A tough road ahead

Over the fold, is my piece from today’s Fin on the task facing Obama. The original version started “Following his convincing election victory, Barack Obama can look forward to taking office under the most challenging conditions facing any incoming president since Franklin Roosevelt’s inauguration in 1933,”, but another columnist came in with an almost identical lead, so I changed mine. But the great thing about a blog is that you can choose which version you like best (or dislike least). The original opening paras are at the end of the post.

Following his convincing election victory, Barack Obama will have only a brief moment to relax, before preparing to face some truly daunting challenges. The financial crisis is the most immediate, but it is merely a symptom of unsustainable economic, social and environmental trends that have built up over decades, and accelerated greatly under Bush.

As regards the banking system, the immediate liquidity crisis has eased a little, as the banks have been bribed and bullied by their new public part-owners into extending at least some credit to each other, and to the finance markets on which the ordinary operations of business depend.

But the implications for the broader economy are only just beginning to emerge, and here the news is almost uniformly bad. Car sales have crashed, business investment is grinding to a halt, and the housing market shows no sign of a recovery. With many other countries entering a slowdown or recession, the few bright spots in the economy, such as exports, are turning dark.

With ten weeks until his inauguration it is hard to tell how far the economic situation will deteriorate in the interim. But Obama will have to be ready to take immediate and radical action.

First, the government will almost certainly need to extend further help to, and further control over, the financial system. While the bad news about mortgages has largely been received by now, there are looming disasters in credit card defaults, and the prospect of large-scale defaults by businesses hit by the recession. More public equity, and more encouragement to maintain lending to creditworthy borrowers will be needed immediately.

The new global financial architecture that is already emerging, more or less by default, needs some serious thought too. The old architecture rested on the implicit premise that the US system at its centre would never fail, and this in turn created a huge moral hazard problem. The institutions at the core of the system need to be separated much more sharply from the areas of high-risk innovation where rewards need to be matched by the absence of any public safety net.

In fiscal terms, the new Administration must act immediately to stimulate demand, both through aid to those hit hardest by the crisis, notably the unemployed, and through direct public expenditure. At the same time, Obama cannot afford to backslide on his core policy commitments, most importantly on health care.

The existing system of employer-provided health insurance, already in dire straits, is unlikely to survive the current crisis in its present form. Obama proposes subsidies, including public reinsurance for catastrophic claims. The result will be a big expansion in coverage and in costs, leading to a need for more effective public control over health costs, including initiatives similar to our own Pharmaceutical Benefit Scheme.

And looming over all of this is climate change. Obama has promised a cap-and-trade scheme, and a return to world leadership at Copenhagen. But, as in Australia, there will be powerful voices calling for a continuation of the Bush policy of delay and denial, and putting the financial crisis forward as a pretext. Neither the world nor the position of the US as a world leader can afford this.

And there will be bills to pay. The US national debt, is already over $10 trillion thanks to the incompetence and extravagance of the Bush Administration, with its ruinous wars and lavish tax cuts for the rich. The cost of the bailout, and of the deficits that will be necessary to soften the recession and stimulate a recovery, will add trillions more to that figure.

Ultimately that means higher taxes. Obama has already promised to let the Bush tax cuts expire for those earning more than $250 000, but this won’t raise a huge amount. The burden of cleaning up the mess left by Bush, and paying for a more equitable future, must be borne primarily by households in the top 20 per cent of the income distribution. This is the only group that saw consistent gains during the three decades of neoliberalism that began in the late 1970s.

Republicans from John McCain down have called the election ‘a referendum on socialism’. That’s nonsense, of course, but Obama’s victory should mark a revival of the progressive politics of the New Deal, in retreat ever since the 1970s. If Obama can combine an economic recovery with a new commitment to social equity, his election victory could prove more significant than any since that of Roosevelt in 1932.

The original intro in full

Following his convincing election victory, Barack Obama can look forward to taking office under the most challenging conditions facing any incoming president since Franklin Roosevelt’s inauguration in 1933, though it is unlikely that Obama will have to deal with a full-scale closure of the banking system.

As economic managers, Henry Paulson and Ben Bernanke have at least outperformed Hoover’s Treasury Secretary Andrew Mellon, whose motto “Liquidate labor, liquidate stocks, liquidate farmers� was a perfect recipte for Depression.

