Archive for November 5th, 2009

Obama’s Challenge

President Obama finds himself in an almost surreal situation.   He leads a country that stands at the abyss of a major economic collapse, with massive debt threatening the foundation our system, yet the politicians in the House and Senate are unable to come together and try to figure out a way to overcome this mess.   In part this is because the two sides have different perspectives about the world, but in part it is because Americans, including our political leaders, remain in denial.  The US is too big to fail, after all.  China needs our markets, the dollar is still dominant, and we’re the center of the (wounded) world financial industry.

Perhaps.   But twenty years ago this very month the breaching of the Berlin Wall by East Germans wanting freedom (more about that on November 9th) harkened the collapse of the Soviet empire; no country is really too big to fail.  France in the late 18th century was the dominant European power, whose economy had been the most successful in Europe.  Yet as the French refused to change with the times, unsustainable imbalances in their system led to bankruptcy and ultimately revolution.   They didn’t see it coming for the same reason the Soviets didn’t — they were so used to being a major power that the idea of collapse was preposterous.

The US faces a similar threat.   If the lessons of the past are any guide, the economic policies of massively increasing debt to create a short term stimulus will fail.   The most dramatic example of such an effort came in Nazi Germany between 1933 and 1938 (and NO, I’m not calling Obama a Nazi!).   Germany experienced a short term boom, and became convinced their new leader was a miracle worker.   Soon it was clear that this boom would go bust, leaving  Germany’s leaders to choose between war and the collapse of the Nazi regime.   Hitler chose the former (and, of course, had been planning war all along).

Obama’s debt is different.  The stimulus is not based on military spending (which tends to ultimately be a drag on the economy), but infrastructure investments and efforts to create jobs.   The gamble is that this will work, and make the US productive again.  During the past thirty years we’ve moved from being a strong manufacturer of world goods to a consumer of cheap goods made elsewhere.  We consume, but don’t produce.   Obama’s plan is focused on opening new avenues of production — the green economy, new sources of energy, innovative products — to increase our production and allow us to overcome the imbalance.

To pull this off he has to handle three problems.   One involves radically reducing US military commitments abroad, which I won’t discuss today.   The second is the need for radical transformation of our costly health care system which is currently spiraling into a severe crisis.  Insurance premiums are skyrocketing, hospitals are losing money, and millions remain uninsured.   Solving this in a time of economic decline will require us to find a way to ration health care, reduce compensation to doctors, minimize duplication of services, and prioritize care.   All of that sounds scary, so neither party in Congress really tackles the issue.   My hunch: Obama has to get some kind of health care reform which can be built upon as the inevitable deterioration of the system occurs.   Whether its triggers or opt outs or whatever, he needs something he can build upon.   Clearly neither the public nor the Congress comprehend the scope of the problem or, if they do, they prefer to look for short term political gain rather than long term solutions.

Third, there must be aggressive cuts in debt and deficits.   This seems counter-intuitive if we need an economic stimulus.   The problem is that as soon as the US starts getting out of the recession, the inflationary pressures are going to be immense, and the dollar may fall precipitously in value.   In the past the position of the dollar as the world’s global currency allowed the US to essentially export inflation.   This time the imbalances are such that we can’t do that any more; we actually have to figure out how to live within the normal laws of economics.  Moreover, a health care program will cost money and stimulate the economy as well.   If not matched with spending cuts (or tax hikes), inflationary pressures will mount.   There is real disagreement about the possibility of hyperinflation, which is runaway inflation that destroys the savings (and retirement plans) of the public.   To avoid that the US would have to do something like default on its loans, which has other severe ramifications.   In any event, this is a risk we can’t afford taking, we have to find a way to cut debt as soon or sooner than the economy starts bouncing back.

Part of avoiding this is psychological.   Global bankers want a stable dollar and are skeptical of both the Euro or the ideas floating around of some new global currency.  If they have reason to think inflationary pressure will ease, they may act in a way that helps the greenback keep value.   Obama thus needs a plan of spending cuts (or tax hikes) which is realistic and do-able.   Then, he has to pull it off.

To do all this — alter our military commitments, transform the health care system into something sustainable, and work on a mix of budget cuts and tax hikes — will take all the skill any politician could muster.   Obama will need to sell the country on voluntarily taking some pretty strong and distasteful medicine, and he can’t do it with happy talk.   When President Bush took us to war, he did so with flippant optimism.   Obama can’t make that same mistake if he is to pull this off and bring America back from the economic abyss.  He has to tell it it like it is, without worrying about soundbites or political ramifications.

Right now, I get the impression that they are convinced that “we can’t handle the truth” and thus the warnings are vague, the optimism superficial, and more is being hidden from us than made clear.   You can find the reality of the situation if you dig, and there have been documentaries and well publicized reports about the scope of the problem.  But you have to want to look for that, otherwise, it all gets buried by the political noise.

Barack Obama needs to refocus the country on why he was elected — to bring change, and to deal with immense problems left by  not only the last administration, but really the last four administrations.   He should show graphically the state of the budget, the upcoming costs of entitlements, the problems in the health care system, and the devastating consequences doing nothing will have.  He should note how close we came to economic collapse in 2008, and state that we are literally at a crossroads, America could go into steep decline if we do not act aggressively.

He should invite Republicans and Democrats to work together, to put aside ideological purity for the sake of finding common ground to find solutions.   The idea that two parties should fight on “principles” (an oft abused word) and have the “winner” govern in a “pure” sense is un-American and irrational.   Rather, we compromise and find something neither one really likes, but that we can live with.   All sides will have to make concessions, and chart a new path for America.   It has to be honest, bold, and create an atmosphere for real initiative.

I still sense that most people don’t realize how bad the situation is.   Most seem to think the economy will start moving again, and the debt, well, trillions, billions, tens of trillions…it’s just numbers!   But it’s not just numbers.  The fundamentals of the economy are completely out of balance and in danger of collapse.   Unless we work now, we’ll get to a point where solutions become almost impossible and we’ll be forced into a massive downsizing.   President Obama, it’s time to start doing what we elected you to do!