Obama: A Year End Economic Report Card

This has all the appearance of a slow news week coming up. At least for the economy. On Thursday and Friday we will hear a little more about unemployment, consumer sentiment, and retail sales, but before then we will have nothing to do but watch the slow moving lunacy that is the health care ‘debate’.

And, yes, it justifies those quote marks.

Given this, I thought now would be a good time to reflect on the overall Obama economic agenda and start to hand out his year end grades. So here we go:

• Growth, or lack thereof:

I begin here because everything else has to be placed in the context of the overall economy. As those of you who follow my comments closely will no doubt recall – how could you forget? I have shouted loudly enough! – I have been a regular critic of the administration’s luke warm efforts with regard to stimulus. I thought from the outset that they set the bar too low and failed to fight for the necessary injection of cash to guarantee an end to the recession.

This failure was based on two parallel lines of reasoning: first there was a shallow sense of political possibility – the administration deemed that in the aftermath of TARP Congress was not in the mood to spend enough to save the economy, and so it chose not to spend its capital on getting the right stimulus package together; and, second, there was a clear rift within the administration’s economic advisory wing between those who sought a larger stimulus and those who believed the forgoing about the political landscape. This internal conflict resulted in any discussion of a properly configured package being eliminated before the start of debate.

We began the discussion with one hand tied behind our backs.

Naturally the outcome was messy. Far too much of the stimulus was allocated to low effectiveness items – tax refunds being the classic example – and too little was allocated to big spending, and therefore big employment, capital projects. There was to be no second New Deal.

The political calculation was both cynical and misdirected. Opponents of government spending were not mollified or muzzled, and advocates were left doubting the administration’s political will. Both camps ended up with something to grouse about. The opponents were given ample leeway to complain about the failure of government intervention, while advocates – like yours truly – have been left to fret constantly about a missed opportunity. Either way the administration looks a little lame. But that seems to be a theme lately.

As we now know, with the Congressional Budget Office report last week, what stimulus there was had the predicted and desired effect. It put a considerable floor under the economy. Fewer jobs were lost, and growth has returned earlier than would have been possibly without such a stimulus.

The enduring problem is that the weakness of the original package echoes on through the economy’s current struggles. Because the stimulus fell way short of the amount needed to guarantee a return of solid self sustained growth within the private sector, we are faced with an ongoing worry that growth is so weak it could evaporate at the first sign of reversal. Plus, as we all know, unemployment has risen to a sadly high level, notwithstanding its slight decline last month. So while the CBO points to success, that success is sufficiently muted that many regular folks just don’t see it.

As a result, opponents of stimulus still rant about its failure and their complaints resonate well with a populace regularly spoon fed a diet of anti-government ideology over the past thirty years. The opposition has tapped into a populism deeply entrenched and steeped in suspicion of all things to do with government spending. So when the Federal budget is announced to be growing by leaps and bounds, opponents of stimulus find easy access to the media and have an equally easy time convincing voters that now is the time to reverse course and ‘balance the books’.

That these same folks were silent during the great debt surges under Reagan and Bush never seems to register with voters. As I have written here before nothing is more confounding of the stereotypical view of our political parties than the fact that, in its history, the US has had exactly two non-crisis surges in its national debt. Both were associated with Republicans – Reagan in the 1980’s, and Bush in the 2000’s – and yet neither gets the opprobrium it deserves. Let me repeat: national debt should go up in times of necessity. That’s what it’s for: to provide cash when the country faces a crisis. It should never go up when the economy is healthy.

Nonetheless, here we are, the stereotypes are being trotted out, the fiscal hawks are gaining strength, and the economy is still weak.

So what grade should we give? The economy is growing, for that we should allocate a B++. Growth could have been more robust so an A is not in order, but the odds are that we will grow modestly for a while. Unemployment is very high, that garners a C+. We could have attacked it with more energy and commitment, but much of the damage came on Bush’s watch. Most importantly, the political landscape is now strongly set against further intervention, even though the original stimulus was a success. This deserves a C. I can’t help but feel the political sands shifting against us – call it a lack of will, or call it a fine calculation, either way we have deliberately reduced our policy options at a critical moment in our economic development.

Overall grade? B or B- [with a plus trend] depending on how annoyed you are about the poor politics.

• Financial Reform:

It would be easy to say ‘what financial reform’? given the slow dance going on in Congress, but this is a very important part of our economic agenda so we have to eschew giving an incomplete and grade what we know so far. Next year we will hand out the final grades.

I begin by repeating my comment about tepid leadership. Nothing speaks more to the administration’s style than its almost aloof handling of the financial crisis. Again we must be careful: this disaster festered and sprang to life under the auspices of the Bush regime so Obama is left to carry the bag. But that should be an opportunity to write history, not to wallow in bureaucracy. I am afraid the administration’s efforts so far are so way off target that they should not be dignified with the word ‘reform’. The current proposals have all the reformist thrust of a limp carrot. A wilted one to boot. It looks fine but has absolutely no crunch. The administration’s efforts have all the hallmarks of a bureaucrat’s small minded wish list: petty rule tweaks, minor adjustments, and lots of discussion about exactly where to staple the papers together. None about attacking the root causes of our problems. Which is a subject that might upset the bankers, so it gets shunted off to one side.

