Obama Trusted the Wrong Economists
Barack Obama figured his reelection was in the bag. All he had to do was throw the progressive wing of his party a bone by pulling a few thousand troops out of Afghanistan, and then wait for the economy to gradually get stronger. What could be easier? 2012 would be a romp. He never thought that his chief economic advisor, Lawrence Summers, might have misjudged the severity of the downturn or that all those pesky “lefty” economists (Stiglitz, Baker, Reich, Thoma, Krugman etc) were right in pushing for more fiscal stimulus. After all, what did they know? Most of them would have supported another W.P.A. if they were given half a chance. Good luck slipping that by the deficit hawks in congress! Besides Wall Street wants “austerity”; so austerity it is. You don’t get reelected by rocking the boat.
But then something unexpected (at least by the White House) happened, the economy started turning South. Housing, manufacturing and consumer confidence all began to lose altitude at the worst possible time, just when the GOP started hammering away the slowness of the recovery. So, when the BLS released its report last Friday, showing that US payrolls had risen by a paltry 54,000 and the unemployment rate climbed back to 9.1 percent, the Obama team went into full panic-mode. They finally realized that the economy was badly listing and that Obama might not be reelected after all. Horrors. That’s all it took to put the wheels in motion.
In a matter of hours, Obama completely reversed his position on fiscal stimulus and began reciting from the Christina Romer songbook. Romer, you may recall, was the president’s former economic advisor who Obama threw under the bus because she kept pushing for more fiscal stimulus. In an article in the Washington Post, Romer explained why she “decided to spend more time with her family”. Here’s an excerpt:
“There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit. A number of us tried to make the case that more action was desperately needed and would be effective. Normally, meetings with the President were very friendly and free-wheeling. He likes to hear both sides of an issue argued passionately. But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough. As luck would have it, the next day, a reporter asked him if he ever lost his temper. He replied, “Yes, I let my economics team have it just yesterday.”…(“Christina Romer looks back ? and forward”, Washington Post)
Obama had been pushing hard to trim the deficits while shrugging off warnings that the economy was still “too weak”. He opined that “At a time when American families are tightening their belts, government should be tightening their belt, too.” Here’s a clip from the Financial Times that illustrates how committed Obama was to austerity:
“US President Barack Obama warned that the US economy could head into a “double-dip recession” unless urgent steps were taken to rein in mounting public debt.
“The US president’s remarks… marked his strongest language yet on the necessity of putting public finances back on a sound footing.
“‘It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession, ’said Mr Obama.” (Financial Times)
So, why is this worth mentioning?
Well, because Obama has not only done a 180 on austerity, but he’s also stolen Romer’s basic fiscal plan, which just adds insult to injury. This is from Firedog Lake:
“President Barack Obama gave a small hint today about what, if anything, he plans to do about unacceptably high unemployment and slow economic growth over the next year. In a press event with German Chancellor Angela Merkel, Obama was asked about the economy. His answer is worth repeating….
(Obama) ‘“And as long as there are some folks out there who are unemployed, looking for work, then every morning when I wake up, I’m going to be thinking about how we can get them back to work.Some of the steps that we took during the lame duck session, the payroll tax, the extension of unemployment insurance, the investment in ? or the tax breaks for business investment in plants and equipment ? all those things have helped. And one of the things that I’m going to be interested in exploring with the members of both parties in Congress is how do we continue some of these policies to make sure that we get this recovery up and running in a robust way.’” (“Obama Floats Extending Payroll Tax Cut, Unemployment Benefits”, Firedog Lake)
The plan has “Romer” written all over it. No doubt Obama will add Romer’s Number 1 recommendation to the package in due time– a cut in the employer side of the payroll tax–just to add a bit of salt to the wound. Romer explains how it works in the same Washington Post op-ed:
“My particular favorite additional short-run stimulus would be a cut in the employer side of the payroll tax. Congress cut the payroll tax for employees in the budget compromise last December. A similar cut in what firms have to contribute for payroll taxes would make hiring workers cheaper and would therefore likely be particularly helpful for employment growth. This is just a broader and simpler version of the new jobs tax credit that I thought would be a very good idea back in 2009. And, it has the virtue of being something that I suspect policymakers on both sides of the aisle could support.” (“Christina Romer looks back ? and forward”, Washington Post)
So how did President Chameleon get into this mess?
Obama simply trusted his Wall Street mentors Summers, Bernanke, and Geithner, the trio that sabotaged the recovery while making sure the banks and speculators got as much liquidity (and bailouts) as they needed. Also, Fed chairman Ben Bernanke misled Obama about the stimulative effects of his experimental bond purchasing program (QE2) which neither lowered interest rates, nor increased GDP, nor boosted employment, nor sparked another credit expansion. The only thing the policy did was send gas and food prices skyrocketing which further constrained consumer spending. All told, QE2 was a bust. Even so, Bernanke has continued to use his position as Central Bank boss to promote his own political agenda. Here’s a clip from yesterday’s speech where Bernanke makes the case for even more austerity:
“The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government’s finances on a sustainable trajectory….The solution to this dilemma, I believe, lies in recognizing that our nation’s fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk.”
If Obama had listened to Romer instead of Bernanke he wouldn’t be in the pickle he’s in today. Instead, he’s going to be blasted as a hypocrite for doing a volte-face on fiscal stimulus and the leaving the austerity bandwagon by the side of the road. None of this will help to restore confidence in the recovery nor improve his prospects for reelection.
Mike Whitney lives in Washington state. He can be reached at email@example.com