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Failed Leadership

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July 8, 2010

Exactly one year ago (on July 7, 2009) I pointed out that it would eventually become necessary for President Obama to propose a second economic stimulus package because he didn’t get it right the first time.  As far back as January of 2009, the President was ignoring all of the warnings from economists such as Nobel Laureate Joseph Stiglitz, who forewarned that the proposed $850 billion economic recovery package would be inadequate.  Mr. Obama also ignored the Bloomberg News report of February 12, 2009 concerning its survey of 50 economists, which described Obama’s stimulus plan as “insufficient”.  Last year, the public and the Congress had the will – not to mention the sense of urgency – to approve a robust stimulus initiative.  As we now approach mid-term elections, the politicians whom Barry Ritholtz describes as “deficit chicken hawks” – elected officials with a newfound concern about budget deficits – are resisting any further stimulus efforts.  Worse yet, as Ryan Grim reported for the Huffington Post, President Obama is now ignoring his economic advisors and listening, instead, to his political advisors, who are urging him to avoid any further economic rescue initiatives.

Ryan Grim’s article revealed that there has been a misunderstanding of the polling data that has kept politicians running scared on the debt issue.  A recent poll revealed that responses to polling questions concerning sovereign debt are frequently interpreted by the respondents as limited to the issue of China’s increasing role as our primary creditor:

The Democrats gathered on Thursday morning to dig into the national poll, which was paid for by the Alliance for American Manufacturing and done by Democrat Mark Mellman and Republican Whit Ayers.

It hints at an answer to why people are so passionate when asked by pollsters about the deficit:  It’s about jobs, China and American decline.  If the job situation improves, worries about the deficit will dissipate.  Asking whether Congress should address the deficit or the jobless crisis, therefore, is the wrong question.

*   *   *

About 45 percent of respondents said the biggest problem is that “we are too deep in debt to China,” the highest-ranking concern, while 58 percent said the U.S. is no longer the strongest economy, with China being the overwhelming alternative identified by people.

As I pointed out on May 27, even Larry Summers gets it now – providing the following advice that Obama is ignoring because our President is motivated more by fear than by a will to lead:

In areas where the government has a significant opportunity for impact, it would be pennywise and pound foolish not to take advantage of our capacity to encourage near-term job creation.

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Consider the package currently under consideration in Congress to extend unemployment and health benefits to those out of work and support to states to avoid budget cuts as a case in point.

It would be an act of fiscal shortsightedness to break from the longstanding practice of extending these provisions at a moment when sustained economic recovery is so crucial to our medium-term fiscal prospects.

Since our President prefers to be a follower rather than a leader, I suggest that he follow the sound advice of The Washington Post’s Matt Miller:

I come before you, in other words, a deficit hawk to the core.  But it is the height of economic folly — and socially dangerous, in my view — to elevate deficit reduction as a goal today over boosting jobs and growth.  Especially when there are ways to goose the economy while at the same time legislating changes that move us toward fiscal sanity once we’re past this stagnation.

Mr. Miller presented a fantastic plan, which he described as “a radically centrist ‘Jobs Now, Deficits Soon’ package”.  He concluded the piece with this painfully realistic assessment:

The fact that nothing like this will happen, therefore, is both depressing and instructive.  Republicans are content to glide toward November slamming Democrats without offering answers of their own.  Democrats who now know the first stimulus was too puny feel they’ll be clobbered for trying more in the Tea Party era.

The leadership void brought to us by the Obama Presidency was the subject of yet another great essay by Paul Farrell of MarketWatch.  He supported his premise — that President Obama has capitulated to Wall Street’s “Conspiracy of Weasels” — with the perspectives of twelve different commentators.

The damage has already been done.  Any hope that our President will experience a sudden conversion to authentic populism is pure fantasy.  There will be no more federal efforts to resuscitate the job market, to facilitate the availability of credit to small businesses or to extend benefits to the unemployed.  The federal government’s only concern is to preserve the well-being of those five sacred Wall Street banks because if any single one failed – such an event would threaten our entire financial system.  Nothing else matters.




