Monthly Archives: January 2010

David Bromley illustration

American voters want more public services than they are willing to pay for. That is the country’s fiscal problem in one sentence. When it comes to public finance, the “live now, pay later” mentality that caused the economic collapse still prevails.

Figures show a strengthening recovery in the last quarter of 2009. Welcome as that may be, even a sustained expansion cannot balance the books in the longer term. On current policies, the permanent gap between spending and revenues is at least 6 per cent of output.

Will the administration’s new budget help? Not really. The US budget is not a policy announcement, but a minutely detailed wish-list. The press reports it gravely, in suspended disbelief. Congress then ignores it in whole or in part depending on how the wind is blowing. President Barack Obama’s new proposal, which Congress receives today, will say more about his reading of the political climate than about where fiscal policy is headed.

The remainder of this article can be read here.

Bernanke must rebuild confidence. Robert Samuelson, RCP

Bernanke’s exit strategy will fail. Allan Meltzer, WSJ

After Obama’s speech, Democrats are confused. Paul Kane and Shailagh Murray, Washington Post

Deficit hawks and marching peacocks. Paul Krugman, NYT

From my new column for National Journal:

President Obama says he gets the message from Massachusetts. Expect a new focus on jobs and living standards. Expect fresh attention to overgrown public borrowing. The country’s pressing concerns, he says, will be his own priorities.

Fine. Now what? Closer attention to these problems will only underline how little the administration can do to solve them. Saying “jobs, jobs, jobs” does not create any. This is a campaign slogan, not a policy.

The country does not want a second fiscal stimulus. The first was unpopular and another would make the debt problem worse. As for reining in borrowing, there are two ways to do that: lower public spending and raise taxes. When it comes to specifics, people oppose both.

Just what this sharp new focus on the economy is going to achieve is therefore unclear. Caps on student-loan repayments and expanded child care tax credits, as proposed this week? I do not see these turning the economy round. The president calls for a temporary freeze on nondefense discretionary public spending, which is less than 20 percent of the overall budget. Again, not exactly radical — even if it happens.

Are these the bold policies that the health care debate has distracted us from? Obama’s critics say that the focus on health reform was his big mistake. I disagree. In fact, cost control in health care, especially Medicare, is indispensable for long-term fiscal discipline. The White House was right about that. The problem was that its plan raised costs in obvious ways (subsidies, expanded Medicaid) and pressed down too vaguely elsewhere: lots of good ideas and experiments, not enough action. What the administration said about cost control in health care was right in principle but not believable in practice.

It was the correct subject, though…

On Obama’s speech, I’m puzzled by Andrew Sullivan’s response to my asking, in my previous post, “What does it matter who caused the problem [of the budget deficit]? Obama’s job is to solve it.” Andrew replies:

Let me try to explain: it matters who caused the problem and why because if we do not understand the causes we cannot fix the problem and it matters because any adult judgment of a politician’s first year that does not take into account the inheritance he was bequeathed is impossible.

Fair enough, I suppose. In appraising Obama’s first year, one should certainly take note of his poisoned inheritance. If I haven’t always done so, it might be because I think the point so obvious that repeating it gets tiresome. As for needing to understand the problem before we can fix it: of course. But the essentials of the problem are not that hard to understand: the government is spending too much and taxing too little. The question is, what do we do about that?

As he warms to his theme, though, Andrew loses me. He says that, like the GOP, I “remove the context” of the inheritance, thus rigging the debate so Obama cannot win. This kind of punditry is “far more of a problem for the country than anything Obama has done – because it bases political judgment on unreality, and distorts the body politic’s capacity for reasoned argument.” Good God. I had not realised I was doing something so complicated.

It is quite an accusation. In asking for the debate to focus on solutions – which taxes do we raise, which programs do we squeeze – I am eroding the nation’s brainpower, and deliberately, mind you, because like so many others I am “invested in continuing the game”. I suppose it is better to be accused of bad faith than stupidity, but my own brainpower must indeed be seriously diminished, because this complaint strikes me as so much portentous nonsense. That cannot be right, can it?

We are standing in a burning building. “Andrew, help me with this extinguisher.” “One moment, Clive. Let us first examine the causes of the conflagration. We cannot douse these terrible flames until we have laid bare the history, and faced it unflinchingly. I see what you are doing. You and others I could name refuse that necessary course, and are thus depleting the nation’s capacity for rational thought. A few of us have chosen not to play that game. We have invested our hopes and dreams in rising above all that. In the name of the body politic, in the name of reasoned argument, in the name of all that is decent, can we not renounce the [cut short by falling debris...]”

On the other hand, we agree (mostly) about the iPad.

Little sign of a reset that I could see. The speech emphasized jobs and the economy over healthcare reform, but that would have made sense even if the political landscape had not shifted. As for the poll numbers, as for Massachusetts, they might never have happened. He mentioned Scott Brown’s victory only obliquely, and in way that denied it any significance.

