Hot and Cold on Obamanomics

While my blog is not a blog about politics, it is about economics, and you can't talk about economics these days without talking about politics. The big investment opportunities are often directly or indirectly caused by distortions in government policy and the unwinding of those distortions. That's not to say I think government involvement in the economy is bad per se. It's just that the federal government is such a large actor and (in the case of the United States) not governed by normal rules of business and economics, its actions have an outsized effect on the economy.

As I noted in Part IV of my 2009 economics series, the American people have done a good job managing fiscal policy over the past 70 years by switching out presidents and congressional control. Obama's willingness to run large deficits via large doses of government spending is appropriate for the current deflationary environment, and it makes sense to back him up with Democratic majorities. It was appropriate to elect Bush in 2000, to ease fiscal policy via tax cuts, given the weakness in business investment, budget surplus and strong dollar at the time. I was appropriate to elect Clinton in 1992 as a moderate progressive to focus on policies that supported consumer spending after 12 years of "supply-side" Republican rule, but then also appropriate to put in a Republican congress in 1994 to focus on deficit reduction after 14 years of high deficits. I could keep going back, but you get the picture. Circumstances change frequently, but the political parties change ideology much more slowly, so the people conduct economic management for the parties by changing them in and out of power.

Personally, I'd prefer to see us move to a more balanced policy conducted on a bipartisan basis. Otherwise we're doomed to these wild swings in economic fortunes that keep requiring bigger and bigger government responses to keep the game going. As I've frequently stated, I think we're in overtime of the current game of bubble surfing that has been building since the end of World War II. I thought Obama had the chance to start a new game (and he still has that chance), but so far he seems focused on keeping the old game going. So we surf from the Great Society bubble to the 1970s inflation bubble to the Reaganomics bubble to the Dot-Com bubble to the real estate/globalization bubble to Obama's government spending bubble, racking up more and more debt as we go. In the meantime the average American is forced to endure wild swings in inflation, interest rates, stock values and real estate values. Such swings are great for hedge funds managers and Wall Street financiers, but they are tough for working stiffs who just want to work hard and provide a decent life for their family.

With that said, here is my scorecard on Obamanomics so far:

  • Financial Crisis – As I've noted previously, I generally approve of the way the Obama administration has handled the financial crisis, although I actually would have been harder on the banks. The stress tests had too low a standard in my opinion. In my analysis, I thought the banks needed another $1-1.2 trillion to shore up their balance sheets. The Treasury thinks the banks need $75 billion. Why the difference? I thought the banks should have equity equal to 10% of their assets, while the Treasury is targeting equity equal to 4% of assets. 25 to 1 leverage seems inappropriately low to me, given the highly uncertain environment facing real estate and business loans over the next two years. The Administration has lost the political will to ask for more money, so it's hoping we can skate by with what they already have. My suspicion is that within 4-5 years we'll be revisiting this issue. If we were more willing to wipe out private bank shareholders, the American people would have been more amenable to funding the TARP. Unfortunately, the financial industry is one of the biggest donors to both parties, so we are where we are.
  • Auto bailout – Up until recently, I have been supportive of the Administration's auto bailout policy. That is until they decided to rip up hundreds of years of bankruptcy law precedent to conduct a union giveaway at the expense of the secured creditors. It's what I'd expect out of Hugo Chavez's Venezuela, not the United States.
  • Stimulus – While I think it's unrealistic for the government to efficiently spend so much money in such a short period, their heart is in the right place on expanding the government's balance sheet to offset the decline in business investment, residential investment and consumer spending associated with the financial crisis. I would have preferred to see a smaller stimulus and more invested in the financial system (which we will get back with interest). A lot of the stimulus money being spent on "infrastructure" will be a boondoggle, but will provide a decent short-term boost to the economy.
  • Budget – The long term budget outline laid out by Obama is crazy in its deficit projections, but is focused in the right place by emphasizing health care, education, energy reform and infrastructure. It just spends too much for too long a period of time. Expect a Republican congress sometime in the next six years to rein it in.
  • Cap and Trade – As I expected, the cap and trade program proposed by Obama is quickly turning into a joke, with lobbyists battling for exemptions for utilities and manufacturers and watering down the whole thing. If the Administration had followed my advice, and just been honest about the fact that it is a carbon tax, it could have been more effective. Calling it a regressive tax would force policymakers to offset it with a repeal of the payroll tax, trading a tax on work with a tax on spending (on imported oil, no less). Such a trade off, including a big cut in the corporate tax, would appeal to liberals and conservatives alike.  Instead we get something ineffective, shaped by lobbyists and insiders, that will punish average people with no discernable effect on the environment, all to salve the conscious of rich liberals. It would be funny if it weren't so sad.

Overall the Administration is effectively responding to crisis, while missing some of the opportunity to put this nation on sounder long term footing.

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