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Grading Obama’s economic policy after one year

The Democratic defeat in yesterday’s Massachusetts Senate race puts a punctuation mark on the grinding erosion of support for the Obama Administration and its economic policy in a tough first year. Clearly voters were sending the Administration a message that America is on the wrong course with Obama’s poll numbers slipping below 50% by December and Democratic defeats in both of the major state elections in which Obama campaigned in November (Gubernatorial races in Virginia and New Jersey).

But, I don’t think the President gets it. He is holed up in the echo chamber called the White House. If the catastrophic loss in Massachusetts’ Senate race and the likely defeat of his health care reform bill doesn’t wake Obama up to the realities that he is not in Roosevelt’s position but in Hoover’s, he will end as a failed one-term President.

With this in mind, I want to grade the President’s economic policy performance on his first year anniversary, putting Obama’s economic agenda and inheritance in historical terms. I will try to make this as comprehensive as a blog format allows. At the end, I will make some remarks about what to expect going forward.

Grade: Incomplete

If I were a university professor grading the Obama Administration’s economic policy, I would give it an incomplete – but with a warning that the final grade was unlikely to be good given what I have seen so far. Barack Obama has been in office for only one year; so, clearly he has a long way to go before we can make a definitive assessment of his economic policy.

Similarities: Reagan and Clinton

When I look at the polling data, two recent Presidents come to mind, particularly because of the economy: Ronald Reagan and Bill Clinton. Reagan entered office during a deep recession, at the tail end of what might be termed an inflationary depression due to secular issues involving fiat currencies, inflation, interest rates, equity market losses, currency depreciation, globalization of the money markets, and de-industrialization in the United States. And to top it off, Reagan suffered another deep recession right after he came to office. For the United States, the 1970s were a catastrophe economically.

The polling data for Obama and Reagan are very similar. The December chart below from Pollster.com demonstrates this.

 

obama-reagan-poll-comparison

So, clearly the economy has a lot to do with Obama’s falling poll numbers.

I also look at the early days of the Clinton Administration as a comparison. Clinton was a centrist, triangulating New Democrat who entered office during a period of lingering joblessness which engendered the term jobless recovery. Obama’s situation is similar given the rising unemployment rate today and the job losses despite a broad-based economic pickup (Goldman Sachs is estimating 5.8% GDP growth for Q4 2009). The centrality of healthcare reform in the President’s domestic agenda – and it’s potential failure and the resulting mid-term election losses for Democrats in Congress – makes this comparison even more apt.

However, there are critical differences which I will highlight after making another comparison.

The Roosevelt comparison

obama-as-roosevelt Given some of his statements in the past, I suspect the President sees these similarities to Clinton and Reagan. But, it is the comparison to Roosevelt which Obama and his people played up the most during the election campaign and the period just after it.

The media parroted this theme endlessly. As Time put it in the story accompanying the Obama as Roosevelt photo to the right:

Even in the calmest of times, the transfer of presidential power is a tricky maneuver, especially when it involves one party ceding the office to another. But not since Franklin D. Roosevelt took office in the midst of the Depression has a new President faced a set of challenges quite as formidable as those that await Obama. That’s why Obama has been quicker off the blocks in setting up his government than any of his recent predecessors were, particularly Bill Clinton, who did not announce a single major appointment until mid-December. As the President-elect put it in his first radio address, "We don’t have a moment to lose."

Obama is not Roosevelt

But Barack Obama is not Franklin Roosevelt – far from it. He enters office at a point much nearer the beginning of a cyclical downturn as did Clinton and Reagan. His people fail to realize that Obama is more Herbert Hoover than he is Franklin Roosevelt.

What historical period should Obama be looking to then? Clearly, he should be looking to Hoover. And I believe this is very important with the G-20 right around the corner. Any number of pundits from Simon Johnson to Wolfgang Munchau will tell you the G-20 summit will be a big failure. While the Americans are trying to reflate the bubble and bring back the same unbalanced system which got us here, the Europeans are putting their heads in the sand, wishing all of this would go away.

