Barack Obama’s New Deal

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Big government will be Barack Obama’s New Deal

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President-elect Barack Obama is well aware that he is inheriting a very difficult economic situation indeed. Economists with whom I have spoken — and these are the people listened to at the highest levels in both parties and at the Federal Reserve Board – believe that the unemployment rate, now at 6.7%, will hit double digits sometime in 2009, and stay there well into 2010. They expect house prices to drop another 15% and share prices at least another 10% before finding a bottom. Worse still, they are predicting an extraordinarily sluggish recovery. The Obama team sees the crisis as an opportunity to push through a reformist domestic agenda as comprehensive and radical as anything wrought by Franklin Roosevelt. And that is the agenda on which Obama intends to focus. Hillary Clinton at the State Department and General Jim Jones, the national security adviser, should be able to handle foreign policy, which will have the modest objective of preventing conflagrations. Forget about spreading democracy. The economist-superstars – Tim Geithner (Treasury), Larry Summers (director of the National Economic Council, located in the White House), Paul Volcker (chairman of the Economic Recovery Advisory Board), and a bevy of distinguished academics – will manage the macro-economy, initially along with Fed chairman Ben Bernanke. Bernanke receives high marks for his ingenuity in crafting programmes to contain the recession, including last week’s decision to cut short-term interest rates to zero, and to become the nation’s capital-supplier, buying up mortgage-backed and other securities. Nevertheless, when his term as chairman expires early in 2010 he will be replaced by Summers. As one wag puts it, by then everyone who has dealt with Summers at the White House will be glad to see his back, and no politician brought up in the Chicago Democratic regime, as was Obama, can leave a plum job in the hands of a non-crony. Related Links * Obama plans $850 billion recovery package * Obama team signals climate change intent Obama, who sees himself as a transformational figure, has several things going for him: President George Bush’s obliteration of the line between the public and private sectors; the crisis atmosphere; the acceptance of multi-hundred-billion dollar programmes as being, well, normal; the relative strength of Treasury IOUs in the face of budget deficits that will hit 10% of GDP; the belief that government spending creates jobs. The president-elect has appointed former senator Tom Daschle to organise a takeover of the healthcare sector. Carol Browner, perhaps the greenest of America’s regulators, is charged with transforming the energy sector by substituting wind, sun and batteries for coal-fired electricity generation and petrol-powered vehicles, at whatever cost. New York City housing commissioner Shaun Donovan’s claim to his new post as secretary of housing and urban development is his record of attempting to increase the role of government in the housing sector. There will be more, but you get the idea: when Obama leaves office, the government will have expanded its reach as much as it did during Roosevelt’s New Deal. Obama also plans to rebuild and expand the nation’s infrastructure. He will pour hundreds of billions – more likely, at least a trillion dollars – into new roads, bridges, schools, and into repairing existing facilities, as well as into building “human capital” – read, teachers’ salaries. The incoming president believes that the states have numerous projects “shovel-ready”, and has the enthusiastic support of his trade-union allies, who know that when the federal government funds a project, union wage levels are protected, and most of the jobs go to union members. Finally, Obama intends to revise the free trade system that has more or less prevailed since the end of the second world war. No, he will not repeal the North American Free Trade Agreement (Nafta). But his new US trade representative will be directed to renegotiate Nafta to force Mexico and Canada to adopt American labour and environmental standards, and to eschew any new trade-opening deals. Obama will have a Congress that is, if anything, to his left. So it is difficult to imagine an Obama tax or regulatory programme that the House will not approve. The Senate might be a slightly restraining influence, but Republican “moderates” are likely to vote with the Democrats as often as not, giving Obama effective control of that body. But Obama will quietly shelve his campaign promise to raise taxes on families earning more than $250,000 a year. Rather than face the charge that he has defiled the memory of John Maynard Keynes by increasing taxes during a recession, Obama will simply allow the Bush tax cuts to expire at the end of 2010, at which time the rate on long-term capital gains will go from 15% to 20%, the rate on dividends from 15% to 38.6%, and the top marginal income-tax rate from 35% to 38.6%. However, 150m Americans will immediately get new handouts – $1,000 per working family, mortgage-interest and tuition credits, and tax relief for lower-income pensioners. Given the widespread belief that middle-class families have not shared in the benefits of economic growth, the disrepute into which highly paid corporate executives have fallen, and with the electorate inured to deficits set to run at 10% of GDP, there will be little political resistance to whatever Obama proposes to alleviate what he sees as the plight of the middle class. Which inevitably brings us to Robbie Burns, and his famous observation, “The best-laid schemes o’ mice an’ men gang aft agley, an’ lea’e us nought but grief an’ pain for promised joy”. Presidents elected to concentrate on the economy often end up diverted by the need to fight a war or cope with foreign attacks. Enough worry. Only a Grinch would steal from Obama the joy he must feel in this run-up to the inauguration, and the satisfaction the nation feels in having elected a black president. All the people with whom I have spoken, many of whom voted against him, wish Obama well. We know it is in the national interest that our new president succeed. Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

link to article …
http://business.timesonline.co.uk/tol/business/columnists/article5375461.ece

it makes a few interesting points …

a bit of a different view …

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After the pain, America prepares to bounce back

