Wednesday, April 29, 2009

Is Obama being reckless?

This article appeared in the Star newspaper on Tuesday February 10, 2009

Is Obama being reckless?


The president’s proposed stimulus package may worsen US’ indebtedness

LESS than a week after the departure of arguably the worst president of the US, the new president appointed Tim Geithner as his new Treasury Secretary.
During the swearing-in ceremony, Barack Obama expressed his optimism that his appointee will be able to solve the current economic crisis.
His optimism is based on the fact that not only is Geithner very experienced, being a past president of the Federal Reserve Bank of New York, he is also being assisted by very experienced economists including former Treasury Secretary Larry Summers.
Many Americans and probably many more people around the world are hoping that Obama’s optimism will prove to be justified.
They are sadly oblivious to the fact that if Geithner is able to solve the current crisis, it will simply mean that Geithner has only succeeded in postponing the full brunt of the crisis to a future period.
It will also mean that Geithner has prepared for them or for their children pain and suffering on a much bigger scale in that future period.
Obama’s expectation of Geithner is actually very monumental.
Geithner is not only expected to solve the current economic problem but he is also expected to come up with a mechanism to prevent the problem from recurring.
Obama’s discussions with his economic advisory team must have been cursory so far.
Otherwise he would have been informed that no economist has ever dared to promise that his or her suggested policies will prevent future economic crises from happening again, not even Nobel laureates in economics.
Actually the step needed to solve an economic crisis is not rocket science at all.
Every one who has studied basic macro economics knows the concept of “economic cycle”.
As the name implies, the economy will always go through periods of ups and downs.
In other words, regardless of how bad the economy is, it will eventually bottom out and slowly go through a recovery period.
After all, at the core of all economic crises, the problem is over-indebtedness or over-borrowing.
All Geithner needs to do is to wait for the over-indebted firms or individuals to disappear from the system and then allow new players to come into the economy and soon it will slowly move.
However, the problem facing Obama is that the American public is impatient and expects him to solve the problem before he seeks re-election in 2012.
One very important aspect of the US economy is its size. It is HUGE.
As a result it behaves not very differently from a huge ocean-liner. To make it change direction requires lots of effort and resources, especially if the change needs to be done quickly.
For Obama, he has no choice but show the American public, in less than four years, that the economy is picking up.
Otherwise, his name will appear alongside Jimmy Carter, George Bush Sr and others on the list of one-term presidents, a prospect that he obviously will not relish.
And that is exactly the reason why from an economic perspective, I foresee Obama is going to be the most reckless president in the history of the United States.
He has pushed for Congress’ approval for his US$825bil stimulus package.
The problem is, as stated earlier, the US economy is huge and therefore nobody really knows whether that amount is enough or not.
What we do know is that since December 2007 till now, the US government has spent US$3.3 trillion of the allocated US$7.8 trillion.
Unfortunately, so far there has been no discernible positive outcome.
In fact, the situation is getting worse.
On the same day that Geithner was sworn in, CNN Money reported announcements of over 71,400 job cuts by US firms.
Clearly if Obama is serious about being re-elected in four years, he needs to spend more – much more than what has been announced.
Just as nobody really knows when the economy is going to rebound, nobody also really knows the total amount that needs to be spent to turn the US economy around.
One thing is for certain, it is going to be massive.
As is well known, the current problem of economic crisis is mainly due to over-indebtedness of companies and individuals. This indebtedness is yet to be resolved.
Therefore, the huge stimulus package being rolled out by Obama in order to secure his re-election is going to worsen the indebtedness situation.
Moreover this time it is going to involve both the public and private sectors.
By the time the US economy turns around due to the efforts of Obama’s administration, the amount of debt hanging around each taxpayers’ neck will be too scary to imagine.
The United States at the moment is being choked by a huge amount of indebtedness and that is why it is suffocating.
By the time all spending has been undertaken to get the US economy to move, American taxpayers will be completely wrapped up by debt to the point of being “mummified”.
The truth of the matter is, as long as the debt-based system does not change, there is no solution to the problem.
Henry Paulson, the previous Treasury Secretary, left his post without solving the problem even though he tried his level best.
But he should be happy because he will not be remembered as the person who recklessly worsened the US economic crisis by increasing the debt burden of the US taxpayers to unmanageable levels.
That dubious honour is likely going to be Geithner’s.
If Geithner is lucky, the honour may go to the person who appointed him.

Dr Mohd Nazari Ismail is a professor at the Faculty of Business and Accounting, Universiti Malaya. His latest book is “The Globalisation Debate: A Case of Barking up the Wrong Tree” published by University of Malaya Press.

1 comment:

  1. I might be the first to comment but anyway;

    Stimulus is good but the abolishment of trade barriers is better. International barriers be it trade or real investment should be destroyed. As pointed out by Joe Stiglitz recently-

    Excessive savings of Asia which had brought about the insufficient global demand for growth, had actually led to lax monetary policies in the West, particularly the U.S.

    Now, suppose that Stiglitz’s hypothesis is completely valid, wouldn’t free trade settle everything? In the spirit of Milton Friedman, if there were no trade and investment barriers on the U.S. side, wouldn’t China’s rich would want to ‘own’ some profiting U.S. firms? Now, suppose that the Asia’s rich are owning and holding the U.S. giants like GM, AIG, etc., wouldn’t their monies be better looked after than letting others to ‘manage’ their monies? Definitely the agency problem could be drastically reduced.

    Now, the agency problem should be looked at the global level. China putting money in US and US not only mismanaged the money but also make China poorer and grow slower. Suppose again, there is absolute free trade, with cross-ownerships internationally, wouldn’t there be better management of funds?

    As Friedman once said “We spend our money better than others spend our money”.

    In fact this argument is very similar to that of the portfolio diversification argument raised by Mundell in support for EMU. He basically says that in a monetary union, every member holds claims on each other’s real goods since there is only one common currency. Of course there is also pooled reserve. Hence, in the presence of asymmetric shocks, the costs of adjusting is spread across all the countries.

    Comments welcome.