Barack Hoover Obama?
Tuesday, 01/26/2010 - 12:22 pm by Marshall Auerback | 8 Comments
Marshall Auerback argues that spending cuts would be a major misstep for President Obama — and a return to the policies of Herbert Hoover.
Every instinct the President has honed, every voice he hears in Washington, every inclination of our political culture urges incrementalism, urges deliberation, and an abundance of caution, particularly in regard to our “unsustainable government spending.” And for all of his apparent newfound populist vigour, it now appears that the President is about to heed these voices of caution. The moves against the banks, coupled with yesterday’s announcement of a spending freeze and previously voiced support for a bipartisan commission on the deficit, all point to Clinton-style triangulation.
The Wall Street Journal reports that President Obama intends to propose a three-year freeze in spending that accounts for one-sixth of the federal budget. The move is designed “to attack the $1.4 trillion deficit” and would “propose limits on discretionary spending unrelated to the military, veterans, homeland security and international affairs, according to senior administration officials. Also untouched are big entitlement programs such as Social Security and Medicare.”
As with so much else with this president, the effect, then, is likely to be cosmetic, but it sends out an awful statement about Obama’s increasingly “Hoover-esque” governing philosophy, and the future likely direction of fiscal policy. The cuts will apparently be supplemented with some “middle class friendly” proposals to be introduced in the State of the Union Address. But the words of the Who’s Pete Townsend spring to mind from the song “Won’t Get Fooled Again”:
“Meet the new boss / Same as the old boss.”
Any kind of spending cuts in the middle of the worst recession since the Great Depression is insane. What we are beginning to see is the return of Herbert Hoover and the “liquidationists.”
As my friend Mike Norman reminded me, Obama opposed the idea of a spending freeze during the campaign, when it was proposed by McCain. McCain lost the presidency. Now Obama supports it???
What’s next? Raising taxes as the Japanese did in the middle of their recession in the mid-1990s?
Those who rant about the runaway size of government in the US should just go to the BEA statistics page. Bill Mitchell points out that government spending as a percentage of real GDP has actually DECLINED over the past year: “In March 2003 it was 9.4 per cent (and it wasn’t much less than about 10 years earlier as well). It peaked at 12.4 per cent in September 2008 at the height of the crisis when investment was heading south and consumption was still in decline. A year later it was at 11.4 per cent.”
It’s certainly not the image of an out of control, wildly spending, “socialist” government.
If Barack Obama continues to listen to the siren songs of the deficit terrorists, he will almost certainly be a one-term president.
Roosevelt Institute Braintruster Marshall Auerback is a market analyst and commentator.
The problem is not the budget deficit. It is how the deficit money is spent on the wrong programs.
Administration officials said Obama is expected to call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit.
The proposal would be a major component both of Obama’s State of the Union address on Wednesday and of the budget he will send to Congress on Monday for the fiscal year that begins in October.
The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, from air traffic control and farm subsidies to education, nutrition and national parks. but it would exempt the budgets for the Pentagon. The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional debt the government is expected to accumulate over that time.
After trillions have been squandered on wayward financial firms, our leader shouts:
A Freeze, a Freeze, my kingdom for a Freeze!
Posted by Henry C.K. Liu | January 26th, 2010 at 3:33 pm
Your article has a huge factual error. Government spending/GDP is not 10% it is 25%. Even the graph you refer to does not add up to 100%
Consumer = 71%
Government = 10%
business investment = 14%
Exports = -5%
Total = 90%
Posted by Ed McKernan | January 26th, 2010 at 5:55 pm
I don’t think so, Ed. My article is based on statistics I got on the government spending ratio is from the BEA.
http://www.bea.gov/national/index.htm
Take a look at the chart which shows US spending ratios in relation to real GDP from March 2003 to Sept. 2009. I can’t print up the chart here, but the Investment ratio (I/Y), the Net Exports to GDP ratio (NX/Y)and Government spending to GDP ratio (G/Y) are shown on the left-hand axis, while the Consumption ratio (C/Y) is shown on the right-hand side. So don’t be duped by the different scales.
In March 2003, the C/Y was 69.7 per cent, the I/Y was 15.6 per cent, NX/Y was -5.0 per cent and G/Y was 9.4 per cent. At the onset of the crisis, the changes became stark. C/Y fell by 0.5 of a percentage point (this is a large shift) between September 2007 and September 2008. The Investment ratio had been declining earlier than this – which is symptomatic of an economy maintaining growth via consumption fuelled by increasing indebtedness.