But they underestimated the crisis until the last possible moment, before proposing a bailout that would simply have handed a trillion dollars of taxpayers money to those who caused the crisis, on a ‘no questions asked’ basis. Even the modified bailout they were forced to accept remains at best an expedient to stave off imminent disaster.

As regards the banking system…

26 thoughts on “A tough road ahead

  1. It’s now time for Obama to do away with the speeches and reach into his briefcase and pull out his blueprint for the future. I sure as hell (pardon me) hope he has a plan for the future.

  2. The mechanism needed is a new source of monetary liquidity that does not rely on creating more debt as the past debt created is disappearing into the black hole of monetary deflation and insolvency as assets deflate. The personal or household debt levels of the US and all other western countries suggest taxation will bust the consumer just as rising energy and food prices busted the consumer and then the busted consumers busted the banks. This suggests that either new wealth creation is needed ala alternative energy investment which would also create and produce significant cost efficiencies for households and firms, efficiencies in the cost of health via cost reduction for excessive rent seeking enterprises and individuals, and significant efficiencies from reducing wasted resources which have been poured into feeding armed conflict. In other words out with the old in with the new, new energy sources, rebuilding small communities that do not rely on the scale of production linearly but nodally, rebuilding efficient and cheap mass transport systems and rebuilding agriculture so that it supports small units of production not large agri-businesses. It means abandoning the dream of happy motoring, suburbia and big cities for something more human and sustainable. It’s not rocket science.

  3. “there will be powerful voices calling for a continuation of the Bush policy of delay and denial”

    Speaking of which, the science fiction writer and celebrity climate change denier, Michael Crichton, died yesterday.

    Reality catches up with everyone in the end.

  4. The election was indeed a referendum on socialism.
    A quick glance at the US federal tax burdens and expenditure by state: http://www.taxfoundation.org/publications/show/62.html
    compared with the electoral map:
    shows that once again, those states which take far more than they give – who “spread the wealth” in their favour, who are populated by “welfare queens” – voted Republican and those who pay far more in tax than they receive voted Democrat (exceptions: New Mexico; Maine; Hawaii; Virginia – Hawaii’s easy to understand, any theories on the others?). Colorado now gives more than it gets, and went Democrat. Notice that Pennsylvania and Ohio, the “battleground states”, are close to equality on tax/spend; Pennsylvania has gone onto welfare slightly, which might be why McCain thought he could grab it.
    In summary: Socialism type A: mixed economy, welfare statism and progressive income taxes has been soundly supported.
    Socialism type B: soviet style wasteful government subsidies for inefficient farm sectors and pork barrel military spending has been soundly defeated.

  5. Aust Treasury say that confidence is both “hardest to quantify, but arguably the most important” factor in the crisis.

    This will be Obama’s biggest task, restoring confidence.

  6. Today’s edition of the Australian Financial Review.

    By the way, did the paragraph on climate change make the Fin print edition? I think it may have gotten the chop.

  7. Does anyone know what the final tally for the popular vote in US HoR and SEN elections? This would seem a crucial fact to discover for those attempting to track the degree of political sea change represented by the Obama/DEM victory.

    It would be handy to know the Congressional popular vote so we could untangle Obama personality v DEM policy issues. Personality of the candidates is always more important in the US than in other countries elections.

    FWIW, on the evidence so far the Obama/DEM victory was predictable on nothing more than pure cyclical variables ie the recessional phase of both the electoral pendulum and business cycle. That does put something of a damper on wild-talk about “realigning elections”.

    To give a comparison favoured by Pr Q, in the US Presidential election of 1932 Roosevelt won 57% to Hoover 40% – a 17% spread. Now that spelled realignment. In 2008 Obama won 52% to 47% – a 5% spread.

    I do not think that the political evidence supports a realigning election theory, spelling a generation of DEM dominance. I think that it is more likely that the REPs will drift back to the Centre. McCain has showed the way.

  8. Jack, if Obama follows a centrist policy, it’ll be hard for the moderate Republicans to get much traction. He’ll grab the more popular policies of the moderate Republicans and use them to pick up independent support and pit the moderate and conservative Republicans against each other.

    In a two-party system, the public is best served by having two energetic well-organised major parties.

    I fear the US may not have that for the next decade or so.

