Obama Trusted the Wrong Economists

He Should Have Listened to Romer

By MIKE WHITNEY

Barack Obama figured his reelection was in the bag. All he had to do was throw the progressive wing of his party a bone by pulling a few thousand troops out of Afghanistan, and then wait for the economy to gradually get stronger. What could be easier? 2012 would be a romp. He never thought that his chief economic advisor, Lawrence Summers, might have misjudged the severity of the downturn or that all those pesky "lefty" economists (Stiglitz, Baker, Reich, Thoma, Krugman etc) were right in pushing for more fiscal stimulus. After all, what did they know? Most of them would have supported another W.P.A. if they were given half a chance. Good luck slipping that by the deficit hawks in congress!  Besides Wall Street wants "austerity";  so austerity it is. You don't get reelected by rocking the boat.

But then something unexpected (at least by the White House) happened, the economy started turning South. Housing, manufacturing and consumer confidence all began to lose altitude at the worst possible time, just when the GOP started hammering away the slowness of the recovery. So, when the BLS released its report last Friday, showing that US payrolls had risen by a paltry 54,000 and the unemployment rate climbed back to 9.1 percent, the Obama team went into full panic-mode.  They finally realized that the economy was  badly listing and that Obama might not be reelected after all. Horrors. That's all it took to put the wheels in motion.

In a matter of hours, Obama completely reversed his position on fiscal stimulus and began reciting from the Christina Romer songbook. Romer, you may recall, was the president's former economic advisor who Obama threw under the bus because she kept pushing for more fiscal stimulus. In an article in the Washington Post, Romer explained why she "decided to spend more time with her family". Here's an excerpt:

"There was a definite split among the economics team about whether we should push for more fiscal stimulus, or switch our focus to the deficit. A number of us tried to make the case that more action was desperately needed and would be effective. Normally, meetings with the President were very friendly and free-wheeling. He likes to hear both sides of an issue argued passionately. But, about the fourth time we had the same argument over more stimulus in front of him, he had clearly had enough. As luck would have it, the next day, a reporter asked him if he ever lost his temper. He replied, “Yes, I let my economics team have it just yesterday.”...("Christina Romer looks back — and forward", Washington Post)

Obama had been pushing hard to trim the deficits while shrugging off warnings that the economy was still "too weak".  He opined that  "At a time when American families are tightening their belts, government should be tightening their belt, too." Here's a clip from the Financial Times that illustrates how committed Obama was to austerity:

"US President Barack Obama warned that the US economy could head into a “double-dip recession” unless urgent steps were taken to rein in mounting public debt.

“The US president’s remarks... marked his strongest language yet on the necessity of putting public finances back on a sound footing.

“‘It is important though to recognize if we keep on adding to the debt, even in the midst of this recovery, that at some point, people could lose confidence in the US economy in a double-dip recession, ’said Mr Obama." (Financial Times)

So, why is this worth mentioning?

Well, because Obama has not only done a 180 on austerity, but he's also stolen Romer's basic fiscal plan, which just adds insult to injury.  This is from Firedog Lake:

"President Barack Obama gave a small hint today about what, if anything, he plans to do about unacceptably high unemployment and slow economic growth over the next year. In a press event with German Chancellor Angela Merkel, Obama was asked about the economy. His answer is worth repeating....

(Obama) ‘“And as long as there are some folks out there who are unemployed, looking for work, then every morning when I wake up, I’m going to be thinking about how we can get them back to work.Some of the steps that we took during the lame duck session, the payroll tax, the extension of unemployment insurance, the investment in — or the tax breaks for business investment in plants and equipment — all those things have helped. And one of the things that I’m going to be interested in exploring with the members of both parties in Congress is how do we continue some of these policies to make sure that we get this recovery up and running in a robust way.’" ("Obama Floats Extending Payroll Tax Cut, Unemployment Benefits", Firedog Lake)

The plan has "Romer" written all over it. No doubt Obama will add Romer's Number 1 recommendation to the package in due time-- a cut in the employer side of the payroll tax--just to add a bit of salt to the wound.  Romer explains how it works in the same Washington Post op-ed:

"My particular favorite additional short-run stimulus would be a cut in the employer side of the payroll tax. Congress cut the payroll tax for employees in the budget compromise last December. A similar cut in what firms have to contribute for payroll taxes would make hiring workers cheaper and would therefore likely be particularly helpful for employment growth. This is just a broader and simpler version of the new jobs tax credit that I thought would be a very good idea back in 2009. And, it has the virtue of being something that I suspect policymakers on both sides of the aisle could support." ("Christina Romer looks back — and forward", Washington Post)

So how did President Chameleon get into this mess? 

