The Audacity of Failure: The 4-year Presidency of Barack Hoover Obama

Barack Obama is on his way to becoming a one-term president. According to Politico:

President Barack Obama plans to announce in next year’s State of the Union address that he wants to focus extensively on cutting the federal deficit in 2010 – and will downplay other new domestic spending beyond jobs programs, according to top aides involved in the planning.

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.1

Er, now who exactly is telling Obama that raising taxes or cutting spending in the middle of a severe economic contraction is a good idea?

This clip from Politico tells us more about the people surrounding Obama, than it tells us about Obama himself. Clearly, his chief lieutenants are just as committed to savaging Medicare, Medicaid and Social Security as their GOP counterparts. This is obvious by the way they’ve handled the fiscal stimulus. Where are the jobs programs, the boost to Green Technology, the massive infrastructure rebuild?

Nowhere. Because the industry-reps and bank lobbyists who fill out the Obama roster adhere to the same pro-business credo as the members of Team Bush, that is, that all public assets and resources should be strip-mined from their rightful owners and transferred to the robber barons at the top of the economic food-chain. There’s no way that Geithner, Summers and the rest of the Wall Street insiders would ever dream of rebuilding the public safety net they’ve been trying to destroy for the last decade or more. That’s not in their interests at all.

The administration’s announcement is tantamount to a stealth-attack on Social Security in the name of “fiscal responsibility”. It’s another public relations ploy intended to enrich the parasite class by stealing crusts of bread from penniless retirees. Surely, there must have been a quid pro quo between the two-year Illinois senator and his political backers about how they planned to deal with “entitlements problem”. In other words, Obama must have given the green light to the party bosses who wanted to purloin the last few farthings in the Social Security trust fund.

So, how will Obama’a attack on Social Security etc. effect the so-called “jobless recovery”?

For one thing, it makes a double-dip recession unavoidable. After all, (according to Goldman Sachs) last quarter’s surge in GDP to 3.5% was entirely a result of government stimulus. Take away the stimulus, and the economy slips right back into to recession. Is that what Obama wants, another stretch of negative growth, plunging economic activity, lower demand and higher unemployment? Why? To satisfy the GOP “deficit hawks”?

All the hand-wringing over deficits is just more gibberish from the same people who brought us the Iraq War. The deficits are about as big a problem as the fictional WMD, maybe less. Here’s a clip from an article by Marshall Auerback which sheds a bit of light on the deficit fiasco:

Large deficits are not the problem…. Let’s all take a deep breath here: Whilst the dollar index has fallen some 15% from the high sustained earlier this year, it is still above the lows sustained at the height of the credit crisis reached about a year ago. Secondly, there seems to be a fear that the current fall in the dollar could well engender inflation, and create a panicked response from policy makers where the Fed actually does raise rates and the Treasury begins to reduce government spending. Given high prevailing debt levels and the weak state of the consumer’s personal balance sheet, this would be an unmitigated disaster.

It is true that excessive government deficit spending can be inflationary, and could therefore cause some impact on exchange value of dollar. But this can’t be viewed in some sort of vacuum. The size of the deficit is irrelevant in itself. There is no meaning in the terms ‘large deficit’ or ’small deficit.’ You have to relate them to the extent of labor and capital underutilization, which is a human measure of the aggregate demand deficiency. The fact that labor underutilization is now in excess of 16 per cent in the US (combined unemployment, underemployment and hidden unemployment) and capacity utilization is in the 60-65 per cent range rather than 90 per cent range sends one very clear message — the deficit is not large enough.

