Subject: Why US voters are suing Dr Obama - FT - (Worth the read)
From: "Michael Andrews" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Eric Schwerin" <[email-masked]>
Date: Wed, 27 Oct 2010 15:59:54 -0400

Why US voters are suing Dr Obama
By Martin Wolf
Published: October 26 2010 22:28 | Last updated: October 26 2010 22:28
An ambulance stops by the roadside to help a man suffering from a  
heart attack. After desperate measures, the patient survives. Brought  
into hospital, he then makes a protracted and partial recovery. Then,  
two years later, far from feeling grateful, he sues the paramedics and  
doctors. If it were not for their interference, he insists, he would  
be as good as new. As for the heart attack, it was a minor event. He  
would have been far better off if he had been left alone.

That is the situation in which Dr Barack Obama finds himself. A large  
part of the American public has long since forgotten the gravity of  
the financial heart attack that hit the US in the autumn of 2008. The  
Republicans have convinced many voters that the intervention by the  
Democrats, not the catastrophe George W.Bush bequeathed, explains the  
malaise. It is a propaganda coup.

More FT video

Does President Obama deserve blame for this outcome? No and yes. No,  
because his treatment was right, in principle; yes, because it was too  
cautious, in practice.

It is essential to remember the context. Large financial crises do  
long-lasting damage. As the University of Maryland’s Carmen Reinhart  
and Harvard University’s Kenneth Rogoff note in an update of previous  
work: “More often than not, the aftermath of severe financial crises  
shares three characteristics. First, asset market collapses are deep  
and prolonged ... Second, [it] is associated with profound declines in  
output and employment ... Third, the real value of government debt  
tends to explode.” As ever, the risks built up, disregarded, in the  
boom and materialised in the bust.

Martin Wolf’s Exchange

Martin Wolf elicits readers’ views on current economic issues

As Prof Reinhart and Vincent Reinhart of the American Enterprise  
Institute note in a paper presented at this year’s economic policy  
symposium at Jackson Hole, the US shared with several other high- 
income countries (notably, Spain, the UK and Ireland) a massive rise  
in house prices, credit and the financial sector’s balance sheet:  
between 1997 and 2007, real US house prices rose by 87 per cent, the  
ratio of US financial sector debt to gross domestic product rose by 52  
per cent and the ratio of total private debt to GDP rose by 101 per  
cent. This was a disaster waiting to happen. What has made managing  
the bust far more difficult is the fact, demonstrated in the Reinhart  
and Reinhart paper, that this has been by far the biggest global  
financial crisis since the second world war (see chart).

So how well has the US economy done in this crisis? Quite well, in  
some respects, above all on overall economic output; less well, in  
others, notably unemployment. On average, real GDP per head (at  
purchasing power parity) fell by 9.3 per cent in the previous crises  
studied by Profs Reinhart and Rogoff. This time it fell by 5.4 per  
cent in the US. The unemployment rate rose by 7 percentage points in  
previous crises, on average. This time, US unemployment rose by 5.7  
percentage points. (See charts.)

This contrast between poor US performance on unemployment and better  
performance on output, by historical standards, carries over to  
comparisons between the US and other large high-income countries.  
Despite being at the epicentre of the crisis, the US experienced a  
smaller proportional decline in output per head than other large high- 
income countries, except France. But unemployment rose far faster in  
the US than elsewhere. The explanation is that US productivity growth  
was exceptionally fast, above all in 2009.

What, then, does this performance tell us about US policy? The answer  
is that it did well in terms of what it did address, but far less so  
in terms of what it did not address.

As Lawrence Summers, the president’s chief economic adviser, noted at  
the FT’s “View from the Top” conference in New York on October 7,  
the administration’s focus was on “the return of stability,  
confidence and the flow of credit to support strong recovery”. The  
elements were: support for the financial system – through the  
troubled asset relief programme, inherited from the previous  
administration, financial guarantees and “stress tests” on banking  
institutions; the fiscal stimulus; and the actions of the Federal  
Reserve to sustain the flow of credit.

By their nature, such policies work by sustaining demand and so  
output. Their impact on employment (and unemployment) is indirect. As  
it turned out, productivity growth was so strong that not too bad a  
performance, in terms of output, failed to prevent the surge in  
unemployment. One would have expected supporters of the free market to  
conclude that the US economy and, particularly, its labour market,  
remains flexible, under this “socialist” president. One would have  
expected them to conclude, too, that more stimulus was needed. After  
all, it was quite modest: fiscal stimulus was less than 6 per cent of  
GDP and so accounts for less than a fifth of the cumulative deficits  
of 2009, 2010 and 2011, while monetary policy is caught in a liquidity  
trap.

The truth is not that policy was foolhardy and failed, but that it was  
too timid and so could not succeed. A big mistake was the failure to  
address the labour market directly, perhaps by temporarily slashing  
payroll taxation. There were other mistakes, too: the effort to reduce  
the overhang of household debt should have been stronger.

Yet even the hated Tarp looks remarkably effective in hindsight. As Mr  
Summers noted, its cost to the taxpayer looks likely to be ⅓ per cent  
of GDP. This is far less than the cost of the bail-out of the savings  
and loans institutions in the 1980s. It is also far less than the  
direct fiscal cost of comparable crises elsewhere.

Unfortunately, the Republicans have succeeded in persuading a large  
enough portion of the American public that if the patient had been  
left entirely alone, he would be in perfect health today. This is  
surely a fairy story. But voters naturally pay little attention to  
calamities averted. They focus only on how far experience falls short  
of what they desire. Mr Obama gains no credit for the former and much  
blame for the latter. His aspirational rhetoric no doubt worsened the  
disappointment.

The president’s willingness to ask for too little was, it turns out,  
a huge strategic error. It allows his opponents to argue that the  
Democrats had what they wanted, which then failed. If the president  
had failed to get what he demanded, he could argue that the outcome  
was not his fault. With a political stalemate expected, further action  
will now be blocked. A lost decade seems quite likely. That would be a  
calamity for the US – and the world.

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