And that’s not a good thing at all. If one thinks back to Hoover again, after a long period of globalization, an interconnected world meant problems in one country quickly became manifest elsewhere. The world’s major nations failed to come together and build a common solution. Some thought themselves immune. But, when the depths of Depression finally came, it was little Austria which ushered it in. And soon, depression was everywhere.

This was 1931. Herbert Hoover was president, not Franklin Roosevelt.

-Barack Obama as Herbert Hoover, Apr 2009

Obama’s failure to understand where we are in the economic cycle and the relationship to historical precedent has been catastrophic to the conduct of economic policy and critical in his missteps. There is more to Obama’s misfortune than a bad economy (see Nate Silver’s take on the Massachusetts special election).

Reliving the Clinton days via Reagan’s silver tongue, Kennedy’s Camelot, and Roosevelt’s New Deal

I feel like the Obama Administration is stuck in the past. They talk about the transformative presidencies of Ronald Reagan or  Franklin Roosevelt and the magic Camelot feel of JFK’s time in the White House. But, above all, stands the “Don’t Stop Believin’” retour of the Clinton era. These comparisons to past presidents is blinding the Obama Administration to the realities on the ground (see here and here).

The huge number of Clinton-era re-treads in the Obama Administration should tell you that. And the quote from Time Magazine shows you that lessons learned during the early Clinton days were very much on these policy makers’ minds. The policy agenda (think healthcare and deficit reduction in particular) makes them think that 2008 was a repeat 1992. It was not.

Now, looking back, if one hearkens back to 1992 and the election that took Bill Clinton to the White House, ‘it’s the Economy, stupid’ was the phrase that symbolized Clinton’s victory and George H. W. Bush’s defeat. Today, as we are mired in a deep economic downturn, we should be tempted to bring back that phrase.

But, 2008 was not 1992. This is no garden variety downturn. It is something altogether different. We are not witness to a case of over-production and overheating as is usually the case. It is a case of over-leverage and over-indebtedness. As a result, the key to the outlook for the American economy is fairly simple and it hinges on a single word: credit.

-It’s the writedowns, stupid, Mar 2009

We are in depression not recession because the secular trend is of the three D’s: deleveraging and debt deflation leading to depression. Harkening back to the same old policies of 1992 is not just wrong, it is catastrophically so. It made Obama promise 8% unemployment instead of the 10.0-10.5% that we have received. As I said after the defeats in Virginia and New Jersey called Obama’s economic policy into question:

Well, if you’re the President, you have to under-promise and over-deliver. President Obama has been doing exactly the opposite. Of course people are going to be angry when you promise 8.0% unemployment and instead we get 10.2%. Right now, Obama should be talking about 13% unemployment.

-Unemployment rate illusion, November 2009

I would be remiss if I didn’t remind you that all of this was predictable from the word go. A cautious (Keynesian) politician would have understood the under-promise/over-deliver tactic and implemented a much larger and better-crafted stimulus package as I suggested last January rather than resorting to half-measures as I called the Obama policy in February. And he would have understood the coming implosion in state and local governments’ budgets (as I also pointed out as far back as March 2008 and again as the stimulus package was coming due). A cautious politician would, therefore, have sensed the enormity of the problem and taken precautionary action.

The Triangulating Neo-liberal Con

But, Obama is yet another centrist, triangulating New Democrat in the Bill Clinton mold. Don’t be bamboozled by Republican propagandists telling you Obama is running left or that he is a ‘socialist.’ This is nonsense – kabuki theater, if you will. They are merely using Obama’s weakness to gain control of the historical political narrative. In reality, Leftists are absolutely outraged at his legislative agenda.

Obama is a corporatist like other New Democrats of the neo-liberal mold. The schtick – as also used by Schroeder in Germany, Koizumi in Japan and Tony Blair in the UK – is to say the things that progressives want to hear, but do the things that big business wants to be done. You have to give a sop to the base here and there like exempting unions from the healthcare bill’s Cadillac policy tax. But, the goal is to curry favor with big business, which is the paymaster of both established parties in the U.S.

