Saturday, August 14, 2010

DeLong Nails It

Here is a post by Brad DeLong that nails the incompetence of the Obama administration's handling of the recovery from the Great Recession. First he cits Mark Thoma, then he goes for the jugular by citing the relevant economic facts. It is a skillful blow that drives home the lying incompetence of the Obama administration in handling the recovery. But what do you expect when you put the fox in charge of the hen house?
Department of "Huh?!" (Has the Obama Administraton Lost Its Mind? Department)

by Brad DeLong

Mark Thoma is, politely, puzzled:
Reverse Psychology?: Instead of a series of op-eds by Christina Romer, Larry Summers, Jared Bernstein and other members of the administration making a strong, strong case for more stimulus -- particularly that devoted to job creation -- along with the president himself making the case to the nation, the appearance of key administration officials on Sunday talk shows to bolster the effort, and so on, the administration has decided to try and sell a recovery that hasn't yet taken hold.

Thus, instead of a much needed and impressive effort to move Congress to action, or at least make clear to voters who is and who isn't trying to help those struggling with the recession, here's Timothy Geithner saying it's time for the government to back off because a solid recovery is underway:
Treasury Secretary Timothy Geithner said the economy has now recovered sufficiently for government to begin to make way for private business investment.... Mr. Geithner’s comments on Sunday, which echo previous sentiments expressed by President Barack Obama, reflect a turning point in the government response to the worst economic downturn since the Great Depression, a period marked by deep federal intervention in the financial, housing, auto and other industries...
The message is that the administration is pulling back, and maybe even starting to balance the budget because good times are just around the corner:
“We need to make that transition now to a recovery led by private investment,” Mr. Geithner said Sunday on NBC’s “Meet the Press.” Mr. Geithner hit two Sunday talk shows, delivering the Obama administration’s message that the economy was recovering...
I don't understand this strategy. The election is not that far way. If unemployment continues to be a problem, and it looks like it will, saying that things are fine and recovery is just around the corner will backfire.
I would put it much less politely: have Tim Geithner and Barack Obama lost their minds? The Administration's mid-session review--released last week--projects that the unemployment rate will rise in the next several months and will be at 9.3% in February 2011. It projects that Q4/Q4 real GDP growth will be 2.9% this year--and I don't see how we are going to get there with a 2.7% growth rate in the first quarter, a likely 2.0% growth rate in the second quarter, and with the tracking third-quarter growth at 2.9%. We would need 4.0% growth in the fourth quarter of this year. Nor do I understand where the 1.7% decline in unemployment over 2011 is supposed to come from: a simple Okun's Law coefficient of 2 would suggest that we need 2 x 1.7 + 2.6 = 6% real GDP growth to generate such a decline.

According to Mark Zandi, in the fourth quarter of this year the phase-out of the ARRA is likely to shave 0.3% off the real GDP growth rate. in 2011, the contractionary effects of the ARRA phase-out on the quarterly growth rates are likely to be -0.8%, -1.2%, -0.7%, and -0.2%.

It sure ain't morning in America. Maybe I need to go back and read Geithner's transcripts from this morning to see if the MSM is misrepresenting what he said...
Geithner, Summers, Bernanke are all part of the crew of Clinton/Bush appointees who failed to see the housing bubble, who were slow to react once the bubble burst, and who are now lame in their attempts to revive the dying patient. With that kind of grotesque incompetence, it is amazing that Obama promoted all three to positions of power in his administration!

My interpretation: Obama is beholden to Wall Street for financing his presidential bid. It is payback time. He and his "team" have laid down and rolled over to allow Wall Street to pick the pockets of Americans. His "team" looks the other way while this crime takes place. For me, the idea that Obama can be re-elected in 2012 is laughable. He did half-deliver on healthcare, but he had pushed the US deeper into war in Afghanistan, failed alleviate the suffering of the recession, and remained aloof when the nation needed leadership. He will compound the tragedy if he doesn't step aside in time to allow a real candidate to emerge. Otherwise the resurgent Republicans will get the reins of power and get a chance to finally kill off the economy that they so badly gutted with Bush policies from 2001-2009.

