc prices despite a 5 percent decline in demand are up over 75 percent. And while food inflation has so far remained in check, there are warning signs of creeping food prices.

It is to the Administration's credit that we have averted a systemic crash. However, as the Federal Reserve and the Treasury Department begin to wind down the extraordinary programs implemented over the past year, the likelihood of further financial turmoil is not just extant but high. And for too many Americans, the financial turmoil never ceased to begin with.

Below the fold, the thoughts of Joseph Stiglitz on the recovery.

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Paul Sullivan who writes the Wealth Matters column for the New York Times has an important column out today that sheds insights on how the nation's monied elite views the current economic crisis. As Mr. Sullivan puts it, "the tiny slice who live at the top of the wealth pyramid -- are not sleeping any better than the rest of America." Not surprising, really.

Though much of the article covers how America's aristocracy manages their wealth for the benefit of generations yet unborn and the dynamics of managing trusts that run a half billion or more, a number observations are worth highlighting because even though their worries aren't quite like ours, some of their worries are worth noting and their behavior is of critical importance to the general well-being of the nation.

Even though the stock market has rebounded from its March 9 low, the family office advisers said many of their wealthiest clients were bracing for more bad news and wondering how it would affect their family unity.

"They are now looking at financial planning and things middle-class families live by," Kathryn McCarthy, a leading adviser to wealthy families, including the Rockefellers, said at the gathering this week convened by Bessemer Trust.

Before you start laughing up your sleeve, be advised that this is not a good thing. When the super-rich get cold feet, the rest of America gets swine flu. They are, after all, the people who might finance new companies that create jobs, make big investments to support existing companies and spread their wealth throughout the economy.

According to a study the Family Office Exchange plans to release this month, the super-rich are most worried about what they do not know. Some 45 percent of the 108 ultrahigh-net-worth families surveyed in August ranked the economy and financial markets as their No. 1 concern. They were most concerned about government intervention in the financial markets and a commercial real estate bust.

The former worry, from their point of view, is certainly understandable. Lax regulations of financial markets allowed old money to turn serious money into some rather serious money. Between 1982 and 2000, the Rockefellers went from $3.3 billion to $8.5 billion, the Mellons from $1.6 billion to $10 billion, the Phippses from $1.2 billion to $7 billion, the Pritzkers from $1.0 to $10.0 billion, the Mars from $1.2 billion to a very robust $16 billion, the Hearsts from $500 million to $7 billion. The 'financialization' of the economy coupled with the low tax regime has been very good to them. If in 1981, the top one percent accounted for 9.3 percent of the national income by 1997 that share had grown to 15.8 percent.

But with two-thirds of the nation's total income gains from 2002 to 2007 flowing to the top 1 percent of US households, their share of the national income has only grown. As of 2007, the top one percent accounted for a 21.8 share of the national income. In my view, such uneven gains spell trouble for the future of American democracy.

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Speaking at the Sibos conference in Hong Kong earlier this week, William White, the highly-respected former chief economist at the Bank for International Settlements in Basle, warned that the world has not tackled the problems at the heart of the economic downturn and is likely to slip back into recession even it starts to recover from the most significant downturn in over 70 years.

"Are we going into a W[-shaped recession]? Almost certainly. Are we going into an L? I would not be in the slightest bit surprised," he said, referring to the risks of a so-called double-dip recession or a protracted stagnation like Japan suffered in the 1990s. Mr. White added that the only thing that would really surprise him is a "rapid and sustainable recovery from the position we're in."

The position we are in is this: we essentially doubled the national debt in the system over the last ten years while growing GDP by about 40%. And as a result of Alan Greenspan's overzealous pursuit of cheap money dangerous imbalances accrued in the US and global economy. Consumers and businesses willingly took on new debt believing that asset prices would continue to rise without fail. But fail they did.

The markets corrected wiping out tens of trillions of dollars in various asset classes from residential and commercial property to equities. In the United States, 6.7 million jobs have been lost in the last 18 months, personal income tax receipts are down 21%, corporate tax receipts are down 58%, the deficit is tracking at $1.8 trillion this year alone with $9 trillion more predicted over the next decade, the US government is now spending nearly 200% of taxes taken in, 13% of residential mortgages are either delinquent or in foreclosure, more than 20% of all FHA loans are delinquent or in foreclosure, and asset prices have fallen by as much as 50% in certain markets and about 20% nationwide.

Nor is the deflationary spiral limited to the US. In Barcelona, Spain, for example, rents for commercial property have been reset to 1989 levels. To combat this, central banks worldwide, including our Federal Reserve, have pumped thousands of billions of dollars of new money into the financial system over the past two years in an effort to prevent a depression. Meanwhile, governments have gone to similar extremes, taking on vast sums of debt to prop up industries from banking to car making. So far, the cost of mopping up after the world financial crisis is a staggering $12 trillion worldwide, or equivalent to around a fifth of the world's annual economic output.

These measures may already be inflating a bubble in asset prices, from equities to commodities. Natural gas, for example, is up over 60% in September. Gold in New York is bumping against the $1,000 mark. All that money has go somewhere and provides the illusion of a recovery. But there is no recovery, in truth, for the underlying problems of the economy remain same as they were 20 months ago when the recession began.

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In his New York Times op-ed today, Paul Krugman attacked the Reagan era economic and financial policies for breaking "longstanding rules of fiscal prudence" and laid the blame for much of our current economic woes at the feet of Ronald Reagan and his advisers. There's much there in the column but I want to highlight a matter of concern for the economy going forward and why recovery may yet be far off. Dr. Krugman notes:

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.

We weren't always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income, slightly more than in the 1960s. It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis. Household debt was only 60 percent of income when Reagan took office, about the same as it was during the Kennedy administration. By 2007 it was up to 119 percent.

According to the Federal Reserve, US household leverage, as measured by the ratio of debt to personal disposable income, increased modestly from 55% in 1960 to 65% by the mid-1980s. Then, over the next two decades, leverage proceeded to more than double, reaching an all-time high of 133% in 2007, a figure slightly higher than Dr. Krugman's 119%, but the point remains the same. There was a radical change in American behavior.

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