So the correct policy response is to spend until we get to full employment. That is the only consequence of excessive deficits — insolvency is not possible. Your social security check will never bounce in a country issuing debt in its own freely floating non-convertible currency.2

The best way to restore economic well-being is to increase the fiscal stimulus, expand the deficits and put the country back to work. There’s no chance of inflation until unemployment drops to roughly 5%, which could be a decade away. And don’t believe the doomsayers about the dollar either. It’s a bunch of malarkey. Check this out:

As I have shown in two recent papers, even very large currency depreciations in developed economies have no effect on inflation unless they are caused by policies that attempt to hold an economy’s unemployment rate below its equilibrium level. With US unemployment currently at 10 percent, there is no chance that inflation will rise in the near term. Whether inflation rises in the longer run will depend on whether US monetary and fiscal policy stimulus is withdrawn appropriately as the economy recovers (and tighter macroeconomic policies would tend to support the dollar).3

The dollar is dropping because the Fed is doing everything in its power to push it downwards. “It’s the policy, stupid.” A falling dollar increases exports and speeds up recovery. But once the Fed stops printing money via quantitative easing, (which is set for the end of 1st Q 2010) watch out. The dollar will rebound. Here’s an excerpt from an article in the Economist:

This dollar declinism is overblown. It exaggerates the scale of the slide and misunderstands its cause. Much of the recent weakness simply reverses the earlier safe-haven flight to dollars, a sign of investors’ optimism about riskier assets rather than their fears about America’s currency. On a trade-weighted basis the dollar today is close to where it was before Lehman failed. Yields on Treasuries have not risen and spreads on riskier dollar assets continue to shrink. If investors were growing leerier of dollars, the opposite should have occurred.4

When the financial crisis broke out two years ago, investors around the world flocked to the dollar for safety. Now that the crisis has (somewhat) abated, those same investors are less risk-adverse, which means they are putting that money in other assets (stocks, bonds, commodities). Naturally, that is weakening the dollar, but it is not a sign of impending collapse. And while it is true that the greenback faces stiff headwinds in the long-term–due to the US’s deteriorating fiscal situation–the dollar is in no immediate danger of losing its position as the world’s reserve currency. That will take a decade or more.

The growing fear about the dollar and the deficits is understandable given the amount of money that is being hurled at the financial system. But that shouldn’t dissuade reasonable people from doing what needs to be done. The dollar and the deficits are NOT the issue. The issue is jobs, jobs, jobs. Here’s an excerpt from an article by Henry Liu which sums it up perfectly:

An economy that has collapsed under the burden of excessive debt cannot recover until such debt has been extinguished. And debt can only be extinguished by wealth creation, not by creating more debt with easy credit. And wealth can only be created by employment and not by financial manipulation.5

Bingo. The Fed is bailing out unproductive speculators, while tossing the “creators of the nation’s wealth,” the workers, a few table scraps. That’s why we need a different policy which focuses on jobs programs, fiscal stimulus, and more deficit spending so households can rebuild their tattered balance sheets and the “engine of global growth” (the US middle class) can be re-energized. We don’t need more belt-tightening, as Obama seems to think. That is precisely the wrong approach.

Henry Liu again: “Thus we have financial profit inflation with price deflation in a shrinking economy. What we will have going forward is not Weimar Republic type price hyperinflation, but a financial profit inflation in which zombie financial institutions turning nominally profitable in a collapsing economy.”

Right again. The soaring stocks and commodities prices prove that central bank policies can create asset bubbles even during periods of severe deflation. (like now) Fed chair Ben Bernanke’s policies have had no material effect on households, consumers or workers. This is why credit contraction is in its 8th straight month and jobless claims continue to mushroom.

Bernanke–a disciple of Milton Friedman–has taken the monetarist “trickle down” approach throughout, which is why stocks are surging even though the broader economy is still flat on its back. The Fed chief is doing what he’s always done, stimulate demand by creating more bubbles. Only this time it’s not working because liquidity is unable to flow through the clogged credit system. The administration needs to bypass the credit system altogether and provide direct relief via state aid, tax cuts and jobs programs to jump-start the economy and reduce the widening output gap. What’s needed is more stimulus and an aggressive reform agenda aimed at putting the country back to work. Here’s Paul Krugman:

“It’s truly amazing, and depressing, how completely deficit-phobia has swept the field in Washington. The economy remains in deeply dire straits… Yet the respectable thing, all of a sudden, is to claim that we can’t possibly afford to spend any more money on job creation.

