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Figuring Obama’s confidence and the US economy

Michael Tomasky in the NYRB writes:

I was struck by the sense of good feeling and optimism among these people [Democrats]. There was a broad understanding of the importance of the historical moment. In stark contrast to 1993 (Bill Clinton’s first year as president), the factions within the Democratic Party are keeping their disagreements pretty quiet for now. People grasp that in this moment of high political capital, when they are up against a GOP that is becoming increasingly forceful in opposition, Democrats must prove this year that they can pass legislation that will fix the country’s problems. And there was a confidence in their ability to do so that surprised me….

To the extent that internecine warfare is being sublimated in the pursuit of concrete gains, much of the credit for this goes to Obama himself, for two reasons. First, and this is very important to understand, he comes from no faction within the Democratic Party. He has managed to stand apart from all of them. Liberals assume that he’s mostly one of their own, which he almost surely is at the level of personal values (strict civil libertarians are probably an exception here). Centrists see a leader who has placed moderates such as Timothy Geithner and Robert Gates in key posts, and who sends them ample signals that he will bring the liberals in line when he feels he has to—as with the refusal to release more photographs of detainee abuse…

The second reason for the common resolve has to do with the strategy being deployed by Obama, his chief of staff Rahm Emanuel, and his other lieutenants.

He goes on to describe the lay of the chessboard in the coming battles over health-care, climate change, and Guantanamo. He suggests how these fights will proceed in light of this two part model for Obama’s approach for maintaining his coalition.

Ultimately he comes back to the observation in the first quoted paragraph above: the basic premise Obama’s team is running on is that the policies will succeed, and it’s just a matter of getting the preliminary bills through to get the ball rolling. They expect political “mortgages” to be taken out… but fully expect to be able to pay them back.

That read seems to me to be both on and unsurprising. It also doesn’t seem ridiculous. People forget the power of America’s position, and the degree to which it is it’s own biggest encumburance. Stepping back for a second, there’s so much low-lying fruit that, for Obama, it’s like the fucking Garden of Eden.

Beyond America’s own vastly improvable inefficiencies, yes,  China’s got an impressive and growing presence in the world, and owns a lot of US debt. But it’s not less dependent on a healthy American economy than America is dependent on it buying T bills.  The threat of a sell off is a threat of harikiri. China’s economy depends on ridiculous growth not to crash right now. And that’s not necessarily possible without America doing well. Read Nouriel Roubini (Dr. Doom!):

Roubini had recently been in China and met officials there. We talked about the bind that the world economic slowdown had created for China’s leadership—not despite but because of its huge trade surpluses and foreign-currency holdings. Many Chinese commentators have blamed American overborrowing and excess for dragging them into a recession. But even they realize that the very excess of American demand has created a market for Chinese exports. Chinese leaders would love to be less dependent on American customers; they hate having so many of their nation’s foreign assets tied up in U.S. dollars and subject to the volatility of American stock exchanges. But for the moment, they’re more worried about keeping Chinese exporters in business. To do that, they want to prevent their currency from rising. And for reasons laid out in detail in a previous article (“The $1.4 Trillion Question,” January/February 2008 Atlantic), the mechanics of finance require them to keep buying U.S. dollars and entrusting their savings to the United States. “I don’t think even the Chinese authorities have fully internalized the contradictions of their position,” Roubini said.

It’s still a high stakes bet. And a horrifying amount of money is on the table, see Ritholtz (vis Boing Boing):

If we add in the Citi bailout, the total cost now exceeds $4.6165 trillion dollars. People have a hard time conceptualizing very large numbers, so let’s give this some context. The current Credit Crisis bailout is now the largest outlay In American history.

Jim Bianco of Bianco Research crunched the inflation adjusted numbers. The bailout has cost more than all of these big budget government expenditures – combined:

Marshall Plan: Cost: $12.7 billion, Inflation Adjusted Cost: $115.3 billion
Louisiana Purchase: Cost: $15 million, Inflation Adjusted Cost: $217 billion
Race to the Moon: Cost: $36.4 billion, Inflation Adjusted Cost: $237 billion
S&L Crisis: Cost: $153 billion, Inflation Adjusted Cost: $256 billion
Korean War: Cost: $54 billion, Inflation Adjusted Cost: $454 billion
The New Deal: Cost: $32 billion (Est), Inflation Adjusted Cost: $500 billion (Est)
Invasion of Iraq: Cost: $551b, Inflation Adjusted Cost: $597 billion
Vietnam War: Cost: $111 billion, Inflation Adjusted Cost: $698 billion
NASA: Cost: $416.7 billion, Inflation Adjusted Cost: $851.2 billion

TOTAL: $3.92 trillion

Scary shizz. But at the same time, America is far bigger and more  economically powerful (in absolute terms) than it was in the mid-20th century, and certainly than it was in the era of the Louisiana Purchase. In that sense, even adjusting for inflation doesn’t really turn the apples into comparable oranges.

A second point: the bailouts confuse the crap out of me… but aren’t they effectively public investments (i.e. isn’t the amount effectively a public buyout of company shares)? Even if it’s at a bad rate, as the companies recover that’s going to offset a large portion of the total no? (I’m really fuzzy on this and would appreciate clarification).

Also, the only item in the list to have taken place in the last 20 years is Iraq. Let’s again step back for a second. WWII isn’t there… with it, how much was spent between 1935 and 55 with the second New Deal, WWII, Korea, and the interstates (also not included)? All of this spending didn’t prevent what is widely regarded as the golden era of the American middle class in the late 50s and 60s.

I leave you with this from Bloomberg:

The [stockmarket] turnaround started with the news from the U.S. Labor Department that the total unemployment insurance rolls fell by 148,000 to 6.69 million, the first drop since January and a sign that layoffs are easing.

The optimistic tone generated by the jobless claims data was accentuated by the news from the Philadelphia Reserve Bank that manufacturing around the mid-Atlantic region is not far from growing again. Its main index of manufacturing conditions rose to minus 2.2 in June from minus 22.6 in May. Any reading below zero indicates contraction, but the nearer to zero, the smaller the rate of the contraction.

Further good news came from the Conference Board, a private research group, which said economic activity probably rose in May, the second straight gain after seven months of declines. Its index of leading economic indicators, designed to forecast activity in the next three to six months, rose 1.2 percent, above expectations of a 0.9 percent increase.

“The U.S. is moving in the right direction; it’s not massive but enough to give one confidence that the actions by government and the central bank are working,” said Howard Wheeldon, senior strategist at BGC Partners.


2 Responses to “Figuring Obama’s confidence and the US economy”

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