Thursday, July 14, 2011

What Obama is Up to In Dealing with the Republicans (And why it is likely to fail)

Robert Reich is a terrible economist, but a very savvy political analyst. He writes in WSJ:
After a bruising midterm election, the president moves to the political center. He distances himself from his Democratic base. He calls for cuts in Social Security and signs historic legislation ending a major entitlement program. He agrees to balance the budget with major cuts in domestic discretionary spending. He has a showdown with Republicans who threaten to bring government to its knees if their budget demands aren't met. He wins the showdown, successfully painting them as radicals. He goes on to win re-election.

Barack Obama in 2012? Maybe. But the president who actually did it was Bill Clinton. (The program he ended was Title IV of the Social Security Act, Aid to Families with Dependent Children.)
It's no accident that President Obama appears to be following the Clinton script. After all, it worked. Despite a 1994 midterm election that delivered Congress to the GOP and was widely seen as a repudiation of his presidency, President Clinton went on to win re-election. And many of Mr. Obama's top aides—including Chief of Staff Bill Daley, National Economic Council head Gene Sperling and Pentagon chief Leon Panetta—are Clinton veterans who know the 1995-96 story line by heart.
This is likely Obama's game plan, but it has a flaw and Reich sees it:
So will Barack Obama pull a Bill Clinton? His real problem is one Mr. Clinton didn't have to contend with: a continuing terrible economy. The recession in 1991-92 was relatively mild, and by the spring of 1995, the economy was averaging 200,000 new jobs per month. By early 1996, it was roaring—with 434,000 new jobs added in February alone.

I remember suggesting to Mr. Clinton's then-political adviser, Dick Morris, that the president come up with some new policy ideas for the election. Mr. Morris wasn't interested. The election will be about the economy—nothing more, nothing less, he said. He knew voters didn't care much about policy. They cared about jobs.

President Obama isn't as fortunate. The economy remains hampered by the Great Recession...
Bottom line: The President's electability is dependent on an economy that is on the edge of higher price inflation and higher interest rates. At the same time an academic sits at the head of the Federal Reserve, who appears to have no sense of economic timing.

I am not in favor of any manipulation of the money supply, but I have to say Paul Volcker and Alan Greenspan, both with real world experience were much more skilled at operating the Fed money pumping machine. It's a possibility they would be able to bring the economy around for Obama for the election, before the entire thing collapsed, but in Bernanke, Obama has a captain manning the money printing ship, who is infatuated with inventing new monetary policy "tools" with only a mediocre understanding of the ones he has created to date, and even less of an understanding about when to use them.

If I'm Obama, I'm real scared right now.


  1. You said the Fed money printing would cause a recovery (albet with distortions). you said the lack of jobs were not because of policy gone over the deep end but because jobs were a lagging indicator. You basically said that we are in for a recovery (distorted) and inflation.

    The 30 year treasury I bought six months ago is in the green. I still think a worldwide recession with collapse of commidities and deflation is possible. The world has to much mfg capacity. The world has too much debt that will never be repaid. Writing off the deby will shrink the money base, defaulted debt destroys money.

  2. He is not savy. From what I read no one in the Clinton Administration would stoop to talking to him. He was a short nonentitiy. He gets a UCB appointment based on his title and gets interviewed because of his formal position, but Bill Clinton would not listen to one of his ideas for thirty seconds. Monica had more policy input.

  3. @RW: If I'm Obama, I'm real scared right now.

    Not to worry. The Republicans will nominate another stiff. (sigh)

  4. @ Anon1 If a collapse occurs, commodities are priced at infinity in terms of fiat currency.

    @ Wenzel, It's not that Volker and Greenspan were more 'skilled;' it's that no one cares about the cheap money anymore; the gig is (soon to be) up.