Monday, January 24, 2011

Obama Assessment, Year Two

A year ago I made a series of posts on the first year of the Obama administration. Now, as he enters his second year, it is time for a second assessment.

The most urgent task the Obama administration inherited was to save the American and world economy, which was collapsing at the end of the Bush administration. The economy is one of the most complex of all social institutions. No one person or organization can control it. President Bush initiated the bailout of specific large companies, leaving the government in temporary control of several of them. President Obama continued those bailouts, though with a bit more regulation, especially of the stockbrokers turned "investment banks" that had produced the crisis in the first place.

The bailouts worked. Much of the money authorized for bailouts was not actually spent, and most of the loans that were made have already been paid back. In particular, we saved half the auto industry, which is an essential pillar of our economy. In the end, we might even make money.

The recession stopped getting worse, and has slowly been getting better. The most recent consensus of economists is that the next couple of years might see enough growth to recover most of the lost jobs, as well as the lost profits that are already improving.

The administration has also been trying to invest in new industries to establish the foundation for our future economy. They have been particularly interested in alternatives to oil as an energy source, and in making up for the big slowdown in new drug development. Naturally, the large companies that benefit from the current energy and drug markets, and their representatives in the legislature, have opposed these new investments. Nonetheless, I am hopeful that the economy of, say, twenty years from now will rest on investments in alternatives that we make now, both by government and by business.

I believe the economy is the single most important issue determining how people vote - most especially, whether they feel secure in their own economic future. I expect that by 2012 the economy will be sufficiently improved that Democrats will have a big year, and President Obama will probably be re-elected.


Anonymous said...


I'm not sure what financial reports you are reading, because all the ones I've been reading pretty much agree that something has gone horribly wrong with Ameica's job-creating engine. I don't think it's that much of a mystery. I work for a Fortune 500 company that is outsourcing jobs to India and other emerging countries as fast as it can. These are (were) high-paying IT jobs that put its employees solidly in the middle to upper-middle class. Those jobs are never coming back. Fortunately my husband and I are nearing retirement, but I'm not sure what younger folks are going to do.

Peter Orzag, former Director of the US Office of Management and Budget under Barack Obama,
recently published an article in Financial Times entitled "America Must Brace Itself for Turbulence", the gist of which is that the fiscal spending of the federal government is unsustainable, and that we may experience significant crisis before that situation is resolved. Furthermore, many states, including my home state of California, are broke and faced with severe cuts or total bankruptcy.

Personally, I don't believe Obama stands a chance of being re-elected unless unemployment comes down and the stock market stays up.

Whit said...

"The administration has also been trying to invest in new industries to establish the foundation for our future economy."

I assume he, and you, are not talking about traditional sorts of government investment in infrastructure such as road, sewers, etc.

I assume what he is talking about are investments in the form of subsidies for industries where there is, in his opinion, insufficient private investment. That, of course, can never create a net increase in jobs.

If an industry were profitable, or promised to be profitable, there would be plenty of private investment. The only reason for the government to "invest" is because the industry or activity is not profitable. And subsidizing an unprofitable enterprise takes resources away from actual profitable private businesses where the investments would actually create jobs and wealth.

The big examples are drugs and "green" jobs. If "green" jobs were profitable, they would not need subsidies. Subsidies for "green" jobs is like paying people to dig holes, and paying others to fill them in - a complete waste from an economic point of view.

As far as drugs are concerned, I have my doubts. I think the main reason the drug companies have stopped innovating is because of the regulatory risk. It takes so much money to develop a drug and get it through the approval process, only to have the IP stolen by Indian drug companies and the price limited by various types of price controls. I can't imagine a situation where the government would know better how to invest research dollars than private companies investing their own money. I think a better regulatory environment, and perhaps reinstating some limits on advertising to the public, would do a lot more.

Every time I hear the government is going to "invest" in something, I grab for my wallet.

Siarlys Jenkins said...

Excellent analysis Gruntled. My mother, a life-long Republican who voted for Obama, lived through the last Depression, and pointed out that most people don't realize how close we came to a second one of similar magnitude.

It is true that jobs are not coming back strong. That is because the large capitalist enterprises are sitting on their money, rather than invest it. There isn't a lot that the President of the United States can do about that, not in a nation where private property is constitutionally protected. I think a good approach would be to impose a sharp increase in corporate income tax, applying to a second tier, all income above a certain level, with the proviso that all money invested in new capital (NOT buying another company's stock, not mergers, not playing the money markets, NEW equipment, buildings, productive enterprises) will be deductible from taxable income.

At worst though, 10% unemployment and slowly falling is better than 30% unemployment and rising. I speak as someone who has had no steady job since July 2009, and plans to work until I'm 70 in order to qualify for enough social security to get by on it.