The I/Y peaked at 17.6 per cent in March 2006 and then plunged to its low of 11.3 in June 2009. As you will see in the next graph, this plunge drove the aggregate demand failure.
Bill Mitchell does a very good analysis of the charts on his blog:
http://bilbo.economicoutlook.net/blog/?p=7576
I would be interested to see where you got your numbers.
Posted by Marshall Auerback | January 26th, 2010 at 6:20 pm
Henry,
Don’t disagree with what you have written except to say that the budget deficit is a problem, by not in the way that you think: it’s insufficient to accommodate the savings desires of the private sector. Their savings proclivities have been increased due to the uncertainty brought about by rising unemployment, rising foreclosure rates, fear of repossession of their homes, etc. Obviously, if Obama does nothing to deal with these problems then the US is cooked. And if he is serious about cutting back spending, unemployment will go much higher and so will the deficit.
The US government did exactly this in 1937 and the unemployment worsened. Japan did it in 1997 with the same outcome. The UK government is likely to do it in 2010 with totally predictable results – their economy will falter. What the US government is now in danger of repeating is taking its economy down the fast track to a double-dip recession. With investment still flat, consumers trying to increase their saving ratio and net exports making a negative contribution to growth – the President and his advisors evidently believe the persistently high unemployment is something the private sector has to deal with.
No question the funds have been deployed in a very inefficient way. Virtually almost all of the administration’s focus thus far has been on the preservation of the financial interests of major banks. The government (through the Troubled Asset Relief Program (TARP), the Federal Reserve, FDIC and the US Treasury) has committed at least $23.7 trillion dollars to support the economy. Most of this money has been allocated to the financial sector, and only minimal efforts have been applied to solve the debt problems of households and non-financial businesses.
So what should the President do? Well a Job Guarantee program would be an excellent start (as you suggested the other day). He can also help borrowers via real loan modifications; marginal and temporary loan modifications will not do; we need a significant and permanent reduction of debt payments; this is even truer if one consider that second lien mortgages are even more likely to redefault.
It is true that loan modifications may entail large fees and penalties that households cannot afford to pay; and, depending on circumstances and state laws, mortgage modifications might lead to a change from a non-recourse loan to a recourse loan, which makes households who redefault much worse than they were before the modification. Third, loan modifications usually have occurred far too late–after the borrower has long been delinquent. In fact, past policy initiatives like Project Lifeline gave a strong incentive to become a 90-day delinquent because a loan modification would not be considered until a borrower reached that stage. This state of affairs contributes to higher redefault rates because “the more serious the delinquency, the less likely the borrower will remain current after modification” (Office of the Comptroller of the Currency and Office of Thrift Supervision 2009: 31).
Essentially, we’ve got to find a more effective way to restart the economic process on the solid ground. You do that by dealing with the underlying cause of the problem: borrowers cannot meet the required payments. This implies sustaining their income and employment and, if necessary, drastically modifying their debt service burden. The whole boom of the 2000s (and more broadly the growth process that emerged at the in the early 1980s) was based on household borrowing and the continuation of negative saving trends (that is, household deficit spending). A good place to start recovery efforts, therefore, would be to change this method of economic growth to one which genuinely supports demand, not subsidies to the FIRE part of our economy.
Posted by Marshall Auerback | January 26th, 2010 at 6:37 pm
It’s always the same scam…
EMERGENCY!
We must take your money and hand it over to other members of the ruling class.
Sorry, nothing left over for the serfs.
Now get back to work!
You’re only as free as the dumbest voter.
Posted by Angry Voter | January 26th, 2010 at 7:17 pm
This was exactly what occurred to me this morning, that Obama was following in Hoover’s footsteps. And Grant’s, with his hard money response to the Panic of 1873.
Posted by Knute Rife | January 26th, 2010 at 7:53 pm
Nice to see the allusion to Grant… that period of our history is always inexplicably overlooked.
Posted by James Call | January 27th, 2010 at 8:45 am
He’ll go down as anotherNixon, corruption and a currency crisis due to war like when Nixon disconnected the dollar from gold on Auguast 15th 1971.
Posted by Festus | January 29th, 2010 at 8:00 pm