Obama simply trusted his Wall Street mentors Summers, Bernanke, and Geithner, the trio that sabotaged the recovery while making sure the banks and speculators got as much liquidity (and bailouts) as they needed. Also, Fed chairman Ben Bernanke misled Obama about the stimulative effects of his experimental bond purchasing program (QE2) which neither lowered interest rates, nor increased GDP, nor boosted employment, nor sparked another credit expansion. The only thing the policy did was send gas and food prices skyrocketing which further constrained consumer spending. All told, QE2 was a bust. Even so, Bernanke has continued to use his position as Central Bank boss to promote his own political agenda. Here's a clip from yesterday's speech where Bernanke makes the case for even more austerity:

"The prospect of increasing fiscal drag on the recovery highlights one of the many difficult tradeoffs faced by fiscal policymakers: If the nation is to have a healthy economic future, policymakers urgently need to put the federal government's finances on a sustainable trajectory....The solution to this dilemma, I believe, lies in recognizing that our nation's fiscal problems are inherently long-term in nature. Consequently, the appropriate response is to move quickly to enact a credible, long-term plan for fiscal consolidation. By taking decisions today that lead to fiscal consolidation over a longer horizon, policymakers can avoid a sudden fiscal contraction that could put the recovery at risk."

If Obama had listened to Romer instead of Bernanke he wouldn't be in the pickle he's in today. Instead, he's going to be blasted as a hypocrite for doing a volte-face on fiscal stimulus and the leaving the austerity bandwagon by the side of the road. None of this will help to restore confidence in the recovery nor improve his prospects for reelection.

Obama Economic Team Bails, System Fails to Generate Jobs

Are the Causes, Um, 'Structural'?
by Danny Schechter | Monday, August 9, 2010 by CommonDreams.org

In Washington, the Obama economic team has sprung a leak. First, Budget Director Peter Orszag, the calculating numbers savant, bailed. And now, "distinguished" economist Christina Romer, the only woman in that inner circle boys club has quit too. (Would you want to be around Larry Summers all day long?)

Why this crew of losers wasn't fired eludes me despite their claims of having prevented a worse collapse. No doubt, they know more than they are saying, and, perhaps, now that they are no longer selling, they may be willing to do some telling on just how bad it is and what went wrong.

Who's next? Could Ben Bernanke be leaving the Fed for Fed-Ex?

Economist Max Wolfe has none of the political restraints of power. At the news of another 131, 000 jobs gone, at all the talk of permanent unemployment as the "new normal," he sighed with a tinge of optimism:

"We have been in the present labor market swoon since December 2007. We are 30 months into the process. Nearly everything is not getting worse fast. Most economic indicators have seen slow, uneven progress. We are a weary nation and hope, is running low. All lethality is dosage and we have received a massive dosage- an overdose- of bad economic news since the winter of 2007. Things are getting ever so slightly less bad in the aggregate.

"The sheriffs of this rough economic neighborhood are running low and out of ammunition. The populace is fed up. Our Sheriffs are The Treasury and The Fed and they have spent, cut taxes, slashed rates, bought securities and ballooned their balance sheets. They have made the bad less worse, but not appreciable better enough for many. All that economic toxin still pumps the blood of this economy. Now, the state is having a contractionary direct impact on employment."

"Contractionary"? I am a first-time contractionary word user so I will leave it to Stephen Colbert to take that term apart, but it can't be a good thing.

The bigger surprise is being buried. The more serious problem is more systemic and rooted in the structure of our economy. These structural problems used to be referenced to show how deep the rot goes and why more fundamental reforms are needed, but now, as Paul Krugman has argued, this very idea is now being used to encourage acceptance of the problems because they are beyond repair, as in, "we can't change that because it is, so, um, 'structural'!") Thus, the existing power relations can't be questioned because they are the existing power relations

Makes sense, doesn't it?