In the 1990s, the so-called Third Way, popularized by Bill Clinton and Tony Blair, changed the fortunes of liberals dramatically.  Traditionally, the Democratic and Labour Parties were controlled by unions and working class interests – the so-called left wing.  This is one reason Democrats controlled the South until the civil rights movement. But, stagflation seemed to discredit leftish policies. In the U.S., the 1980s ushered in 12 years of Republican Presidency.  Labour’s trip into exile was even longer, 18 years.

The Republican’s were stopped only as a result of an unusual combination of Ross Perot’s third-party candidacy and Bill Clinton’s co-opting of large parts of the right’s pro-business anti-regulation, pro-free market platform – so-called Neo-Liberalism.  The neo-liberals in America were so successful that Tony Blair adopted the same tactics in creating New Labour and overthrowing the Conservatives in 1997. Junchiro Koizumi copied Blair in moving the LDP away from its base toward neoliberalism, vaulting him into power in 2001. In fact, one could even see Gerhard Schroeder as a neo-liberal who moved Germany’s SPD into power in 1998 – one reason the SPD is now losing voters to Oskar Lafontaine and die Linke (The Left).

So, Marshall is right. Obama has been more interested in sending out a pro-business signal to re-assure business interests and to court independent voters. I believe he has made a political calculation that he can hold his base of support even if he adopts a more center-left positioning because they have nowhere else to go.  It’s not like they are going to vote for the Republicans. This has been an effective way to power for left-leaning mainstream parties for at least 15 years.

-Obama and the Fat Cat bankers, Dec 2009

Read the post above in its entirety because it highlights many of the political issues we are now seeing and why Obama’s newfound populism rings hollow. I should add that there is nothing Libertarian about this Corporatist agenda either. If I had to define corporatism, I would call it “the policy whereby government favors of incumbent and larger enterprises over other businesses or households.” See my post Deregulation as crony capitalism for more on this theme.

The political capital lost in bailouts 

The real killer for Obama has been his dependence on Summers and Geithner which I liken to George W. Bush’s dependence on Rumsfeld and Cheney. For his part, Geithner, now ensconced in a huge scandal over the cover-up at AIG, says:

The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives.

And indeed they have been willing to go against the will of the people. But, Obama mis-underestimated the outrage these policies would cause. It’s the bailouts and the crony capitalism and looting they brought into public view that people object to most – not healthcare, not the wars in Iraq and Afghanistan, not the Christmas Day airline failure.  Think about the public mood and the joy of election day one year ago at electing the first Black president in American history:

President Barack Obama was elected last year in a sizable victory over his Republican competitor. Bolstering his position was the huge Democratic majority in both houses of Congress. Given these advantages, combined with intelligence and his natural talent as an orator, the President could pretty much chart his own course.

He did so, immediately turning to the weak economy and the battered financial sector first. In his first days in office, Obama pushed through a sizable stimulus package, bailed out numerous financial institutions, and put into place a host of measures to prop up the banking industry at considerable cost to taxpayers.

The plan worked. The financial industry has roared back to life with huge profits and large bonuses all around as a result of the government’s largesse – well at least for most of the largest companies. The surviving large financial institutions are even larger and more dominant than before the crisis. Now, it is business as usual again on Wall Street. In this sense, Obama and his economic team have been very successful.

But at what cost?

While the captains of finance are deciding how to spend their bonus money, ordinary Americans are still losing their jobs and their homes. The economy is still in tatters.

People are angry about this juxtaposition.

-Obama and health care: Wasting political capital, Jul 2009

What’s likely to happen now

And of course, it is bonus season right now. So, the bonuses are a reminder that the recent populist rhetoric and the too-big-to-fail bank tax is a political stunt and nothing more. There has been absolutely zero attempt at making transformative amendments to the financial system and its regulation because the political process is broken. The emphasis on deficit reduction means a double dip recession is a distinct likelihood.  On both these issues, Obama’s centrist instincts make him an unlikely Roosevelt – either FDR New Dealer of Teddy Trustbuster (see FDR’s inaugural address for why). It also makes him an unlikely Reagan, who fought off a Democratic Congress and a deep recession to push through his agenda.

