Advice From Across The Pond For Obama

This is an updated version with links, sorry.

If you were Barack Obama and had just been elected President of the United States on a platform of change and hope how would you approach the situation you would now be faced with. Realistically, you know that change as your supporters perceive it is probably not the best medicine for a very sick economy and hope may be something they will have to do for a very long time.

A few brave souls have ventured some opinions on how he ought to approach this dilemma. I found the best to be in the Telegraph. Admittedly written from a British viewpoint, I think it lays out well the difficulty he faces and the risks of not getting it right.

To be as responsible as he has promised, he has to change the behaviour of
consumers, of government and of regulators that has led America into a period of
declining growth and employment.

If he is successful, he could create so much resentment that he will be
booted out of the White House after just one term. Obama’s supporters may
imagine their man to be the next Roosevelt or Kennedy. But instead of BHO to follow FDR and JFK,
he could end up being the next Jimmy Carter.

Fixing the economy pitches Obama into two big battles. The first will
be with many of the Americans who have just voted for him. They have responded
to a promise of “change you can believe in” – and they had better start
believing that they have to accept falling house prices and a pervasive feeling
of being less wealthy.

The Democratic-controlled Congress is Obama’s second battle. If the economy starts to grow
again, then Democratic politicians had better believe that spending must be cut
heavily and that they will not be able to fulfil campaign promises.

Just an aside here, the WSJ has quite a good editorial on the players in the Democratically controlled Congress that may give Obama fits. Read it if you have time, it’s fascinating.

It is hard to imagine that a new president with a thumping majority in the
electoral college will start to lower expectations quickly. But Obama must.
American consumers had only one of the starring roles in the financial and
economic crisis, but it was important.

Goaded by cheap credit they spent more of their income. They took out
ludicrously unsafe mortages and ran up big balances on their credit
cards. Their overborrowing was mirrored by private equity groups
that overpaid for businesses. Such deals encouraged shares to go up as investors
foresaw being bought out at crazy rates. Higher share values made people feel
wealthier: it must be time for another cruise, or car.

Now all that credit has been withdrawn, house prices must continue to
fall until people who are not taking unsustainable risks can afford to pay them.
People are starting already to spend less. Their reduced economic activity will
drive down asset prices.

Obama must tell Americans that this is necessary. A painful recession
is inevitable. He can promise help from the government with targeted spending of
its own until the economy picks up

.

Indeed it is hard to imagine that Obama or any other politician for that matter will have the courage to throw much cold water in the face of the electorate. I, for one, don’t think it is saleable as I don’t believe my countrymen and women are at all prepared for the reality that is bearing down upon them. To not do so, however, may be suicidal. Is he in fact trapped by the fallacy of prophecy?

The article goes on to discuss the problems he is likely to encounter with the Congress both in terms or working through current problems and then persuading them to cut spending as the economy recovers. Getting things growing is going to be enormously expensive, yet the mopping up that will be required later may be more than the political class can swallow.

The final lesson of history that the article imparts is well worth encapsulating here.

I found this online, from Time magazine in June 1977: “Determined to
balance the budget by the end of his first term, Carter, the fiscal
conservative, is clipping away at congressional spending. The more liberal
Congress is on the verge of passing three bills that could exceed his spending
plans…the White House seems to be virtually itching to veto the [plans] …
when [they reach] … Carter’s desk.”

And so the seeds of Democratic civil war and electoral disaster were
sown.

I wish Barack Obama well, only a fool would not. If he successfully navigates all of this he will certainly have earned a place in history.

Tom Lindmark

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