Part of the problem is that while the livelihoods of workers and homeowners are sinking, the economic and political elite is doing just fine, as the Automatic Earth Website explains:

"Perhaps what we witness is an ongoing and deepening chasm that divides the world of finance and politics on the one hand and the world of everyday people on the other, as Rasmussen Reports indicates: 67% of Political Class Say U.S. Heading in Right Direction, 84% of Mainstream Disagrees. This chasm was greatly facilitated by governments relying on policies based on the notion that too-big-to-fail -financial- institutions needed to be bailed out at any cost. Later in the year, as a direct consequence of these policies, we will see another round of insane banker and trader bonuses, just as citizens' sentiments and incomes fall, and unemployment and poverty keep rising."

When you create and enable a casino economy, the public becomes a player too, taking risks they shouldn't at the behest of bankers and finance companies who assure them all is fine.

Last week, Countrywide, the country's mortgage fraud factory, reached a settlement with the SEC for more than Goldman Sachs settled its last complaint for a whopping $600 million. Their shark-in-chief, Anthony Mozillo, still facing a criminal investigation, later said he was pleased when the federal regulators admitted that the investors were not defrauded, because they knew what kind of projects they were funding. How reassuring!

So the circle of complicity widens. We now learn that the companies and individuals that invested in the subprime/subcrime mortgages KNEW people were being ripped off but did it anyway because there was so much money to be made.

And because security laws only protect investors, who were defrauded, many have no case. What about the borrowers, the homeowners now facing foreclosure? They are apparently not worthy of protection. This is comparable to the Madoff investors who profited in his illegal scheme and knew his returns were too good to be true but shoveled money to him anyway. They became partners in the ponzi, not just "victims" trying to be made whole.

Is anything changing? The banks say they will not change the way they finance mortgages so it is still buyer beware. The Wall Street Journal reports another instant crash of the markets is possible. And General Motors that was down and on the way out is back thanks to the government's largesse but sniping at its rescuers, insisting an end to government ownership would be good for their image and "employee morale." Huh?

"We want the government out period," blusters GM's ungrateful CEO Edward E. Whitacre Jr. This same company recently spent $3.5 billion buying a new subprime lending company to replace GMAC, the GM lender whose bad loans sunk GM. On top of that, these geniuses just produced The Volt electric car that sells for $40,000, hardly a brilliant move in this economy. Of course they blame all their problems on the government, never themselves.

Like so many others, they seem to be banging on Obama, everyone's target of choice. If that's your inclination, let's blame him also for what he has not done.

He hasn't led a consistent push back against Wall Street, perhaps because he hopes in vain that big business will create private sector jobs and wants to show naysayers how pro-business he really is. This has turned him into an inversion of FDR.

As Ezra Klein of the Washington Post observed:

"The reality is that America's supposedly anti-business president has led an extremely pro-business recovery. Businesses are sitting on about $2 trillion in cash reserves. Business spending jumped 20 percent last quarter, and is up by 13 percent against 2009. The Obama administration has dropped taxes for small businesses and big ones alike."

So much for that canard.

Is there anything to be done? There is no shortage of proposals for jobs programs and taxes on transactions, for tougher rules on derivatives, and imposed compensation limits. In most cases the US, with pressure from Wall Street and its political allies, has opted for easily maneuvered around and malleable regulations.

One small reform has been proposed by the much-maligned Ralph Nader for those of us who live in the appropriately named "Empire State," one that currently shelters a Wall Street where hedge fund managers make billions.

Nader notes, "Low-moderate and middle-income New Yorkers already pay a higher percentage of family income in state and local taxes than do the richest one percent of New Yorkers!

"Surprisingly, there is a simple way to eliminate the state deficit and prevent tens of thousands of layoffs and large service cutbacks.

What most New Yorkers do not know is that for about a century there has been a state stock transfer tax on purchases of securities. This year, this tax, similar to ones imposed in 30 other countries, will amount to about $16 billion. Amazingly, since 1979, this tax has been instantly rebated by New York State back to the brokers or clearinghouses who paid it. A 100% rebate every year for the bailed out industry that caused the recession and its immense human damage."

Putting a stop this sleazy practice could be as important in phasing out the Bush tax cuts but so far it's not on anyone's agenda, Dems, Repugs or Media.

Maybe because they think of it as "structural."

Are We In a Recession or Not?

by Matt Taibbi | Sunday, August 8, 2010 by Rolling Stone

"Everyone agrees that the recession is over." - Larry Summers, director of the National Economic Council

"Of course not." - Outgoing Council of Economic Advisers Chairwoman Christina Romer, when asked if the recession was over. 