In all likelihood, we will not get any real reform and, as Jamie Dimon recently said – and Stephen Colbert ridiculed – financial crisis is “something that happens every five to seven years.” So, I see another crisis as likely – and given the fragility of the economic environment, this crisis will be a killer economically (and politically for Obama).

I fleshed out these themes in three 2009 retrospectives and my comprehensive post on recession and depression:

If one wants an economic parallel for secular bear markets and depression, 1931 (Hoover) or 1938 (Roosevelt II) and 1974 (Ford) are more akin to 2010 than are 1934 (Roosevelt I) or 1982 (Reagan I). From a Japanese perspective, think 1997 (see articles here, here and here).

For Obama, the loss in Massachusetts puts the nail in the coffin for health care. His linchpin domestic agenda item is bust and he must start anew.  Meanwhile, there is huge populist outrage and an improving but weak and unsustainable recovery in the works. Defenders of the President point to the recovery in financial services as testimony of Obama’s economic team’s mettle.  But my friend Marshall Auerback pointed out in an e-mail that:

While the Administration continues to take credit for averting a financial catastrophe, it is far more accurate to suggest that they have merely forestalled that eventuality.  The ultimate outcome is still in doubt.

Overall, Obama’s first year has been dismal.

I believe Obama is a triangulating New Democrat. His kneejerk reaction, therefore, is to look back to 1994 and draw the same conclusions Bill Clinton did when his own healthcare agenda collapsed. And all of the Clintonites surrounding him in the White House bubble are no doubt convincing him to do this. But 2010 is not 1994. Barack Obama would be well-advised to understand this.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

19 Comments

  1. Anonymous says:

    I left this comment on Naked Capitalism also.
    Clinton did not triangulate until after the ‘94 republican takeover in congress.
    He called in Dick Morris (who was so despised by Rahm, Hillary, etal that he had to be brought in through the white house basement) to help him figure out how to get anything done with the GOP.
    The result was triangulating.
    And was why a lot of his staffers including Rahm left.

  2. LavrentiBeria says:

    Obama is finished. When he had every opportunity at first to make himself a legend, he has all but urinated on that possibility.

    The election of Brown to the Senate signals the final envelopment and capture of the Tea Party movement by Republican Party operatives bent on killing off Obama once and for all. What began as a legitimate anti-bailout populism successfully has been subverted into a crypto-fascist, imperialist crusade in support of torture, Israeli ethnic cleansing, and war with every Muslim nation on earth, and domestically into an selective, anti-deficit paranoia certain to bring a reprise of 1937. We are looking at something chillingly similar to the political situation that existed in immediately pre-Hitlerite Germany, what with a feable, almost powerless left and a growing, menacing, fascist right. Sadly, many well intentioned people stupidly have allowed themselves to be taken up into an “opposition” that in reality is more hyper-Regime than anti-Regime. In present circumstances, the appearance of an authentic opposition appears to be many, many years away.

  3. But he was the One who was supposed to bring balance to the force, not side with the Sith.

  4. Anonymous says:

    Grade C-. Would have beed A- with Summers replaced by Volker!
    (Grade A+ to Ed H.)
    Side Issue: Economy is STILL AT RISK since nothing has been passed to regulate the banks.
    The banksters propaganda now includes the claim that now that TARP is nearly paid back, lay off the banks bonuses.
    Well, if TARP was the only $ they got, that might be legit. How about free money to loan/hold, having their bad MBS bought by the Fed, and other programs that indirectly benefit the banks.
    These guys are now going full press to water down new legislation.

  5. Terry says:

    I’m sorry, Edward, but your “incomplete” grade for the first year of the Obama Administration is, well, a cop out. The year is over. How did he do?

    My take is very poorly; probably a “D” grade. The only thing I think he even got directionally right was the stimulus bill (ARRA), and there are plenty of arguments that it was insufficient and poorly focused, especially in creating jobs. His horrendous pussyfooting with the banks was wrongheaded and clumsy–and directly traceable to his key economic advisors Summers & Geithner who are still there. His early endorsement of Bernanke was also wrong.