History says differently… Other advanced countries have been substantially deeper in debt without either defaulting or having runaway inflation…

I’d be a little more forgiving of the nonsense if all the people screaming about the deficit were sincere. And some are. But many, if not most, are perfectly happy to incur huge unfunded liabilities for the wars they want to fight, and/or to eliminate inheritance taxes for the heirs of multimillionaires. It’s only deficits incurred to help working Americans that get them all moralistic.

The point is that the economy desperately needs more help — and yes, we can afford to provide it.”6

Yes, we can afford it. We just need to shrug off the deficit hawks and the dollar demagogues and provide the necessary resources to get the job done. It’s that simple.

Here’s more from Marshall Auerback:

The Administration … must free themselves from the discredited dogmas of neo-liberalism and channel the spirit of FDR’s bold experimentation. We need less deficit terrorism. Fiscal policy must be much more oriented to personal balance sheets, not bank balance sheets. We need to turn around the private sector and begin to produce more tax revenue, so that the large deficits would be short-lived.

If we continue down the current path, we slow recovery and court large budget deficits for many years to come. Far better to spend now to create jobs and get the private sector growing again.7

Economists know what it will take to put the country back to work; debt relief, loan modifications, wage growth and full employment. But it will require a fundamental shift in ideology; a rejection of neoliberalism and a strong commitment to rebuild the middle class. Obama can either help in that process or follow the beggarly path to early retirement. So far, there’s no reason to be hopeful.

  1. politico.com. []
  2. Marshall Auerback, “The US Dollar – Don’t just do something, stand there!newdeal2.0. []
  3. Joseph Gagnon, “Who’s Afraid of a Falling Dollar,” Baseline Scenario. []
  4. The Diminishing Dollar,” The Economist. []
  5. Federal Reserve Power Unsupported by Credibility; part 1 “No Exit” Henry Liu. []
  6. Paul Krugman, “Fiscal Perspective,” New York Times. []
  7. Marshall Auerback, “New Agenda for America: How to Start Anew,” newdeal 2.0. []

Mike Whitney lives in Washington state. He can be reached at: fergiewhitney@msn.com. Read other articles by Mike.

15 comments on this article so far ...

Comments RSS feed

  1. David A. Smith said on November 18th, 2009 at 9:56am #

    Should the goal really be to put back together an economy based on the imperative of growth? Or should we be taking this downturn as an opportunity to restructure our whole way of thinking about the purpose of our economy?

  2. Michael Kenny said on November 18th, 2009 at 10:01am #

    Why is Mr Whitney still trying to prop up the American Empire? Who benefits from that empire? Certainly not Americans, buried under a mountain of debt and with their jobs outsourced. Certainly not the rest of the world, victims of American economic blackmail. Survival of the American Empire produces no winners and its demise produces no losers. The dollar’s role as world reserve currency is the lynchpin of the empire. Yet, Mr Whitney sees the ending of that role as a “danger” (to whom?) and speaks of “growing fear” (on whose part?), all of which he first claims is a “bunch of malarkey” and then contradicts himself by accepting that it will inevitably occur, but only at some vague point in the future! Which is it? Absurdly, his “authority” for the latter proposition is the right-wing British periodical the Economist, which has spent the last 30 years peddling the very ideology which has now blown up in everyone’s face! Naturally, they would claim that they were right all along! Mr Whitney is slowly but surely moving left, but he still has a long way to go before he abandons his adulation of neo-liberal gurus. He is, so to speak, an armchair revolutionary who finds himself forced to choose between his armchair and his revolution and has , so far, opted for the armchair!

  3. b99 said on November 18th, 2009 at 11:07am #

    david – So you are talking about ending capitalism. Can’t imagine how that would happen.

