Thursday, January 8, 2009

Obama Knows

I have recently been quite disturbed by the appointments that Obama has made, especially with respect to his economic team. Yesterday, my wife tried to console me by saying: “he has a plan”. By that she meant that the appointments don’t necessarily translate into the policy favored by the people Obama has chosen, who largely constitute a restoration of the Clinton economic team. I put a lot of blame on Clinton for the situation we are in today, and I also blame Reagan and Bush Jr., but I don’t blame Bush Sr.

In a speech at George Mason University, Obama spoke in very serious terms about the economic state, and he, I believe, correctly identified many of the upcoming challenges. What Obama realizes is that the challenges we face are not limited to the restoration of confidence in the financial markets. This is not about even about the financial markets anymore. We are unavoidably facing a paradigm shift in the way that this country functions.

To put this in perspective, we seem to be facing a budget deficit of around 2 Trillion dollars with the Obama plan. The current estimated value of “toxic” financial assets is now around 8 Trillion dollars. If it would take 8 Trillion dollars to clean up the financial markets so that those markets can again provide America with across-the-board prosperity (which they can’t), but 1 Trillion dollars to provide direct relief according to the Obama plan, then the choice seems easy. Obama suggests something pretty simple: to funnel taxpayer money directly back to the taxpayers who need it, instead of giving it away to financial institutions in the hopes that, some day, that money will trickle back to the taxpayers. The latter was the Paulson plan.

I am definitely not a fan of deficit spending, even in a crisis. Normally, I would have argued that fiscal restraint, followed by a time of a baptism of fire would be called for. However, since the people of The United States have essentially no societal protection with respect to incomes, pensions and healthcare, such a harsh experience would probably be too devastating. To set the record straight, what we really should be talking about now are things like the following:

real dangers to future American competitiveness, a deterioration of the fabric of society, hunger, poverty, crime and the like.

Obama makes the case that the only way to deal with the situation is to mortgage our economic future. I reluctantly agree.

Here’s an important quote from Obama’s speech:

“We could lose a generation of potential and promise, as more young Americans are forced to forego dreams of college or the chance to train for the jobs of the future, and our nation could lose the competitive edge that has served as a foundation for our strength and standing in the world. In short, a bad situation could become dramatically worse.”

We cannot move forward thinking that the financial markets are going to provide prosperity and security for Americans, we must provide that among ourselves. That is the only way.


Anonymous said...

How will a tax cut to consumers help reduce their debt?

And where is obama going to get the money to invest in his infrastructure programs?

Jacob said...

I'm not wild about a stimulus package either, but in this political environment I believe it's the best we can get. In the highly fragmented and gridlocked political system, responsible government policies are usually a mirage. I would prefer fiscal restraint coupled with structural changes to the economy to set the country up for the next crisis. Please read my theory on that here:

We know that tax cuts to lower income people constitutes a direct injection into the economy. but you're right, it won't reduce debt levels. That can only be dealt with later.

The money will haver to be borrowed from China, Japan or Germany, but there are also quite a few things you can do budget-wise, like cutting military spending.