    This was not “change we can believe in.” It was not change. Period. Just more of the same old Washington money-driven cronyism.

    If the Democrats loss in Massachusetts serves as a wake-up call, he may be able to bring his grade up in his second year. The scheduled meeting and presser with Volcker today may give some indications. But, frankly, this will be more about partisan politics–bashing the banks to make Democrats look good in November. Still, it can’t be worse than the last year.

    • Terry, the bank tax was a cop-out. Let’s wait and see what is proposed at 1140 before we make any determination on this new proposal.

      You’re jumping the gun on this and on making an assessment of Obama’s economic grade.

      The fact is we are one year in. The parallel to Reagan shows you that what happens after one year is NOT what we must expect for the full four or eight.

  6. David Smith says:

    The solid B+ was surely a bit of grade inflation. I’ve heard the Harvard faculty does that. ;)

  7. Element says:

    I wrote this just minutes before it was reported that Obama had declared war on the TBTF banks claiming, “never again will the American taxpayer be held hostage by a bank that is too big to fail”, and insists they play with their own money I wonder if he means it this time? But either way, the damage is already in the system, and it will take many years to repair and for the banks to restabilise. Here’s the comment anyway.

    Getting very weary of the absurd White House (etal) claim and attitude that a total financial meltdown of the banking system and a fall into depression was avoided.

    Banking and debt-crisis does not occur over 12 months, it historically occurs over about 10 years. There was a massive peak of 4,000 US bank failures during 1933, four years after the initial stock crash and after repeat equity recoveries and slumps.

    The FDIC may now prevent such traditional ‘runs’ on insured bank deposits, but this does not prevent a run on unregulated and uninsured ‘securitised’ assets (ain’t that term a joke) in shadow-banks. That’s exactly what happened in Sept-Oct 2008, and it drained and crippled the formal ‘regulated’ TBTF banks as a result.

    For anyone to claim that the current financial crisis is “mission accomplished”, ignores all quantitative evidence and historical parallels, not to mention continued falls in lending and the steady rise and rise of default, plus a 30% synchronised fall in global trade that’s still way below the old-normal. Most of the default and toxic asset writedowns are still coming. At best this crisis is at the end of the beginning. Obama and his advisers are clear-cut fools if they really believe it’s all sorted.

    The 1982 to 1992 ‘S&L’ bank failure period was comparatively minor compared to the current situation, but it generated a peak failure of around 530 banks in one year, but built up to this peak over 4 to 5 years (same as the 1933 4-year failure peak delay). Once even a non-systemic US banking crisis begins, it takes many years for the losses to finally kill-off all the hiding-and-hoping insolvent banks, to restabilise the remainder.

    But this is not some rather mild 1990′s type recession, this is a global systemic financial crisis and international private-debt crisis within a major protracted global recession with structural (lagging) high unemployment, with a general global real estate implosion with broke local, state and national governments. To assert such a crisis could be over in only 15 months, or to imagine that it will not be a minimum of three times worse at its peak than the S&L bank failure period, is wholly delusional.

    “… Bank losses that come in bad times are particularly bad because consumption is lower in bad times. Just when the agent is worse off in terms of consumption, the bank might fail. So, in a recession income and consumption decline and banks tend to fail, because their borrowers also tend to fail. …” – Gary Gorton, Slapped in the Face by the Invisible Hand: Banking and the Panic of 2007, May 9, 2009.

    The US shadow house inventory is still out there, and all those postponed unprocessed foreclosures are still coming, as are the losses-and the shadow banking effects of this. Last year only 140 bank failures, and yet US bank stocks are virtually single-handedly driving a record ‘recovery’ in the Dow-Jones index?

    Is that sane? Irrational exuberance is a euphemism for ‘dumb blind greed’.