  4. Jeff Moore said on November 18th, 2009 at 11:49am #

    Your reasoning is not sound. Inflation can happen even if no one is working. Commodities are going up in price. Actually they are shooting up. We keep hearing we are in deflation not inflation but everything we use, oil, grain, copper, silver, gold, orange juice, etc, etc are doubling in price. I mean Orange Juice is up 68% this year all while we are losing more and more jobs. The government’s inflation data is tainted to say the least. How can you exclude FOOD and ENERGY from your inflation data? Food and Energy is a huge part of what we spend our money on. I agree that the Fed actions alone can be controlled and stimulus withdrawn but the Federal Deficit is at a point it will always be increasing. We can never pay back the deficit nor will we even try. SS, Medicare, Health Care, etc, etc all paid by printing money and it is only going to get worse as we pile more and more debt on. With over 10% out of work and the REAL economy getting worse by the day (more and more unemployed) the US cannot raise taxes. This means even more printing. More and more money is being created out of thin air. The rest of the world has always propped the US up by buying our debt but now we are trying to debase the dollar so we can become more of a producing nation instead of a consuming nation. This might sound good except the rest of the world needs us to keep consuming. If we show the world we are going in the opposite direction they will have no reason to keep buying our debt. Without foreign government buying our debt the US government will be forced to print even more because the bills are still do and we are still piling more and more entitlements on.

    America need to understand that nothing in life is free. As a human born on this earth you are entitled to NOTHING. You can get anything you want but it take work. That is how it has been since the dawn of mankind. Only in the last 100 years has there even been health insurance, retirement funds, and free education. You want something in life go out and work for it.

  5. David A. Smith said on November 18th, 2009 at 1:22pm #

    b99 – perhaps not capitalism per se, but certainly late modern globalized capitalism with its reliance on growth.

    And that you can’t “imagine” it is precisely why we should be thinking real hard about it. At least to my way of thinking. Perpetual growth in a finite world is a losing bet, so we’d better be coming up with some real alternatives before the choice is made for us.

  6. b99 said on November 18th, 2009 at 1:56pm #

    David – I think capitalism has always relied on growth. That’s probably a good way to differentiate it from the mercantilism of post-feudal Europe.

    Yes, perpetual growth is a losing bet. What will likely happen however, is that the meltdown of society, whenever it passes a tipping point into free fall – will not be subject to planned alternatives. This is a gigantic and complex contraption, the demise of which will result in ten-thousand as yet unknown outcomes. The likelihood, I think, is that totalitarian entities will emerge from what remains. I’d like to think that we can plan our way into something better, but we can tell by the conversation on most any subject on DV – that this is only a chance outcome.

  7. bozh said on November 18th, 2009 at 2:40pm #

    Heatlth, feeling of belonging, secure jobs is also wealth. But eating out and or eating corporate food actually deforms people. Using escalators and not steps is not wealth.
    Driving cars instead of riding trolleys, bicicles, railways is not wealth. Having a large house that cost $5-10 a yr to heat is not wealth; it is actualy a burden; at least for some people.
    Add to this 200k cia agents, warships, aircraft, tanks, ammunition, artillery, soldiers, etc, etc, and one can say where is the wealth? Especiallly if you’re sick but can’t pay for treatment.
    Sorry folks, that’s as far as my knowledge goes ab mystorical economy.

    So please, i beg u, don’t talk to me ab reserve currency, leverage, toxic assets, federal reserve, falling or desperately climbing US$, etc. tnx

  8. Hex said on November 18th, 2009 at 2:57pm #

    Sorrily misguided article.

    Whitney, who’s your daddy?

  9. Deadbeat said on November 18th, 2009 at 3:30pm #

    It’s only deficits incurred to help working Americans that get them all moralistic.

    Whitney hits the nail on the head here. Economics is all about politics thus is extremely ideological.

