lemonade“All politics is local,” said Tip O’Neill, and it is true. Even politicians on the national stage are dependent on local or regional voters to return them to office. And so despite the national or international rhetoric, local values and concerns always have to be met in the end, something we are likely to see ahead in the way our economy is managed.

Out of the bubble years, you see, we’re now embracing slow growth as our national mantra. Pay as we go. This new norm means slower U.S. growth from a lower base with higher unemployment and lower U.S. living standards.  The U.S. is setting itself up for a weak new-norm recovery in 2010 as capital continues shifting abroad.

Only it won’t work. This slow-growth outlook cannot be sustained very long because too many states, cities and companies will be below breakeven. The new norm growth rate built into the bond market is below the stall speed for the economy.

In the end, Washington will have to change economic policy in reaction to slow growth and high unemployment.  We’re seeing this a bit already in the statements of Treasury Secretary Timothy Geithner supporting a strong dollar even though his agency is not yet doing anything to make the dollar strong.

Inevitably the state and local governments will come begging and rightly so. It is unclear whether that points to another ratchet up in federal spending, a tax cut, protectionism, regulatory relief from the small-business credit crunch, a departure from Washington’s weak-dollar policy in order to draw capital back to the U.S., or something else.

Whatever the solution the Obama Administration attempts to apply, it will mean the quick end of slow growth as local politics again holds sway.