    Extend-and-pretend works only until you don’t get paid, then all pretence ends. And when it ends businesses fail, and when businesses fail, that’s when banks get stressed and traditional ‘runs’ on near insolvent banks normally occurred and credit froze solid. This is what the shadow banks will do to each other when extend and pretend fails to pretend any more and businesses fail in numbers while “larger than expected losses” accumulate at the banks.

    You can bet the un-insured unbacked shadow-banking system is watching extremely nervously as banks like JPMorgan and BOA dribble out their “higher than expected losses” tales, each quarter. The shadow banking system isn’t fooled, their margin losses rise every time this happens and their toxic-asset losses feed straight back into the formal and insured Govt-backed banking system’s balance sheets, which then just further increases margin problems for both formal and shadow-banks. All the while the fear in both on-book and off-book banking divisions rise.

    Like credit growth, or debt-deflation, this asset contamination process is also a self-reinforcing feedback where losses lead to losses, which lead to more losses elsewhere, which then trigger some more losses. Hence these “higher than expected losses” tales will continue to dribble in for >5 years. The TBTF banks attempts to ‘securitise’ (off-load the liability to loss on others) resulted in a trap. They eventually believed their own BS and locked themselves into a self-reinforcing liability and loss-making mechanism.

    It self-reinforces both positively, yes, but also negatively when things go bad. We saw a spectacular growth and we will also see a spectacular reversal, because this was always just an undifferentiated Ponzi system, where massive final losses were implicit. That’s why the banks unloaded these ‘securities’ in the first instance-they were a ticking bomb and they knew it.

    At some point nothing will prevent the shadow-banks ‘running’ on each other (again), and no one can stop it when it begins. The only place it can be ‘stopped’ (temporarily that is, as in 2008) is by either bailing-out or nationalising the formal banking system, to make it appear quasi-solvent (again). Or to let the informal shadow-banking system destroy the formal TBTF banks, to get back to systemic stability quickly, so sustainable rebuilding can actually occur.

    At present the actual systemic crisis and vulnerability is only getting worse. I see no solution to this but to eventually abolish securitised ‘assets’ (i.e. the generally unknowable level of high liabilities) altogether, in order to break this feedback cycle to prevent continual “higher than expected losses” in the formal banking system.

    But then you have eliminated the bankers and politicians cherished source of easy-credit, which caused the whole mess, for use in malinvestment and over-consumption, and that’s why nothing is being resolved.

    Higher than expected losses are actually a structural problem-not just some more bad loans.

    Raw greed for easy-credit is preventing resolution, the system is unable to self-repair or self-correct and the Government doesn’t want to repair it either so a worse bank failure crisis and credit freeze is assured. Soon we will be right back at square-1 (Lehman’s collapse) only the Dow will fall to <5,000, with credit in a glacier on Pluto, unemployment 15%, US consumers not willing to make discretionary purchases, nor wanting credit any year soon, whilst saving all they can. And deficits and taxes increase sharply, and public services evaporate, while public anger swings off the dial.

    Enough of these sick White House denials!

    We ARE in a global financial crisis, and it's only just begun. Maybe in ten years it will be almost over, if things go exceptionally well, but with this level of political denial and avoidance, it can only get much worse than need be. The White House doctrine that the danger has passed must be debunked and disallowed if there is to be any credible resolution.

    Amazing what an election can do to refocus the mind on what the people want–for once.

  8. Scott says:

    Through all the hooplah, this has to be one of the best attempts at actually analyzing the problem. Hat tip.

    However, from a de-centrist standpoint, there has not been much analsys on the fact that people around the nation are so involved in a Massachusettes election (or any other for that matter). I’m only proposing that I’m scared that state representation has become a national issue (this election is hardly the time to be talking about this because the two parties putting all their money into contested elections in Ohio or North Dakota has been the norm), but it would be nice to go to bed knowing that my state representatives to Congress are mine and not the rest of the nation’s reps as well. I only hope mass attention, does not some how help hurt local representation any more. On a philisophical level I was ready to abandon all attachment to this election on the basis that Mass is Mass, and I don’t live there so it’s none of my business. I’m out on blogger support against Barney Frank for that very reason too. He’s not my rep.