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Throwing in the towel…

December 22, 2009 Leave a comment Go to comments

With today’s revision of third quarter GDP, from 3.5 percent growth to 2.2 percent, it is clear that we were right: What failed in 2008 was not simply the five biggest investment houses on Wall Street, but the actual Rube Goldberg mechanism that is the American Dollar Empire itself.

First, with Krugman, DeLong, and Galbraith, now the defeatism is setting in among the independent economics writers as they begin to throw in the towel on stimulus measures as well.

From Naked Capitalism:

From the very start, Obama’s lead by negotiating with oneself approach led to a weak and poorly crafted stimulus package.  My comments in “Obama takes middle road on stimulus and taxes that leads nowhere” from February sum up what was likely to happen (emphasis added):

In my view, it has become ever more apparent that the Obama administration is caught in some sort of muddle, trying to fudge between the calls for fiscal discipline from conservatives and the calls for stimulus from liberals.  Obviously, it is in Obama’s nature to lead by consensus, and he has looked for an inclusive political and economic strategy since he came to office.  However admirable these intentions may be, this middle path is unfortunate because it will leave no one satisfied.  Moreover, taking this middle path on the economic front — some stimulus but not massive stimulus, some tax cuts but also some increased spending, increased spending now but tax increases or budget cuts in a few years – is the worst of all outcomes; the economy will not gain enough traction to get the desired ‘jump-start’ and stimulus will ultimately be seen as ineffective.  If the Obama Administration later attempts to return to Congress for more of the same after a failed stimulus bill, it will find a more skeptical response

My view here is that Obama is forging a middle path that leads to a dead-end. The stimulus is not nearly enough by half to get the job done. The proposed deficit reduction measures for 2013 are outright scary as they risk repeating a mistake from the 1930s. And the banking sector and mortgage plans, both of which I failed to mention, are dubious half-measures as well. One needs to act aggressively and proactively or not at all.

This is exactly what has transpired.  To make matters worse, his team’s lack of accurate economic forecasting has led to an Armageddon scenario at the state and local level, where even unemployment benefits are not adequately funded. All of this was predictable as evidenced by these two posts from early in the year.

The President has effectively discredited fiscal stimulus as a policy tool. What’s more is the bailout of the too-big-to-fail institutions without strings, the apparent cronyism in how these bailouts were done, and the gutting of financial reforms by the financial lobby has also discredited government as an agent to level the playing field for struggling households and taxpayers. See Blodget: Obama suffers because “taxpayer always finishes last” for now, but I will take this subject up in another thematic post.

I certainly underestimated the degree to which cronyism and special interests ruled the roost in Washington. I no longer believe government can be an effective agent of change in the U.S any more than it has been in Japan (see “Japan: stimulus without reform leads to a policy cul de sac”).   As I wrote in “Stop the madness now!

If you are going to deficit spend you need to do it in a big way. You need to stop the deflationary spiral.  That means hitting the reset button by promoting private sector savings and deleveraging and purging all built-up malinvestments. The risk in addressing the situation this way, of course, is replacing the imperfect invisible hand of markets with the imperfect hand of politicians and legislative fiat.

This is a risk I no longer see as worth taking. I have bailout and deficit fatigue just like most Americans. It is abundantly clear that this Administration has absolutely zero intention of purging any malinvestment or promoting any deleveraging. All they want to do is continue business as usual and go back to the asset-based economy that caused this mess. This is why we have seen bailout after bailout coupled with easy money. It makes for record profits on Wall Street but it does nothing for the unemployed.

Moreover, the political process in the U.S. is such that any stimulus money will be diverted to pet projects and used to pay off political constituents. While this may increase aggregate demand, it does so at the risk of serious social unrest as the outrage will certainly spill over into populism.

So, I have developed a case of big government revulsion as I suspect many Americans have done. I will let Marshall Auerback argue the case for fiscal stimulus and its role leading to a sustainable recovery.  I am moving away from stimulus happy talk to focus on malinvestment.

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