The Second Stimulus

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July 9, 2009

It’s a subject that many people are talking about, but not many politicians want to discuss.  It appears as though a second economic stimulus package will be necessary to save our sinking economy and get people back to work.  Because of the huge deficits already incurred in responding to the financial meltdown, along with the $787 billion price tag for the first stimulus package and because of the President’s promise to get healthcare reform enacted, there aren’t many in Congress who are willing to touch this subject right now, although some are.  A July 7 report by Shamim Adam for Bloomberg News quoted Laura Tyson, an economic advisor to President Obama, as stating that last February’s $787 billion economic stimulus package was “a bit too small”.  Ms. Tyson gave this explanation:

“The economy is worse than we forecast on which the stimulus program was based,” Tyson, who is a member of Obama’s Economic Recovery Advisory board, told the Nomura Equity Forum.  “We probably have already 2.5 million more job losses than anticipated.”

As Victoria McGrane reported for Politico, other Democrats are a bit uncomfortable with this subject:

Democrats are all over the map on the stimulus and the possibility of a sequel, and it’s not hard to see why:  When it comes to a second stimulus, they may be damned if they do and damned if they don’t.

Kevin Hall and David Lightman reported for the McLatchy Newspapers that at least one high-ranking Democrat was keeping an open mind about the subject:

“I think we need to be open to whether we need additional action,” House Majority Leader Steny Hoyer, D-Md., said Tuesday.  “We need to continue to focus on bringing the economy back to a place where we’re not losing jobs.”

An informative article by Theo Francis and Elise Craig, in the July 7 issue of Business Week, explained the real-world difficulties in putting the original stimulus to work:

Dispensing billions of dollars, it turns out, simply takes time, particularly given government contracting rules and the fact that much of federal spending is funneled through the states. Moreover, some spending was intentionally spread out over several years, and other projects are fundamentally more long-term in nature.  “There are real constraints — physical, legal, and then just the process of how fast you can commit funds,” says George Guess, co-director of the Center for Public Finance Research at American University’s School of Public Affairs.  “It’s the way it works in a decentralized democracy, and that’s what we’re stuck with.”

Nevertheless, from the very beginning, when the stimulus was first proposed and through last spring, many economists and other commentators voiced their criticism that the $787 billion stimulus package was simply inadequate to deal with the disaster it was meant to address.  Back on December 28, Nobel laureate Paul Krugman explained on Face The Nation, that a stimulus package in the $675-775 billion range would fall short:

So you do the math and you say, you know, even these enormous numbers we’re hearing about are probably enough to mitigate but by no means to reverse the slump we’re heading into.

On July 5, Professor Krugman emphasized the need for a second stimulus:

The problem, in other words, is not that the stimulus is working more slowly than expected; it was never expected to do very much this soon.  The problem, instead, is that the hole the stimulus needs to fill is much bigger than predicted.  That — coupled with the fact that yes, stimulus takes time to work — is the reason for a second round, ASAP.

Another Nobel laureate, Joseph Stiglitz, pointed out for Bloomberg TV back on January 8, that the President-elect’s proposed stimulus would be inadequate to heal the ailing economy:

“It will boost it,” Stiglitz said.  “The real question is — is it large enough and is it designed to address all the problems.  The answer is almost surely it is not enough, particularly as he’s had to compromise with the Republicans.”

On February 26, Economics Professor James Galbarith pointed out in an interview that the stimulus plan was inadequate.

On January 19, financier George Soros contended that even an $850 billion stimulus would not be enough:

“The economies of the world are falling off a cliff.  This is a situation that is comparable to the 1930s. And once you recognize it, you have to recognize the size of the problem is much bigger,” he said.

Despite all these warnings, as well as a Bloomberg survey conducted in early February, revealing the opinions of economists that the stimulus would be inadequate to avert a two-percent economic contraction in 2009, the President stuck with the $787 billion plan.  He is now in the uncomfortable position of figuring out how and when he can roll out a second stimulus proposal.

President Obama should have done it right the first time.  His penchant for compromise — simply for the sake of compromise itself — is bound to bite him in the ass on this issue, as it surely will on health care reform — should he abandon the “public option”.  The new President made the mistake of assuming that if he established a reputation for being flexible, his opposition would be flexible in return.  The voting public will perceive this as weak leadership.  As a result, President Obama will need to re-invent this aspect of his public image before he can even consider presenting a second economic stimulus proposal.