  9. McCain hasn’t shown them the way to the centre at all. Criminalizing abortion even when risking the health of the mother (“health” in air-quotes), a complete non-defense spending freeze while maintaining the Bush ultra-rich tax cuts/deficit pump, health-care “deregulation” taxing health benefits to give a small cheque redeemable to the for-profit HMO industry, hundred year occupation of Iraq while threatening war with Iran, a loony Christo-fascist running mate who didn’t even know which countries were in NAFTA, insinuating his opponent was an anti-American closet-Muslim socialist with terrorist friends. The John McCain of this year was very different to the McCain of 2000. As Krugman said, the way he ran his campaign indicated that he would have been worse than B*sh, as if such a thing were possible.

    Look at the youth vote. The GOP in its current form is doomed. Thank you Bush/Cheney! And thank you Obama, for overturning the Clinton/McCaullife/Kerry head-in-the-sand loser Democratic strategy of imitating Republicans (‘triangulation’), refusing to fight, and ignoring the grassroots. Obama has revived the Democratic Party with an unprecedented community-based national organization which and although he may be a centre-right politician by international standards, by the standards of America’s criminal psychopathocracy that is quite a change indeed.

    Of course, in my unrealistic fantasy, once arriving in the White House he reveals himself for the secret socialist that the GOP said he was 🙂

  10. urgh – so much for my fantasy.

    Obama appoints Corpo-Right DLC hack as Chief-of-Staff.

    Emanuel is Obama’s first high-level appointment and it’s one likely to disappointment those who hoped the president-elect would break with the George W. Bush Administration’s pro-Israel policies. Rahm Emanuel was born in Chicago, Illinois in 1959, the son of Benjamin Emanuel, a pediatrician who helped smuggle weapons to the Irgun, the Zionist militia of former Israeli prime minister Menachem Begin, in the 1940s. The Irgun carried out numerous terrorist attacks on Palestinian civilians including the bombing of Jerusalem’s King David Hotel in 1946.

    Emanuel continued his father’s tradition of active support for Israel; during the 1991 Gulf War he volunteered to help maintain Israeli army vehicles near the Lebanon border when southern Lebanon was still occupied by Israeli forces.

    In Congress, Emanuel has been a consistent and vocal pro-Israel hardliner, sometimes more so than President Bush. In June 2003, for example, he signed a letter criticizing Bush for being insufficiently supportive of Israel. “We were deeply dismayed to hear your criticism of Israel for fighting acts of terror,” Emanuel, along with 33 other Democrats wrote to Bush. The letter said that Israel’s policy of assassinating Palestinian political leaders “was clearly justified as an application of Israel’s right to self-defense” (“Pelosi supports Israel’s attacks on Hamas group,” San Francisco Chronicle, 14 June 2003).

  11. urgh #2:

    Summers’ call for poisoning Developing World?

    Bloomberg is reporting that Larry Summers is on a very short list for nomination as Secretary of the Treasury. One doesn’t need to look at the global financial meltdown to recognize that this is a truly critical post but the impact and import of this post cannot be underestimated. With the need to move toward a more sensible energy policy and the myriad of issues of Global Warming, hopefully, a (if not, the) top agenda item for the coming Administration, it is important to place an environmental/energy/global warming lens against every potential cabinet appointee. And, in this vein, Larry has provided very serious reasons to question his candidacy … if not torpedo it.

    For example, when at the World Bank, Summers signed a memo advocating exporting polluting industry and toxic pollutants to Lesser Developed Countries (LDCs), a concept which is fundamentally at odds with any concept of environmental justice and blindly ignorant of the potential and imperative for ‘clean’ developmental prospects. If Summers still holds to any of the concepts he put forth in that memo, he simply should not be considered for a Cabinet position.


  12. One of the curious things about this election is that opinion polls throughout the year have consistently shown that the Democrat-controlled Congress is even more unpopular with voters than the Bush administration. Given this, it is remarkable that the Democrats increased their majority in the Congress and that voters were happy to give Democrats unified control of government.

    Partly, it is because Obama’s coattails and get-out-the-vote drive effectively gave House and Senate Democrats an exta boost.

    It is also partly because voters tend to take out their frustrations on the incumbent administration before taking out their wrath on Congress. A similar thing happened in 1992 when Bill Clinton’s popularity helped prop up an unpopular Democratic congress. Then in 1994 voters whacked the congressional Democrats.

