Brand New View

The Moment is Here

At times the journey from Obama's announcement 2 years ago to run for the Presidency to the inauguration seemed like it might never end. But the inauguration came and went. The spectacle was heightened by expectation. "This is Obama's moment" was among the sentiments. What would his equivalent of Kennedy's "Ask not what your country can do for you..." or FDR's "We have nothing to fear but fear itself" grand rhetoric be? As it turns out, his speech was less electrifying than anticipated, but (from my point of view) perfectly tuned to the times. With 2 wars, Guantanamo, chaos in the Middle East, Iran and North Korea flaunting their nuclear ambitions, a global economy run off the rails, major environmental issues, and host of domestic challenges, soaring statements filled with lofty ideals would have been out of place. What has impressed me about Obama the past 2 years has been his steady, consistent, "no drama Obama" style that conveys confidence. He has used his oratorical gifts wisely over the past year, giving arguably his finest speech last Spring when he discussed race in response to the Reverend Wright flare-up (I thought this speech more attuned to reality than his remarks at the 2004 Democratic convention), yet also showing us that sweeping emotion is not required in all instances. Sometimes we just want to see that the guy at the top is in touch with reality. When I watched his inaugural speech, I will admit that there was a tiny part of me that wanted a more emotionally stirring call to cause. But as the speech progressed, what I heard was something more important--a call to action. By telling us that we must adjust to the world around us, he was also telling us that we can no longer live in an American cocoon, ignorant of the challenges confronting those beyond our shores. In effect, he was politely yet pointedly telling Americans to pull our collective heads out of the sand and become active participants in solving the challenges that confront us. I haven't felt this good about the future of the US in years.

Obama's Current Economic Plan

Paul Krugman, the Nobel Prize winning economist from Princeton and columnist for the New York Times (NYT)/International Herald Tribune (IHT), wrote a piece the other day about the disappointing size of Obama's economic rescue plan. Calling it the 'Obama Gap', Krugman asserts that despite Obama's strong rhetoric, his plan falls short of what is needed. With estimates that every $1 of public investment increases GDP by $1.50, only 60% of Obama's $750 billion+ plan is for public spending. The reason this is not enough is that we may face a potential economic shortfall of $1-$2 trillion (or more). Krugman argues that even with a multiplier effect, Obama's plan is insufficient (Paul Krugman: The Obama Gap). This is partly because part of Obama's plan, in an effort to court Republican support, includes tax breaks. Yet many economists agree that every dollar in tax relief produces less than a dollar in stimulus spending. In another article in the IHT (No Consensus on Whether Obama's Plan Will Work), the authors contend that tax relief works only under certain conditions (individuals use the money to save and/or pay down debt, thereby limiting in the impact on economic activity that leads to growth) and that the current global challenges are anything but certain, or normal. In an interesting related article (US Debt Losing Its Appeal in China), China's own economic woes are reducing their appetite for US debt, usually in the form of massive investments in short-term US Treasury securities. This is important for a couple of key reasons. First, because China's short-term Treasury purchases support the debt that funds long-term deficit payments. With reduced demand from China for short-term US Treasury securities, interest rates may rise (i.e. high demand boosts Treasury prices and reduces interest rates whereas low demand does the opposite), which affects a wide range of debt-holders, from government borrowers to home buyers. The impact? Well, with the potential for rising interest rates, the consumer appetite for housing will be reduced further, which will affect the economy negatively, beyond the already severe impact of the recent housing woes. However, there is an important consideration in all this. The housing crisis that precipitated a good chunk of the US's current economic problems was partly the result of loan programs that enabled, even encouraged, consumers to buy homes they could not afford, creating lower-quality debt. So while China's reduction in US Treasury purchases may well cause interest rates to rise, the long-term affect may help correct the US housing market by 'forcing' home buyers to purchase only those homes within their means. Ultimately, this means the quality of the debt will rise, since there will be higher confidence that borrowers will be able to repay their loans. As for Obama's economic plan being too small--Krugman makes important points. In normal times, enormous deficits are problematic for future generations. But in abnormal times, such as those we currently face, we need larger public spending to spur job creation, improve infrastructure (which is an important long-term capital investment) and improve overall confidence. An important question is how the debt, even in Obama's 'undersized economic plan', will be funded. The even larger question of whether Obama's plan will even work remains unknown. But at least the emphasis is on the right component for now: increased public spending. Let's hope that politics take a back seat to economic necessity.