I know it’s an election year. And after last week, it is clear that campaign fever has come even earlier than usual. But we still need to govern.

He conveyed almost no sense that the country was sending him a message and that he was paying attention. He shuffled priorities-but goals and methods had not changed. The tone was uncompromising and often combative. “We don’t quit. I don’t quit.” If you admire tenacity, there was a lot to like.

He followed James Carville’s bad advice in Monday’s FT, dwelling at length on his poisoned inheritance. (On CNN, Carville said the speech was wonderful.)

Now, even after paying for what we spent on my watch, we will still face the massive deficit we had when I took office.

True, that massive deficit is largely due to the Bush tax cuts-only part of which, however, Obama intends to reverse. The tax cuts Obama intends to retain belong to him, and so does the corresponding part of the deficit. But the point is: who cares? Carville is wrong. What does it matter who caused the problem? Obama’s job is to solve it.

He called for a bipartisan fiscal commission to look into the matter. He said this must not be a way to kick the issue down the road. That is what it would be, of course. He offered little in the way of recommendations on long-term spending cuts or tax increases-no mention of fundamental tax reform. The proposed temporary freeze on discretionary spending (less than a fifth of the budget) is trivial, little more than a gesture. Achieving fiscal sustainability requires presidential leadership, a national debate on taxes and spending, and bipartisan action. Americans have grown accustomed to demanding more in public services than they are willing to pay for, and the gap is now enormous. Obama let all this slide.

In a way, he let health reform slide too-not just by pushing it way down the running order, but by conspicuously failing to propose, much less champion, any way out of the current impasse. We have to get this done, he said, but he did not say what or how. Even now, his position seems to be: “Just give me something to sign.” As for making the case to a public that remains, at best, unconvinced, all he had was the usual stories about the injustices of the present system. They are good stories, but they are too familiar. They have not worked, and they aren’t going to now.

It was a highly partisan speech, despite the occasional obligatory reference to the need to work together. Nancy Pelosi was loving it throughout, except for the partial spending freeze.

He criticized Democrats not for over-reaching, but for being wimps.

I would remind you that we still have the largest majority in decades, and the people expect us to solve some problems, not run for the hills.

He criticized the other side for being purblind obstructionists.

[I]f the Republican leadership is going to insist that sixty votes in the Senate are required to do any business at all in this town, then the responsibility to govern is now yours as well. Just saying no to everything may be good short-term politics, but it’s not leadership.

Fair points, you might say. Still, the whole thing came over more as an attempt to restore the Democrats’ energy and morale, while cracking a few jokes at the Republicans’ expense, than as a plea for moderation, compromise and co-operation. I’ll be surprised if independent voters were impressed.

The weirdest paragraph was this:

Our administration has had some political setbacks this year, and some of them were deserved. But I wake up every day knowing that they are nothing compared to the setbacks that families all across this country have faced this year. And what keeps me going – what keeps me fighting – is that despite all these setbacks, that spirit of determination and optimism – that fundamental decency that has always been at the core of the American people – lives on.

One could spend a while untangling that. Are we supposed to empathize with Obama for the setbacks he has suffered at the hands of voters-and admire his resilience in the face of these misfortunes? It is as though losing political support and an election or three is not a judgment on the administration’s performance: it is an accident, an injustice even, akin to somebody losing his job. But Obama will carry on, just as America’s people will carry on, because he is righteously determined to ignore the voters’ opinion.

When you put it that way, it doesn’t sound so good.

I’ve previously argued that the Senate health care bill is much better than none. I agree with Jonathan Rauch about this – he makes the case especially well – and with Paul Krugman. But is this a sufficient reason to say that the House should pass the Senate bill rather let the matter drop? No. These are separate questions.

Even if I am right that the Senate bill is better than nothing, there are two complications. One concerns political strategy, the other democratic legitimacy.

The Senate bill is not popular. Most voters want Congress to walk away and start over. If Democrats say we will pass this bill despite hearing that message, they are asking for a drubbing in November – an outcome that would put the rest of the party’s agenda in jeopardy. If I were a Democrat, I might conscientiously prefer retaining control of the House to passing the Senate bill. I might think that, on balance, this was the best outcome for the country.

That is the strategic issue: how much harm does the party inflict on itself by pressing on? But suppose for the sake of argument that passing an unpopular healthcare reform will not hurt, and might even help, the Democrats’ prospects in November, as some seem to believe. Would it be right, in any event, to pass a bill that most Americans oppose? It would help to be sure that the country had failed to understand the proposal. (Whose fault would that be, by the way?) But this seems a bit of a stretch, even though there is a lot of confusion about what the measure would do. It is an even bigger stretch, I think, to call failing to pass an unpopular bill a “betrayal of trust”, as Krugman does. Whose trust?

