Still Too Little and WAY TOO REPUBLICAN

The Financial Time’s Martin Wolf adds his voice to the growing number of economists saying the Obama financial plan is a dud.

“Last week, President-elect Barack Obama duly unveiled his American recovery and reinvestment plan. Its title was aptly chosen, for Mr Obama spoke, astonishingly, as if the policies of the rest of the world had no bearing on the fate of the US. He spoke, too, as if a large fiscal stimulus would be enough to restore prosperity. If that is what he believes, Mr Obama is in for a shock. The difficulties he confronts are much deeper and more global than that. “

His criticisms echo many of those I’ve mentioned before as well as those you’ve read if you’ve followed Dr. Krugman’s op-ed pieces, blog, or my cites of his comments here.  Wolf warns that the U.S. could face the same type of ‘lost decade’ suffered by the Japanese after the Asian Financial Crisis of the 1990s.  The Japanese experience is well documented and studied.  Wolf cites a book by Richard Koo of the Nomura Research Institute that points to the combination of downward asset prices combined with high indebtedness in the private sector that forces both households and businesses to stop spending to pay down debt.  In *The Holy Grail of Macroeconomics: Lessons from Japan’s Great Recession (Wiley, 2008), Koo documents that the government winds up being both the lender and the borrower of last resort.  Recognition by the government of these theories of depression economics led the Japanese government to take action that led to a prolonged slump instead of a prolonged recession.

The Obama administration is holding on to the tax cut portion of its plan despite decades of economic research showing that tax cuts are not as efficient as government spending in aggregate-demand led recessions.  Now the Financial Times is no ‘liberal’ rag.  Its closest U.S. counterpart is the Wall Street Journal.  Wolf not only argues that the spending portion of the package is too small, but that the bigger the tax cut portion of package, the bigger the fiscal stimulus must be.  I’ve highlighted some of his relevant arguments below.

“Any complacency about US recovery prospects is perilous. Moreover, the fact that the US has a structural current account deficit has bearing on the second point Mr Obama’s advisers must make. Fiscal stimulus is a necessary palliative for a debt-encumbered economy afflicted by falling asset prices. But the likely longevity and scale of the needed fiscal deficits are quite scary.

“The Congressional Budget Office forecasts that US output will be 7 per cent below potential over the next two years, on unchanged policies. If so, the actual deficit should now be much larger than the structural one. It is easy to see, therefore, why the critics argue that the Obama plan for an additional fiscal stimulus of 5 per cent of GDP over two years is too small, even though the CBO forecasts a baseline deficit of 8.3 per cent of GDP this year. It is also easy to understand why many object strongly to tax cuts, since the more likely cuts are to be saved the larger the package must be – and, in addition, taxes will clearly have to rise in the longer term.

The bigger point, however, is not that the package needs to be larger, although it does. It is that escaping from huge and prolonged deficits will be very hard. As long as the private sector seeks to reduce its debt and the current account is in structural deficit, the US must run big fiscal deficits if it is to sustain full employment.”

Obama’s tax cuts, at this point, seem clearly aimed at placating Republicans in the Senate to achieve some magical, happy, consensus vote of 80 that says yes, he can.  I’m trying hard right now to determine if this is some weird need to look popular and right or an even weirder need to be able to say “see, everyone thought it the right thing to do, it wasn’t just my policy” if and in this case WHEN it fails miserably.  I’m tempted to say both and probably more right up to and including the weird fetish Obama seems to have with Republican Presidents like Lincoln and Reagan, himself.

David Sirota clearly points to continual inconsistencies in Obama’s campaign rhetoric in his column.

“The veto is the legislative equivalent of a nuclear warhead – a rarely used instrument of devastating force that singularly vaporizes the votes of 535 elected representatives. So when a president-elect issues a veto threat before being sworn into office, it sets off a particularly big explosion because it is a deliberate agenda-setting edict about priorities for the next four years.

That’s why every American who isn’t a financial industry executive should be nervous.

After President Bush this week asked Congress to release the bank bailout fund’s remaining $350 billion, Obama pledged to veto any bill rejecting the request, meaning he is beginning his presidency not by “turn(ing) the page on policies that have put the greed and irresponsibility of Wall Street before the hard work and sacrifice of folks on Main Street,” as he once pledged. Instead, he is promising a mushroom cloud unless lawmakers let taxpayer cash continue flowing to the biggest of Big Money interests.

Amid paeans to “new politics,” we’re watching old-school paybacks from a politician who raised more Wall Street dough than any other – a president-to-be whose inauguration festivities are being underwritten by the very bankers who are benefiting from the bailout largesse. Safely distanced from electoral pressure, Obama has appointed conservative economists to top White House positions; floated a tax cut for banks; and is now trying to preserve corporate welfare that almost exclusively benefits the political donor class.

This isn’t much-ballyhooed “change” – it’s money politics by a different name. How do we know? Because neither Obama nor anyone else is genuinely trying to justify the bailout on its merits – and understandably so. Even the most basic queries prove such merits don’t exist.”

I think I’ve indicated as strongly as possible that these are truly perilous economics times.  We need leadership with a bold vision based on knowledge of what works.  FDR didn’t have much economic theory  when he confronted the Great Depression.  Barrack Obama does and yet continues to make the same kinds of mistakes that Hoover made in the name of “new politics”.  I know how much taking a stand in the PUMA corner lands one in La La Land in the eyes of many progressives/liberals. So many voices in the wilderness of spam shout that I’m just not giving Obama a chance because I hate him so much because Hillary lost.  I’d also bet that these same folks believed in Santa Claus way pass the normal age.  If you think it’s wrong because it’s coming from a PUMA site, then I’m just going to ask you to look at the facts here and look at the voices of dissent.  Krugman and Sirota are icons of the left.  Wolf is British.  These folks are saying the same things that I have said for months.  The guy isn’t who he said he was and you can tell a lot by the actions he’s taking now. There is a lot at stake here and it’s time to stop hiding behind the feel good historic nature of this president and expect something more than repackaged trickle-down economics.

Note:  You’ll have to be patient with me for a bit since this is the beginning of a semester and I’m also facing some publishing deadlines.  I’m afraid my focus will be elsewhere so I won’t be as consistent as usual in my blogging efforts.