  10. Don Hawkins said on November 18th, 2009 at 5:21pm #

    The consequences of a six degree Celsius rise in temperature was outlined in the Independent on the basis of Mark Lynas research:

    It would cause a mass extinction of almost all life and probably reduce humanity to a few struggling groups of embattled survivors clinging to life near the poles.
    With the tropics too hot to grow crops, and the sub-tropics too dry, billions of people would find themselves in areas of the planet which are essentially uninhabitable. This would probably even include southern Europe, as the Sahara desert crosses the Mediterranean.
    As the ice-caps melt, hundreds of millions will also be forced to move inland due to rapidly-rising seas. As world food supplies crash, the higher mid-latitude and sub-polar regions would become fiercely-contested refuges
    Professor Le Quéré’s conclusion is frightening, “The Copenhagen conference next month is in my opinion the last chance to stabilise climate at C above pre-industrial levels in a smooth and organised way,”

    http://www.independent.co.uk/opinion/leading-articles/leading-article-a-climate-change-warning–we-ignore-at-our-peril-1822427.html

    We have long known that, unchecked, climate change is likely to result in a serious reduction in global agriculture, chronic drought, rising sea levels and the mass displacement of populations. But the implications of a 6C rise are more disastrous still. They include the acidification of the oceans, the loss of all polar ice and the combustion of the rainforests. It is doubtful that mankind could survive such a catastrophe.

    That’s last chance to stabilise climate and any spending just might want to have a focus in mind. A total focus. In a smooth and organised way is that what we see? I watched Sen Inhofe today on the floor of the Senate talk about climate change and was it smooth and organised what he said yes if you enjoy total illusion. bullshit.

    Facts do not cease to exist because they are ignored. The Earth is about to change weather me you Inhofe Obama rich poor young old like it or not. In about ten years right in our face in twenty years the beginning of survival. Spend all you want but if not focused the rest is academic. A Herculean effort kind of like a war and should be easy to see if we try. Still time maybe and today Inhofe said the American people don’t care about climate change bottom of the list in the polls it’s the spending and jobs and so it goes.

  11. Deadbeat said on November 18th, 2009 at 8:31pm #

    American people don’t care about climate change bottom of the list in the polls it’s the spending and jobs and so it goes.

    Right now many American are concerned with the immediate survival — food, housing, education, health care, taxes and debt. If those issues were alleviated then climate change would be taken more seriously.

    However as we’ve seen with the health care debacle the ruling class don’t care about what the American people want anyway and so long as they can continue to profit.

  12. David A. Smith said on November 18th, 2009 at 8:58pm #

    b99 – you may be right about the character of capitalism. I typically go for a more specific “late capitalism” version just because so many people have a hard time questioning the “free market,” so I give them an out.

    I’m also afraid that I agree with you about the coming meltdown of society. I’m not as convinced as you that totalitarian regimes will have any success, though they no doubt will pop up here and there. But this really is the reason I made the point I did about Mr. Whitney’s article. Even so called “progressives” have a hard time seeing any solution other than rebuilding the failed economy of the recent past. Shouldn’t we be using this time as an opportunity to explore new options? You are right, that we won’t, but that doesn’t change the validity of the question.

  13. B99 said on November 18th, 2009 at 9:12pm #

    Hawkins – Don’t believe the hype – Copenhagen is not the last chance – the last chance was likely more than 30 years ago when Jimmy Carter put solar panels on the roof of the White House. Taking them down was one of Reagan’s first moves as president. We’ve been cascading downward ever since.

  14. Don Hawkins said on November 19th, 2009 at 4:40pm #

    I don’t think Americans are even told anymore if it’s global warming or just climate change. Palin

    I heard someone say Palin can help bring back the GOP to it’s glory. I have to say James Inhofe two day’s ago kind of said the same thing. I don’t think Americans are even told anymore if it’s global warming or just climate change, what does that mean is it new speak what does that mean? B99 still time and man anything but easy if we try. If we try boring it will not be and let me add got to be better than the strangeness we all feel now is it football season or baseball I know its time for basketball. It’s basketball season right. I know a tour to the Arctic to see the ice melt then off to Vegas nice cup of coffee.

  15. richard fle-man said on November 19th, 2009 at 10:28pm #

    mike is trying to decode financial-speak excuses for not helping working people.he is pointing out that there could be a political cost to obama if he adheres to deficit-hawk,budget cutting,starve the people policies.try to read and comprehend what he has actually written.