If I were a Congressman, certain this bill was better than nothing, and the voters in my district had decided they did not want it, I ought to think hard before shoving it down their throats, even if I were confident they would come to love me for it later.

It would not be enough to feel that the bill was merely better than nothing. I’d want to feel it was so much better than nothing – and so important – that I was right to ignore the people I am supposed to be representing, the people I’d failed to convince of the merits of my case. I’d expect to lose the next election and would have no complaints.

This is a high bar. In the end, I’d vote for the Senate bill – but this answer is not obvious, even if the bill is as good as I think. There are respectable reasons (as well as sleazy ones) for admitting defeat.

The health care bill is worth saving. Jonathan Rauch, National Journal

Resisting the growth of the state. The Economist

The Chavez revolution has failed. Jackson Diehl, Washington Post

Blame Bush more. James Carville, FT

Blaming Bush hasn’t worked. Jonathan Martin, Politico

Bromley illustration

One year into his presidency, Barack Obama has come to a defining moment. He needs to reset, and Wednesday’s state of the union address is the place to begin.

Scott Brown’s election in Massachusetts was an astonishing rebuke. It is difficult, still, to take in: one of the most liberal states in the union sent a conservative Republican to succeed Edward Kennedy in the Senate. A few weeks before, this was scarcely imaginable, even allowing for the Democratic candidate’s impressive incompetence.

For Mr Obama to carry on as though nothing had happened would be a gross mistake. But overreacting would be as bad. Going populist in a way that is false to his character would be one such error. Abandoning his ambitions for his presidency, occupying the office with no purpose except to keep it, would be another.

The remainder of this article can be read here.

I thought this concise analysis by The Economist was one of the best things I have read on Obama’s new banking proposals.

Allow me a quibble over nomenclature (ie, the politics). To have this plan referred to as any kind of Glass-Steagall–”lite”, “in the spirit of”, whatever–annoys me because that designation is all about pandering to the view that the repeal of Glass-Steagall caused the crisis. It did not. And this plan (as The Economist’s article explains) does not come close to repealing the repeal. Deposit-taking banks would still be able to act as investment banks for their clients, and policing the boundary between client services and own-account activities will be a mess. (JP Morgan doesn’t even think it will have to divest its hedge fund, for heaven’s sake.) I prefer the Volcker rule. That way, as with the Greenspan put, we would know who to blame later. No matter, better get used to it: the new Glass-Steagall, Glass-Steagall lite, son of Glass-Steagall.

Branding aside, The Economist piece gives an excellent even-handed appraisal of the idea and its likely results. There are things to be said for the proposal: it’s just that none of them has anything to do with the crisis we have just witnessed. For me, these are still the key points:

[Once Goldman] is cut loose from banking restrictions, and from Fed funding, would it not continue to enjoy implicit state backing? Would it really be allowed to fail if it blew up? Officials argue that other reforms, such as central clearing for derivatives, will make it easier to let such firms die. Convincing markets of that will be difficult.

I’d say so.

Enforcement could be tricky, too. Regulators will struggle to differentiate between proprietary trades and those for clients (someone is on the other side of every trade) or hedging. Getting it wrong would be counter-productive: preventing banks from hedging their risks would make them less stable.

Moreover, the plan is unlikely to help much in solving the too-big-to-fail problem. Even shorn of prop-trading, the biggest firms will still be huge (though also less prone to the conflicts of interest that come with the ability to trade against clients). As for the new limits on non-deposit funding, officials admit that these are designed to prevent further growth rather than to force firms to shrink.

They may, in any case, be pointed at the wrong target. Curbing the use of deposits in “casino” banking is an understandable impulse, but some of the worst blow-ups of the crisis involved firms that were not deposit-takers, such as American International Group and Lehman Brothers. And much of the losses stemmed not from trading but from straightforward bad lending (think of Washington Mutual, Wachovia and HBOS).

Highly recommended.

Obama’s doing all right, considering. Carl Cannon, Politics Daily. An intelligent contrarian. Carl always makes a lot of sense.

Attack mode won’t work for the Democrats. Amy Walter, NJ

Pass universal coverage now, fix it later. Froma Harrop, RCP. Not a bad idea, but…

Health care reform on the brink of collapse. O’Connor and Brown, Politico

Yes, worry about inflation. Jim Hamilton, Econbrowser

Clive Crook’s blog

This blog is no longer updated but it remains open as an archive.

I have been the FT's Washington columnist since April 2007. I moved from Britain to the US in 2005 to write for the Atlantic Monthly and the National Journal after 20 years working at the Economist, most recently as deputy editor. I write mainly about the intersection of politics and economics.

Clive Crook’s blog: A guide

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