Desperately Seeking Reset

The Economist conducts a post-mortem of the first two years of President Obama’s term, wondering how did it come to this?

How is it possible, just 21 months later, that the Democrats are expecting a thrashing next week and the Republicans look poised to take control of the House of Representatives, and maybe even the Senate? The main answer is that the same economic storm that propelled Mr Obama into office has played havoc with his presidency. But there is more to it than that. To see why, it helps to break the story into three parts: the legacy he collected from George Bush, the distraction of health reform and the resulting fracture between the American people and the man in whom they had invested so much hope.

On coming into office the Obama Administration largely continued along the path blazed by the predecessor Barack Obama had reviled during the campaign and continues to blame for the problems at hand. TARP was the policy crafted by George W. Bush’s Secretary of the Treasury, Henry Paulson. Its successor, HAMP, is no bold departure from that policy. Rather, it’s a development of it, another grab at the same ring.

The bailouts of GM and Chrysler were begun with the lifelines thrown under the Bush Administration and reached their fruition under the Obama Administration. To be sure President Obama’s approach has incorporated features that might not have been followed by his predecessor. So, for example, in the handling of the two auto companies the UAW’s interests have been carefully safeguarded.

The stimulus package enacted into law in spring of 2009 was not the only attempt at fiscal stimulus since the beginning of the economic downturn, it was merely the largest. See here for an interesting analysis on why the stimulus package wasn’t as effective as its advocates hoped:

I argue here, however, that the structure of a fiscal stimulus is crucially important and that the package Congress adopted was far from ideal, regardless of the merits of the Keynesian model. Whether countercyclical fiscal policy is beneficial is a more difficult question, but it is not the critical issue if a stimulus package is properly designed. In fact, the Administration could have created a package that stimulated the economy in the short term while improving economic performance in the long term. This package, moreover, would have been immune to criticism from Republicans. The stimulus adopted was a missed opportunity of colossal proportions.

That the Administration and Congress chose the particular stimulus adopted suggests that stimulating the economy was not their only objective. Instead, the Administration used the recession and the financial crisis to redistribute resources to favored interest groups (unions, the green lobby, and public education) and to increase the size and scope of government. This redistribution does not make every element of the package indefensible, but even the components with a plausible justification were designed in the least productive and most redistributionist way possible.

I think these defects are obvious and were obvious from the outset; it’s good to have a little support from an economist on that.

The benefits of what will no doubt be the keystone legislation of President Obama’s first term, healthcare reform, remain to be seen; healthcare costs continue to rise and, if the recent announcements of insurance companies are any gauge, will continue to do so at an appalling rate.

The attention that was lavished on healthcare reform at the expense of other legislatives goals however important is key to understanding how it came to this. There’s pretty good evidence that the pursuit of healthcare reform did, indeed, come at the expense of other goals:

For some of the shortcomings of financial regulatory reform, Mr. Baird blames the disillusioning battle over ObamaCare. “When the House had to pass the Senate version of health care unchanged, some members asked why should they invest the mental effort in mastering the details” of financial reform. Mr. Baird found parts of the bill mind-numbing.

which lends credence to the idea that President Obama is more concerned about his place in history than about the conditions of the present.

That’s not entirely fair. Healthcare costs are an enormous burden on local, state, and the federal governments. With healthcare cost reduction many more things are possible; without it nearly everything becomes much more difficult. But somehow the need for cost reduction got lost in the pursuit of expanded coverage. The irony of this is that cost reduction would itself allow for expanded coverage while of itself expanded coverage increases costs.

Also key, as The Economist notes, are the expectations that President Obama raised in his winning presidential campaign. Clearly, the change that President Obama has delivered has either been insufficient or of the wrong sort to satisfy an increasingly restive American public. Just four years after turning Congress over to Democratic control, the electorate appears ready to return control of the House to Republicans and, at the least, narrow Democratic control of the Senate.

I also think that you have to look at what the beneficiaries of the policies of the last three years, banks and GM, have done with their reprieves. The banks, impelled by the same arrogance and fecklessness that created the financial crisis, have created a crisis in foreclosures. The message is clear: the shape that saving the financial system took, far from inducing the banks to take a lesson, has not deterred them from taking excessive risks. This is moral hazard with a vengeance.

GM has used its borrowed time to produce a product that few will buy at a price at which the company can make a profit without government subsidy and which won’t materially reduce our use of fossil fuels:

The administration’s objectives – reducing carbon emissions and U.S. dependence on foreign oil – are legitimate. But $5 billion wasted on electrics is $5 billion that cannot be used to meet these goals. And then there’s the private capital that Obama’s policy is attracting to this losing proposition.

J.D. Power suggests, sensibly: “Rather than rushing to commercialize [battery-electric vehicles], the industry might be better served to pursue continued fuel economy improvements in [internal combustion engines] and the mass production of [conventional hybrids].”

For a president who claims to make policy based on “facts and science and argument,” lavishing subsidies on electric cars is an intellectual scandal. The J.D. Power study is hardly an outlier. It jibes with similar work by Deloitte Touche, Boston Consulting Group, Roland Berger Strategy Consultants, professor Henry Lee of Harvard’s Belfer Center for Science and International Affairs, and the Massachusetts Institute of Technology’s Energy Initiative.

Last year the National Academy of Sciences’ National Research Council concluded: “Subsidies in the tens to hundreds of billions of dollars. . .will be needed if plug-ins are to achieve rapid penetration of the U.S. automotive market. Even with these efforts, plug-in hybrid electric vehicles are not expected to significantly impact oil consumption or carbon emissions before 2030.”

It’s clear that Americans’ patience is wearing thin but what do they want? The typical answer is that Americans’ wants are conflicted but I don’t think that’s the case. I think that what most Americans want is what happens in a Hollywood movie of the Hayes era: hard work and pluck are rewarded, the villains are punished, the good guy who made bad choices dies in the third reel, and it all takes place in 105 minutes. That’s not conflicted it’s merely unrealistic.

In my view we have been on the wrong path for a very long time and returning to the right one will take a commensurately long time. Perhaps we should keep in mind that there are no substitutes for hard work, prudence, and frugality, that we can’t achieve prosperity by redistribution because redistribution will always and inevitably be redistribution not from the rich to the poor but from one group of the rich to a different group of the rich (if not from the poor to the rich), that it’s a much smaller world than it used to be and we can’t protect our inefficient industries from overseas competition, that keeping corporate dinosaurs on life support expends resources that can be put to better use elsewhere in the economy, and that without a vibrant, energetic business environment there will be no jobs let alone job growth.