Watching the US from Canada is like watching a train wreck in slow motion. You see the inevitable. You yell, scream, wave your hands, but realize that with that much weight with that much momentum, there is nothing that can stop the wreck from happening. I simply feel sorry for Americans. At best they can hope to begin recovery sometime after the 2016 elections when hopefully they return a Democratic President and Congress who are commited to "Change you can believe in!"

In a previous post, DeLong cites Martin Wolf of the Financial Times who is equally bleak about the US given the cynical and destructive policies of the Republican Party.
I want to examine what is going on... inside the Republican party.... My reading of contemporary Republican thinking is that there is no chance of any attempt to arrest adverse long-term fiscal trends should they return to power. Moreover, since the Republicans have no interest in doing anything sensible, the Democrats will gain nothing from trying to do much either. That is the lesson Democrats have to draw from the Clinton era’s successful frugality, which merely gave George W. Bush the opportunity to make massive (irresponsible and unsustainable) tax cuts.... Indeed, nothing may be done even if a genuine fiscal crisis were to emerge. According to my friend, Bruce Bartlett, a highly informed, if jaundiced, observer, some “conservatives” (in truth, extreme radicals) think a federal default would be an effective way to bring public spending they detest under control....

To understand modern Republican thinking on fiscal policy, we need to go back to perhaps the most politically brilliant (albeit economically unconvincing) idea in the history of fiscal policy: “supply-side economics”. Supply-side economics liberated conservatives from any need to insist on fiscal rectitude and balanced budgets. Supply-side economics said that one could cut taxes and balance budgets, because incentive effects would generate new activity and so higher revenue.... Supply-side economics... allowed them to promise lower taxes, lower deficits and, in effect, unchanged spending. Why should people not like this combination? Who does not like a free lunch?... [T]he Republicans were transformed from a balanced-budget party to a tax-cutting party. This innovative stance proved highly politically effective....


The evidence shows, then, that contemporary conservatives (unlike those of old) simply do not think deficits matter.... But this is not because the supply-side theory of self-financing tax cuts, on which Reagan era tax cuts were justified, has worked, but despite the fact it has not.... So, when Republicans assail the deficits under President Obama, are they to be taken seriously?... Yes, they are politically interested in blaming Mr Obama for deficits.... But no, it is not deficits themselves that worry Republicans, but rather how they are caused: deficits caused by tax cuts are fine; but spending increases brought in by Democrats are diabolical, unless on the military. Indeed, this is precisely what John Kyl (Arizona), a senior Republican senator, has just said.


What conclusions should outsiders draw about the likely future of US fiscal policy? First, if Republicans win the mid-terms in November, as seems likely, they are surely going to come up with huge tax cut proposals (probably well beyond extending the already unaffordable Bush-era tax cuts). Second, the White House will probably veto these cuts, making itself even more politically unpopular. Third, some additional fiscal stimulus is, in fact, what the US needs, in the short term, even though across-the-board tax cuts are an extremely inefficient way of providing it. Fourth, the Republican proposals would not, alas, be short term, but dangerously long term, in their impact.

Finally, with one party indifferent to deficits, provided they are brought about by tax cuts, and the other party relatively fiscally responsible (well, everything is relative, after all), but opposed to spending cuts on core programmes, US fiscal policy is paralysed. I may think the policies of the UK government dangerously austere, but at least it can act.

This is extraordinarily dangerous. The danger does not arise from the fiscal deficits of today, but the attitudes to fiscal policy, over the long run, of one of the two main parties. Those radical conservatives (a small minority, I hope) who want to destroy the credit of the US federal government may succeed. If so, that would be the end of the US era of global dominance. The destruction of fiscal credibility could be the outcome of the policies of the party that considers itself the most patriotic.

In sum, a great deal of trouble lies ahead, for the US and the world.
You can't get much more bleak than that. People I respect are wailing and gnashing their teeth. They are in mourning as if the patient is already dead because they see no way to rescue the US from its self-imposed destruction. Tragic.

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