Bird that Sings

December 15, 2010

The Voodoo Economist: Obama+Clinton=Politics-Policy

As Karl Marx once said, History repeats itself, first as tragedy, second as farce.

It wasn’t so surprising then, to see old Bill Clinton, aka the ghost of Christmas past, back at the White House the other day with a ruefully smiling, but sick looking, Barack Obama at his side.

Clinton had come to offer his support for Obama as the latter attempts to triangulate with the Republicans over the expiration of the Bush Tax cuts.

Actually the only real surprise of the day was that the other of yesterday’s men, former UK Prime Minister Tony Blair, didn’t join them for an impromptu symposium on how to define yourself against the base of your own party.

In the 90′s, both Clinton and Blair played this game to great political advantage, but of course Clinton and Blair had the open range of the great bull market to ride back then.

Obama doesn’t enjoy the same economic wind at his back and that’s why his tax deal with the Republicans is, at best, a parody of Clinton’s sell-out on Welfare Reform.

The Obamaites claim that the deal to extend all the Bush cuts, which also includes the extension of unemployment benefits for those out of work for over ninety-nine weeks, will serve as a backdoor economic stimulus. They add that these measures, along with the Federal Reserve’s six hundred billion dollar purchase of Treasury Bills, aka “Quantitative Easing II” will flood the economy with liquidity, stirring up a Kool-Aid of instant demand, which will in turn stimulate hiring.

Maybe, but as with Clinton and Blair, there is another agenda at work.

On the left hand, the deal with the Republicans is meant to further isolate grassroots Democratic activists increasingly bitter with Obama, even while lining up the support of liberal, deficit spend-your-way-out-of-the-slump Keynesian Economists (and those who love them).

Meanwhile on the right, it’s meant to provoke the conservative tending, cut spending, balance-the-budget-now crowd into attacking House Republicans for making the deficit exploding deal with Obama in the first place.

This is certainly a higher level of triangulation than we’ve seen before and David Axelrod and the Obama political team must be pretty happy with themselves at the moment.

The politics are smart. It’s the policy that’s a disaster.

Here at the Institute, we admittedly feel the crisis a bit more acutely than mainstream academic economists but to us, the flaw in the Administration’s neo-Keynesian stimulus argument is readily apparent. Simply put, all stimulus is not equal.

The Fed’s QE II is a poster child for what not to do in the aftermath of a financial crisis: that is, re-inflate a bubble in the stock market. This is the real purpose of the Fed’s buying up of debt; to reduce the return on Treasuries and hence make equities look like a better deal.

While extending the Bush middle class tax cuts is obviously a good idea, extending the tax cuts for the Rich is not only morally and politically reprehensible, it’s terrible economics.

As Robert Reich and others(see “Which Side are You On/Dec ’07) have pointed out, our current economic problems are not cyclical but structural.

For thirty years, the blue-collar middle class has been downsized and seen its’ jobs shipped overseas.  All through the 90′s and into the first decade of the new century, working and middle class Americans went deeper and deeper into debt trying to keep their accustomed standard of living even as the good jobs went a glimmering.

The financial crash of ’07-’08 ended the debt game, but it had already done it’s work, effectively transferring the wealth of a downsized middle class to the new financial elites who prospered even as the broader National economy was hollowed out.

To extend the Bush tax breaks for the Rich would not only reward the frankly criminal style of Capitalism that created the crisis, it would build onto the structural inequities that are collapsing the system. It would also saddle the country with unsustainable fiscal deficits as a far as the eye can see.

The Administration’s notion that you can further exacerbate the real causes of the crisis and still claim your policies as beneficial is either madness or magical thinking.

In either case, Voodoo Economists believe that House Democrats need to show Obama some tough love. Vote down the Obama deal to extend the Bush tax cuts for the Rich. And somebody slap him, please.

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