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We Americans can now fill the capacious tanks of our 4x4s at almost half the price that prevailed a few months ago. The interest rate on mortgages is lower than it has been in almost four decades, so applications are soaring to levels not seen in five years. The unemployment rate is 6.7%, not bad by historic standards. Consumers who benefited from substantial pre-Christmas discounts — 65% off cashmere sweaters at swanky Neiman Marcus — are finding even bigger post-Christmas bargains. We once had to shell out $2 to buy £1 and about $1.60 to purchase a single euro. Now we can buy the pound for less than $1.50 and the euro for $1.40. A new, dynamic, and best of all, black, president is about to move into the White House, bring the troops home from Iraq, give some 150m Americans a tax cut, and restore America’s prestige in the world. So Americans must be of good cheer as we prepare to celebrate the new year. Hardly. Year-end tidings are definitely not of comfort and joy. Yes, petrol is cheaper, but who is in the mood for a car trip when the economy is in a very different tank, to use the vernacular for recession? Yes, the unemployment rate is relatively low, but that is because millions have dropped out of the labour market after unsuccessfully searching for work, and others have been forced to accept part-time work when they could not find a full-time job. Add those to the workers classified by the Department of Labor as unemployed, and the rate doubles to over 12%. And that doesn’t count those working shorter weeks or taking pay cuts. Yes, mortgage rates are low, about 5% for the traditional 30-year fixed-rate mortgage. But almost nobody can get one, as the banks hoard money and do business only with the least risky applicants, or find that they have laid off so many staff that they don’t have enough workers to process applications. Besides, with prices falling faster than at any time since the Great Depression, who wants to buy a house now when it might be available at a lower price in a few months? Most of the mortgage applications are aimed at refinancing existing mortgages at the new lower rates, so the inventory of unsold homes remains at about twice normal levels, and half of the homes that do sell are going for prices that don’t cover the outstanding mortgage. Yes, an overseas holiday would cost less than only a short while ago, but who wants to spend money on a trip to some resort where he might end up the target of Muslim fanatics, or when his job might disappear while he is strolling through the National Gallery or the Louvre? And yes, shares are at bargain prices. But will they be cheaper tomorrow? The Wall Street Journal reports that between 2002 and 2005, investors put an average of $62 billion a year into stock mutual funds (unit trusts), before getting nervous and pulling out about $40 billion a year. Well, in October nervousness turned to panic, or resignation, and investors pulled a record $72 billion from such funds. And that was before Bernie Madoff’s $50 billion heist became public knowledge. Some put the money in short-term Treasury bills that yield no interest. One wag says that the way to diversify is to put some of your money under your mattress, some under your wife’s, and some under your children’s. Adding to Americans’ sense of confusion is the gap between what we see and what we are told. The government says the cost of living is falling, with the prices of food, housing, clothes, cars and oil dropping. Meanwhile, pensioners see the costs of medical care and prescription drugs soaring, and consumers claim that they get less for their money at the supermarket, either because prices have risen, or because package sizes have shrunk. So do they believe what they are being told by the statisticians at the Department of Labor and by Federal Reserve Board chairman Ben Bernanke as he pumps cash into the economy to avoid the dreaded deflationary spiral that he sees on the horizon, or what they see on the price tags in the supermarket and at the chemist? Fortunately, history suggests that this gloom and confusion shall pass. At the end of the second world war economists were predicting a resumption of the Great Depression: it didn’t happen. Indeed, then as after every recession since, the resilient American economy resumed its growth. Living standards rose; poverty fell; America’s energy-intensive, mechanised agriculture became the breadbasket of the world; the universities overflowed with students optimistic about their futures; the size of houses grew; household drudgery was replaced by energy-driven appliances that liberated women to enter the workforce; personal mobility rose as the real cost of cars fell; longevity increased. There’s more, but you get the idea. America is endowed with ample natural resources to sustain rapid rates of growth. It is blessed with an entrepreneurial spirit that has produced successive waves of the creative destruction that allow the economy to shed the old and move on to the new. Its policymakers, far from perfect, have never gone so far as to stamp out risk-taking, initiative and the incentive to work hard while reforming the capitalist system. Most of all, our political institutions have been robust enough to survive wars and bitter political differences — difficulties such as we faced in the close-run 2000 election. If you doubt that, consider the civility and efficiency with which the current transition from a right-wing president to his left-wing successor is being conducted. Four American presidents, from both parties, will dine at the White House at the invitation of President George Bush, to share their experiences with Barack Obama and to pledge their support should it be needed in a crisis. This might not be the merriest of Christmas seasons, and for many it is probably one of the harshest in living memory. But the new year is upon us, and the important question now is what it has in store. More on that next week. Irwin Stelzer is a business adviser and director of economic policy studies at the Hudson Institute

link to article …
http://business.timesonline.co.uk/tol/business/columnists/article5404307.ece

it makes a few interesting points …