Monday, March 16, 2009

Economic Change that We Were Waiting For?

Back in late 2008 there were calls for President Bush to step aside and let President-elect Obama take office early. The thinking was that only the brilliant Obama could save the economy.

A few months later and the world is wondering why anyone thought that Obama could accomplish miracles. People are beginning to admit (in whispers) that the Obama administration is worse than the Bush administration. Consider:

Two months into his administration and Obama still has not announced a plan to stabilize the banks. A few outlines of plans have been floated then withdrawn.

The Obama administration is actively anti-business. Obama doesn't wants businesses to project a sackcloth and ashes image. This has hurt the convention business in general and Las Vegas in particular. In signing the omnibus spending bill, Obama talked about future limits on earmarks, but only those going to businesses. He indicated that earmarks going to public officials are always in the public's interest but earmarks going elsewhere are always suspect.

Obama spent the weeks leading up to his inauguration and his first few weeks in office describing the economy in terms of the Great Depression in order to get his stimulus passed. Now that it is law, he is stressing that the fundamentals of the economy are sound. He blasted McCain as an out-of-touch rich guy for saying the same thing last Fall. This abrupt about face convinced everyone that they cannot trust Obama for an honest assessment of the economy.

The current economic troubles cone from real estate and banking but Obama insists that there cannot be a recovery without universal health care and energy reform. He has not elaborated how these are connected leading many to believe that he is using the economy to give himself carte blanche. There is a great deal of skepticism on how taking control of 1/6th of the economy (health care) will solve the problem of toxic debt. It has also convinced much of the country that Obama is more interested in health care than fixing the economy. This is at odds with how most people prioritize the issues.

Candidate Obama insisted that he would pay for everything through increased efficiency, elimination of wasted programs, and taxes on the richest 5%. Now that he is in office he has added a tax on energy usage to that mix. Late last week he said that he is open to taxing existing insurance benefits in order to pay for universal coverage. These last two will hit the poor and middle-class much harder than the rich.

Obama's budget plans call for the highest deficit, by any measure, in history. He then promised to cut it in half within a few years. leaving a permanent deficit much higher (as a percentage of GDP) than any point since WWII*. Even this assumes a quick recovery followed by unpresidented growth and new taxes that are not likely to be passed in their entirety. Since it is easier to pass new spending than new taxes, the real deficit will be much worse than he projects. On top of that, the $800 billion set aside for health care is described as a "down payment". This implies that the real health care costs will be much higher.

There is already talk about the first stimulus bill failing. This is probably a recognition that it is not a stimulus bill at all, just a spending bill. How could it be anything else when most of the money will be spent after 2009? We may see another stimulus proposed before the end of the year.

Obama is currently asking the G20 conference to committing to stimulus spending on the same order that we are doing. They are objecting for several reasons. A big one is the threat of hyper-inflation. This ties in with China's finance minister openly wondering about the safety of the US bonds that China already holds. It is unlikely that he thinks that the US will default on those bonds but he could be signalling worry about hyper-inflation caused by Obama's proposed budget or he could simply be warning Obama that China will not be willing to buy a limitless amount of US debt. Either of these possibilities should be keeping the Obama administration up nights.

So we have critics from both inside and outside the US questioning Obama's competance. This should be no surprise. After all, Obama is an activist/law professor/one-term senator. There is nothing in this resume to prepare him for taking on a world economic crisis (or even a world economic downturn).

* The deficit reached Obama-levels for a couple of years during the recession of the early 1980s when unemployment neared 10%, This is often attributed to Reagan's military build-up but a graph of those years shows that the real culpret was the dip in revenue caused by high unemployment. In contrast, Obama is raising the rate-of-growth of government to unpresidented levels.

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