The two senior White House economic advisers made their comments on the same day.

It's getting harder and harder to read the tea leaves with regard to Barack Obama's economic team, which in recent weeks has seen two fairly major resignations - the above-quoted Council of Economic Advisers chairwoman Romer, and budget director Pete Orszag, two very different people with different views on the economy.

Romer is a former Berkeley professor who was brought into the White House for two reasons; one, she was an expert on the Great Depression, which was looking extremely relevant at the time of Obama's election, and two, she lacks a Y chromosome, which was reportedly the problem with Chicago professor and onetime close Obama confidante Austan Goolsbee, the original favorite for the CEA job. Orszag meanwhile is a Bob Rubin disciple, a former head of Rubin's Hamilton Project think tank who often captained the deficit-reduction effort within the Obama White House.

One thing both of these people had in common was that neither of them got along with Larry Summers. In Orszag's case this reportedly was a personal thing, while in Romer's case it was more political, although her lack of a Y chromosome may also have played a role (Summers's famous dictum that "women lack the ability to succeed at the highest levels of math and science" is looming large now that Larry Fishface seems to have squeezed out one of the highest-ranking women in the Obama White House).

Most of the DC chatter class seems to have interpreted the dual resignations as a sign of the ascendant power of the Summers-Geithner axis within the Obama White House. This is a variation of the same theme that I kept hearing when I was in Washington last month covering the Dodd-Frank bill; that while the Geithner/Summers/Rubin clan briefly fell out of sight after Scott Brown's big win last winter, and relative liberals like Paul Volcker and Romer briefly got more room to push their views with Obama, that situation had reversed itself by late spring and Geithner/Summers once again had the presidential ear on economic matters more or less exclusively.

"[Summers] has kept Romer, [Austin] Goolsbee, [Paul] Volcker all outside the inner policy circle. For Romer, why stay under these conditions, when she would lose her tenure if she stayed for more than two years?" was how one unnamed White House advisor put it this week.

To me the interesting thing about Christina Romer's story is that she decided to leave at exactly the same time a horrific piece of news about jobless claims came out. The country lost 131,000 jobs in July, a much bigger number than anyone expected, and the key reason seems to be that the Obama administration made faulty calculations in its effort to boost unemployment via the government till - the end of Census jobs was apparently a major killer in the recent job stats. "The private sector is still hobbled," said Robert A. Dye, senior economist at PNC Financial Services Group in Pittsburgh, "and certainly is not nearly strong enough to overcome the drain on the government side."

This is interesting because Romer was the Obama administration official who was loudest in her advocacy of a much bigger stimulus, with the idea that the administration's economic strategy should have been based around creating jobs and shaving unemployment as quickly as possible. "You don't get your budget deficit under control at a 10 percent unemployment rate," she said last year. The final stimulus number ended up being $787 billion; Romer reportedly wanted that number at $1.2 trillion and wanted the job creation efforts to be more elaborate and focused on long-term, permanent positions as opposed to stat-juking temp gigs like the Census.

In the end the most telling thing about Romer's resignation is that she was really the only person close to Obama's economic inner circle who isn't a former Clintonite or Rubinite and isn't either a former Wall Street banker or, like Geithner, a public-sector tool of Wall Street. (Even Orszag's replacement, Jacob Lew, is a former Citigroup official who worked in the Clinton White House with Rubin). And the reason that is significant is because the economic data being presented to us these days suggests two completely different narratives, depending on your point of view.

If you're on Wall Street, and you've seen the stock markets recover and the banks go from virtual insolvency two years ago back to record profit numbers now, then like Summers you'll think "everybody agrees" that the recession is over.

If however you're just some schmuck looking for a job somewhere outside the Beltway and/or lower Manhattan, and you're noticing that the only easy job openings this year were temp gig taking census surveys (and even those have dried up), then your view of things is going to be no way the recession has ended, "of course not."

In economics as in all other things, it all depends on how you look at things - and if everyone in the Obama White House is looking at things from the same vantage point, that sucks and is dangerous. Not that Christina Romer was a savior by any stretch of the imagination (one source of mine called her "totally mediocre"), but she was at least not completely a Wall Street pod job - she was pretty much the last inner-circle adviser who wasn't, and now she's gone, for whatever that's worth.