If nothing else, it’s clear (as one wag wrote this morning) that the state of Obama’s rhetoric is strong.
The President almost always gives a good speech, but it’s the follow-through that is generally problematic. And the speech itself sends mixed messages about what Mr. Obama views as his “achievements” and his priorities moving forward. For all of the talk about more jobs and tax cuts, the speech also made it clear there has been a shift to ‘fiscal responsibility’ with plans to pay back the 2 trillion in new debt, all well down the road (3 year spending freeze starting in 2011). The job initiatives announced were minor and there appears to be no additional fiscal relaxation of consequence apart from promises of a new jobs’ bill, the effect of which could be blunted if the President aims for “fiscal neutrality”.
A State of the Union address is always a good place for an incumbent President to set out his priorities, and in that regard, Obama’s speech is most revealing. He rightly argues that everything “begins with our economy” and then curiously emphasizes that “our most urgent task upon taking office was to shore up the same banks that helped cause this crisis.”
No, Mr. President. Your most urgent task upon taking office was to shore up employment. Over the past year it has become obvious that the policy to shore up the banks has been a dismal failure in this regard. It has done nothing to pull the economy out of its deepest slump since the late 1970s. The single most important thing Washington can do to help the vast majority of American citizens who do not work on Wall Street is to create jobs — tens of millions of them.
The President was right about one thing: “If there’s one thing that has unified Democrats and Republicans, it’s that we all hated the bank bailout. I hated it. You hated it. It was about as popular as a root canal.”
But at least a properly executed root canal solves the problem once and for all. The President and Congress have administered the economic equivalent of pain killers, without addressing the underlying problems in our financial sector. If we’re going to undergo root canal, then let’s fix the damaged nerve and prevent a recurrence of the problem. Tens of trillions of dollars have been committed to deeply insolvent institutions (the extent of which we still do not understand due to persistent stonewalling from the Treasury and Federal Reserve). These institutions continue to pay out massive bonuses to their staff on the basis of fraudulent accounting. And many of these institutions are still engaging in activities which continue to worsen household balances in order to maximize their own profitability. Households and non-financial institutions have hitherto received very limited assistance. If this is how the President measures success, God help us when we have failure.
Obama observed that “if we had allowed the meltdown of the financial system, unemployment might be double what it is today. More businesses would certainly have closed. More homes would have surely been lost.” All true, but there was little value to be gained by preserving what are fundamentally insolvent institutions. The President could have done something politically popular which would have resonated with the public by shutting down zombie banks, and used fiscal policy to promote employment via a Job Guarantee program. That would be both smart economics and politically popular. The two are not always mutually exclusive, but this administration curiously appears to conflate unpopularity with “responsibility”. This is what happens when you take your advice from a bunch of failed Rubinite retreads.
Again, the references to the banks reflect profound conceptual confusion at the heart of the President’s financial reforms: “A strong, healthy financial market makes it possible for businesses to access credit and create new jobs. It channels the savings of families into investments that raise incomes.” To repeat, credit is not a “flow” which one can access. Credit is a two-way contract between lender and borrower. The only thing that constrains the bank loan desks from expanding credit is a lack of creditworthy applicants, which can originate from the supply side if banks adopt pessimistic assessments or the demand side if credit-worthy customers are loathe to take out additional loans. The President would be more accurate in suggesting that a strong economy makes it possible for businesses to create new jobs, thereby creating a healthy financial market which facilitates access to credit.
Yes, President is correct to argue that the markets may well have stabilized…for now…but personal balance sheets have not. How long can the former be sustained in the absence of the latter not improving?
And reiterating his proposed fee on the biggest banks might play to the peanut gallery, but the real purpose is not to recover the money spent on TARP, but to change the structure of finance, particularly in the capital markets, once and for all. The President still displays an incoherent approach to financial reform and implicit beliefs in government budget constraints.
For all of the talk about tax cuts (”Let me repeat: we cut taxes. We cut taxes for 95% of working families.”), what really stands out is the President’s fiscal timidity. This represents the cut for 95% of working families that he promised on the campaign. It equated to about $8 per week, on average, for workers. This despite the fact that the President himself seems to recognize at one level that fiscal policy really does work:
Because of the steps we took, there are about two million Americans working right now who would otherwise be unemployed. 200,000 work in construction and clean energy. 300,000 are teachers and other education workers. Tens of thousands are cops, firefighters, correctional officers, and first responders. And we are on track to add another one and a half million jobs to this total by the end of the year.
Surprise, surprise! Fiscal policy works! And if the President had implemented a national payroll tax holiday and introduced revenue sharing for the states, he could have trumpeted even greater economic achievements. Why muddle the message with talks of spending freezes and support for misconceived “bipartisan commissions” to discuss ways of reducing “runaway government spending” when unemployment has shown little sign of stabilizing, let alone coming down? The true engine of job creation in this country will always be America’s businesses, as the President recognizes, but he also notes that “government can create the conditions necessary for businesses to expand and hire more workers.” We have a mixed economy, which is why the President should not capitulate to the conservative lobbies now engaged in a renewed push for fiscal austerity even though the labor markets are disaster zones. History has a habit of repeating itself. The US government did exactly this in 1937 and the unemployment worsened. Japan did it in 1997 with the same outcome.
I could go on. It would have been interesting to hear the President explain how we would succeed in Afghanistan when both the British and Russians had comprehensively failed, but Obama clearly could only achieve so much in the space of an hour. Bowing to the conservative calls for “fiscal consolidation” at a time when unemployment is still very high and will continue to exert a massive deflationary force on the overall economy is the best way to ensure a double-dip recession occurs. Trumpeting the perpetuation of a failed banking system hardly strikes us as an achievement.
There were moments when the President really did appear to understand what it takes to make the state of the union stronger. Unfortunately, those moments were few and far between. Let’s hope for once the muddled message does not reflect the reality.