Forget JFK, Obama could be the next Jimmy Carter
Barack Obama and his supporters have been drinking from a bottle of elixir labelled Hope. But the President-Elect knows as well as everyone else that there are gallons of bitter medicine to be swallowed if the economy is to be saved.
By Adrian Michaels, Group Foreign Editor
06 Nov 2008
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.
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Now all that credit has been withdrawn, house prices must continue to fall until people who are not taking unsustainable risks can afford to pay them.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.
There isn't much money around, but interest rates are low and the government can probably afford to borrow and increase its projected $1 trillion deficit for now. It is interesting to reflect that it was consumers attracted by cheap money that helped to create the crisis. Paradoxically it is the availability of cheap money that could show the way out.
Congress will pass an economic stimulus package and attempt to arrest price falls, or else deflation would last too long and sap the morale of a generation. Infrastructure plans and other projects could fill the gap in demand and reduce unemployment.
And if all that goes according to plan, then Obama somehow has to stop a rampant Congress from believing that a more bloated and invasive government was more than a temporary measure to combat a deep recession. Governments believe that increasing spending in a downturn is probably a good measure, but they find it impossible to cut expenditure when an economy recovers.
Cutbacks will be hard because the Democrats controlling Congress want to spend on far more than anti-recession measures. President-Elect Obama has huge spending plans, and has not told us how they have been affected by the economic crisis.
Decreased government spending in an upturn is a necessity because private enterprise generally knows better what to do with money than government. Businesses and individuals need to be encouraged to invest in projects of their own, when they can, rather than in government bonds.
But will Obama be able to face down a runaway Congress? The House and Senate may pass spending bills, but they can be vetoed by the president. Too many vetoes and the president looks out of touch - after all, Congressmen and women were elected too.
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.
In the battles to come, with his people and then his party, Obama will have numerous opportunities to mess up. If an economic stimulus is spent on tax cuts that simply encourage more consumer spending then all will be lost. He must also play a leading role in framing a new architecture for the world economy. Badly-drawn regulations will create more problems than they solve.
The President-Elect's team must agree on goals and a plan. Its members did that well in the campaign. They need to keep their discipline in the years ahead. An elixir called brandy will come in useful.