    If there is a silver lining for Republicans, it is that it is almost certain that they will recover significant ground in the 2010 mid-term elections. Particularly if the economy deteriorates and liberal Democrats take the country further to the left than the public is ready for. In addition, there won’t be any coattails helping Democrats then.

    Although it will be virtually impossible for the Republicans to take back control of Congress, given that more Republican Senators will be up for re-election than Democrats and given the big advantages that House incumbents tend to enjoy.

  13. Obama has some big hurdles to jump;

    1 China has already rebuked him for his protectionist stance
    2 Russia has totally ignored his win and has continued to criticise US foreign policy
    3 the US may fall foul of the WTO if they increase tariffs
    4 US foreign policy has already been substantially reversed leaving Obama little room to manoeuvre

  14. Polls show that the American public is further to the left than both major parties on both foreign policy and domestic policy. I think there is extremely slim chance that Obama’s moderate platform is going to elicit a swing back to the party of Greed, Fear, Hate, Corruption and Total Incompetance, that is unless voters’ memories are extremely short indeed. I think that Bush’s catastrophic reign of terror will be remembered for quite a while, it has been undeniably the worst Presidency in living memory by any measure – and there are no forces in the GOP at the moment that seem able to make a break with that toxic legacy. They are already descending into civil war as the money wing – which has no popular constituency – tries to put religious useful-idiot wing (who see Sarah Palin as a viable 2012 candidate) back in the box. And let’s not forget all those Ron Paul supporters. At any rate, looking at the changing demographics of America everything is pointing to the decline of the GOP into a regional, Southern Whites based party. Plus the unprecedented grassroots machine that registered millions of new voters and swept Obama to victory is still going to be around in 2 years. The risk is not that Obama will be too far to the left, but that he won’t be left enough, which will dampen the enthusiasm of the base that put in so much effort this time around. They voted for Change, not piecemeal change but profound, FDR-style change, and in the context of 2008 America, Change = Left. Personally, I doubt he can fulfill their expectations – the system can’t be remedied by one nice man in the White House – although the reawakening of popular engagement in the political process is a step forward.

  15. Krugman’s take:

    You might think, perhaps hope, that Republicans will engage in some soul-searching, that they’ll ask themselves whether and how they lost touch with the national mainstream. But my prediction is that this won’t happen any time soon.

    Instead, the Republican rump, the party that’s left after the election, will be the party that attends Sarah Palin’s rallies, where crowds chant “Vote McCain, not Hussein!� It will be the party of Saxby Chambliss, the senator from Georgia, who, observing large-scale early voting by African-Americans, warns his supporters that “the other folks are voting.� It will be the party that harbors menacing fantasies about Barack Obama’s Marxist — or was that Islamic? — roots.

    Why will the G.O.P. become more, not less, extreme? For one thing, projections suggest that this election will drive many of the remaining Republican moderates out of Congress, while leaving the hard right in place.

    For example, Larry Sabato, the election forecaster, predicts that seven Senate seats currently held by Republicans will go Democratic on Tuesday. According to the liberal-conservative rankings of the political scientists Keith Poole and Howard Rosenthal, five of the soon-to-be-gone senators are more moderate than the median Republican senator — so the rump, the G.O.P. caucus that remains, will have shifted further to the right. The same thing seems set to happen in the House.

    Also, the Republican base already seems to be gearing up to regard defeat not as a verdict on conservative policies, but as the result of an evil conspiracy. A recent Democracy Corps poll found that Republicans, by a margin of more than two to one, believe that Mr. McCain is losing “because the mainstream media is biased� rather than “because Americans are tired of George Bush.�

  16. Gerard, it’s true that public opinion in the United States has actually shifted somewhat further to the left in recent years.

    Opinion polls on questions like whether people favour lower taxes or more government provision of services like health care and the like show that public opinion has shifted towards a greater role for government compared to early in the decade.

    But although public opinion has shifted further to the left, it is questionable as to whether the country has shifted quite as much as the government has. Polls still show that only around 22% of Americans identify as liberals, while the majority of the new Congress and administration will be liberals. So there is a good chance that they will stretch too far left for the electorate, leading to a backlash.

    I doubt whether dislike of GW Bush will continue to harm Republicans in future. I think that once Bush leaves people will start focussing on what Obama, Pelosi, and Reid are doing.

    As Labor are discovering in Australia, the only problem with controlling all levels of government is that there is no-one else to blame when things go wrong. The US Democrats will face a similar problem.