I see it as boiling down to this:

1. Break up the big banks. They are too big for us to afford as a nation. Until they are cut down to size policy makers will live – understandably – in their thrall. This should have a nice patriotic and populist ring to it, bit instead is treated as a hair brained scheme thrown in from the fringe. Except that both Volcker and Greenspan have now endorsed it. That the administration doesn’t speaks volumes of its willpower.
2. Cut the Federal Reserve Board down in size and scope. It failed. It failed as a systemic regulator. It failed as a monetary policy institution. And it failed as a protector of consumers. Of these three it should be allowed to keep the monetary policy portfolio alone. The others need to go elsewhere. Plus, and this is another populist measure that should be bringing Obama plaudits from Main Street, we need to open the Fed up. Currently the Fed is still an opaque gentlemanly bankers club. It is riven through with conflicts of interest and is overwhelmingly banker sympathetic. It needs to become a more balanced economic institution akin to central banks elsewhere. At the same time let’s reject the plainly silly notion that we can manage the economy without a Fed. Only extreme libertarians and neo-classical economists could think such a thing. And recent history has just dealt their worldview and nasty blow.
3. Establish a true consumer finance regulator. This should be a no-brainer. And kudos to the administration for backing the idea. The Fed has been horrible as a protector of consumer interests. It fell hook line and sinker for the ‘let the markets decide’ version of regulation. It had a positively Ayn Randian perspective on the benefits of deregulation, so it should come as no surprise that consumer protection fell off its radar entirely. This needs to be fixed.
4. Either abolish or regulate the derivatives markets. Properly speaking there are no centralized ‘markets’, which meant that the world of derivatives possessed all the sanity of the Wild West. No wonder it blew up. I fail to see the underlying economic or social purpose behind most of what goes on in the murky world of the derivatives business: it simply aggrandizes the players while we pick up the tab. Agricultural and commodity futures and their ilk I see a place for, but CDO’s and CDO ‘squared’ … not so much. If the game is to be continued put it out into the open. No more ‘dark pools’ and other testosterone polluted quagmires.
5. Combine. Combine. Combine. Let’s have one financial regulator. No more regulatory arbitrage. Let’s have one national insurance overseer. And let’s get all the financial market regulation under one roof – preferably not the SEC’s given their record of pandering to business, but it will probably have to be there. Plus, and this won’t happen, let’s update Congress itself: one oversight committee and not the current mess.
6. Lastly, ban corporate political contributions. Ban them. I know it won’t happen. But until it does our politics will remain corrupted by the flow of cash.

Well that’s my list. How does the administration stack up? C-, that’s how. They only score that well because the reform effort is still underway and Congress is adding in its own proposals to help stiffen the administration’s spine.

My problem with the administration and its attitude towards banking is predicated on what I perceive to be its over weighting towards the industry. Too many of its key players are closely aligned and sympathetic with industry positions. Geithner, Summers, and Bernanke are all schooled and experienced in the same way as the big industry insiders. They believe the same things. They differ only in degrees. Which is why the administration’s reform is redolent with tweaks and not bold action. They have bought the notion that a few nice nudges are all that is necessary to prevent another meltdown.

I couldn’t disagree more. That C- is under pressure already!

• Health Care Reform:

I have never been more disappointed with Congress, the administration, and the entire structure of political discourse than I am over this issue. It has been a low point in American political life. This is an issue of supreme economic and social importance and the country has been treated to a spectacle worthy of a lower grade school bun fight. Pathetic dignifies it.

I give the administration enormous credit for getting the notion of health care reform on the agenda. That alone deserves an A+. It’s subsequent abject inability to shape the discussion is just appalling. It gets an F for that.

The entire process has been a long drawn out appeasement of a few senators. It has exposed the arcanity of the Senate process, which is designed to enforce compromise even on subjects as divisive as health care reform. Hence we watch people like Olympia Snowe being courted as if she is a world expert on health care, and have to listen to Joe Leiberman – painful at the best of times – twist and turn as he attempts to sink the public option.

As you know I love argument and debate. But this has been neither. It has been mudslinging and avoidance of fact. The name calling and hysteria over things like rationing has been demeaning to a nation that thinks of itself as a world leader. No one, seemingly, wants the public to hear what the central issues are. No one wants to inform.

This is the administration’s fault.

It has the soap box.

Nothing is more telling about the administration’s weakness as a source of leadership than this pseudo debate. Having put the ball in play the administration spent the entire summer avoiding getting entangled or even staking out a clear position on the choices. Even yesterday as he attempted to rally the Democratic caucus, Obama couldn’t bring himself to refer to the public option.

Let me not dither that way: we need reform. Said reform should expand coverage as much as possible. In the absence of a true single payer system – which is the least cost option – the system should highly regulate the insurance companies. We should all recognize that the health care coverage we get from employers is not ‘insurance’ it is a benefit. We need true insurance. But the economic nature of privately supplied insurance militates against widespread provision – private ‘for profit’ companies naturally want to cherry pick who they cover and what they pay for. Private companies ration health care via the prices they charge. Rightly so. The question before us is thus simple: do we agree that we should have limited, higher cost, and private insurance? or do we want more widely available, cheaper, but government provided insurance? They are the two central choices. Both are forms of rationing. All economic choices are a form of rationing. If we want cheap, we need the government’s size and indifference to profit to drive prices down. It is a scale argument. Plus: only the government will be willing to insure everyone. Even sick people.

And that’s what I thought a health system was for.

I don’t blame you if you have turned off from the ugliness that has passed for ‘debate’ this year.

I do blame the administration for not having provided a more muscular leadership to keep us focused on the big issues. Instead we were left to muddle through.

And what a muddle it is. Even now, right at the end of the process, it is hard to tell what will emerge.

So somewhere between an A+ and an F? Pending the outcome I give the administration a C+/Incomplete

There you have it. The year end report:

Economy: B

Financial Reform: C-

Health Care Reform: C+/Incomplete

And a lot of ‘must try harder’!