    One of the biggest problems that Obama will face is that he has created expectations that government should do more for people. But with a big budget deficit and tanking economy, it will be extremely difficult to fund things like universal health care. Obama is going to increase taxes on the wealthy, but raising taxes during an economic downturn is always risky and could exacerbate an economic downturn.

  17. I think that asking people whether or not they identify with the term “liberal”, which is a word that, uniquely in the US, has been deliberately turned into a form of abuse by the establishment, is not a valid way of determining their political outlook. Polls regarding what constitutes fair taxation and government provision of services – such as universal free healthcare – show that the majority of the US population is to the left of mainstream Democrats, as do polls concerning America’s foreign policy. However the fact that the Republicans have successfully convinced many that “liberal” means pro-homosexual, unpatriotic, 60s hippies who want to ban guns and Christmas while taking all their money and giving it to overweight black Welfare Queens driving cadillacs. I think this meme has run its course now, though.

    It is true that Bush has left a huge budget deficit that will restrain social spending – that was their intention – they created the deficit deliberately for that very reason. The deficit has been used to finance tax cuts of many hundreds of thousands of dollars a year for the extremely wealthy one percent – money that was used not for the type of demand-side consumption that would expand the economy through a multiplier effect, but rather money that was spent on hedge fund and residential property speculation bubbles. We have seen the economic consequences of this type of economic policy. It has been utterly discredited and should remain so for a couple of generations at least. Sharp increases in taxation on the super-rich class is the only option for Obama, and there is no reason to believe that it would exacerbate any economic downturn. It didn’t when Clinton came in the early 90s. Conversely Bush’s tax breaks at the start of his term did nothing for the economy. Trickle down Reaganomics is a dead parrot.

    It’s true that when Bush is gone people will be focusing more on the Democrats and I’m sure that many will be unsatisfied. But I think it would be almost impossible for them to be worse – or even anywhere near as bad – as the Republicans were, and people are not necessary going to embrace an alternative that is even worse, and has proven that it has nothing to offer anybody except pathological greed, bigotry and abject ignorance.

  18. I would take issue with Gerard’s view that “mainstream” Democrats are to the right of the population. In this election, one traditional Democrat constituency has dealt itself out of the game through its racism, and that is the traditional southern Democrat, most often white blue-collar worker. The Democratic party of FDR, Kennedy, Johnson and Carter is no more.

  19. That’s true Henry. In the past when the Democrats controlled both Congress and the Presidency (such as under Bill Clinton’s first two years and Jimmy Carter), there were sufficient numbers of more conservative Democrats (mainly from the South) to put the brakes on the more radical ambitions of the Democratic left.

    What is notable about this election result is not just that you have Democratic majorities at all levels of government, but that you have liberal Democratic majorities. Considering also that Obama and Joe Biden have some of the most left-leaning voting records in the current Senate (whereas Jimmy Carter and Bill Clinton were southerners representing the more conservative wing of the party).

    This situation has not existed since at least the 1960s when you had a lot of the Great Society expansions in government programs. We can expect a large increase in social expenditures and entitlements. It is also likely that they will completely reverse what remains of policies like welfare-to-work introduced during the 1990s when the Republicans were in control.

  20. Let’s hope you’re right about the large increase in social expenditures and entitlements Nick K, because that’s what America needs to become a half-way civilized country. And I doubt that any large increase in entitlements would be larger than the recent 700 billion dollar bailout for investment bankers. Since that is what passes for the GOP’s message of ‘fiscal discipline’, I don’t expect them to be able to oppose any of Obama’s social spending plans with any credibility whatsoever. They are nothing but a sick joke of a Party.

    The fact that someone like Joe “Bankruptcy Bill” Biden can be considered one of the most left-leaning in the Senate just goes to show how off the spectrum American politics is compared to the rest of the developed world, where people are generally believed to have a guarenteed human right to healthcare, rather than being condemned to die as a worthless wretch if they get sick with no money. Let the GOP keep the racist Dixiecrats and let Obama’s Party commit itself to turning America into a decent society – that is, a society that is the precise opposite of everything the modern Republican Party stands for.

  21. Strange fascination it is to observe Christopher Hitchens’s tacking with the winds of change. His own website and Slate give a nice albatross’s view of the win(d)ward passage.

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