Obama May Want To Be A Foreign Policy President But It's The Economy That Will Make Or Break Him

We cheered when Daschle was caught cheating on his taxes and disqualified as health czar

Just as the Obama Administration is alienating core sectors of his electoral base, a poll comes out showing his honeymoon with the public is ending. A new NBC News/Wall Street Journal poll finds that Obama is still personally popular but that support for his economic policies is waning. For all his soaring rhetoric, he hasn't been effective in communicating an overall economic vision that the public embraces.

Nearly seven in 10 have serious reservations about the federal government’s ownership stake in General Motors. Almost 60 percent say that President Obama and Congress should worry more about keeping the deficit down-- even if that means it will take longer for the economy to recover. And fewer than half of Americans have confidence in the president’s policies to improve the economy.

An economic analysis in today's Financial Times may go a long way towards explaining American's discomfort-- as well as explaining why George Bush has finally worked up the nerve to pop his head up and denounce Obama. "I know it's going to be the private sector that leads this country out of the current economic times we're in," the former president said to applause from members of a local business group. "You can spend your money better than the government can spend your money."

The Financial Times piece, by Martin Wolf, compares the Great Depression and the current economic mess-- and comes to some harrowing conclusions. "The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted."

First, global industrial output tracks the decline in industrial output during the Great Depression horrifyingly closely. Within Europe, the decline in the industrial output of France and Italy has been worse than at this point in the 1930s, while that of the UK and Germany is much the same. The declines in the US and Canada are also close to those in the 1930s. But Japan’s industrial collapse has been far worse than in the 1930s, despite a very recent recovery.

Second, the collapse in the volume of world trade has been far worse than during the first year of the Great Depression. Indeed, the decline in world trade in the first year is equal to that in the first two years of the Great Depression. This is not because of protection, but because of collapsing demand for manufactures.

Third, despite the recent bounce, the decline in world stock markets is far bigger than in the corresponding period of the Great Depression.

The two authors sum up starkly: “Globally we are tracking or doing even worse than the Great Depression ... This is a Depression-sized event.”

Ironically, the study offers hope that the policies being followed, based on an application of the lessons espoused by economists John Maynard Keynes and Milton Friedman "suggests that the disaster will not be repeated... The question is whether today’s unprecedented stimulus will offset the effect of financial collapse and unprecedented accumulations of private sector debt in the US and elsewhere. If the former wins, we will soon see a positive deviation from the path of the Great Depression."

Robust private sector demand will return only once the balance sheets of over-indebted households, overborrowed businesses and undercapitalised financial sectors are repaired or when countries with high savings rates consume or invest more. None of this is likely to be quick. Indeed, it is far more likely to take years, given the extraordinary debt accumulations of the past decade. Over the past two quarters, for example, US households repaid just 3.1 per cent of their debt. Deleveraging is a lengthy process. Meanwhile, the federal government has become the only significant borrower. Similarly, the Chinese government can swiftly expand investment. But it is harder for policy to raise levels of consumption.

The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers-- and investors-- nervous.

Two opposing dangers arise. One is that the stimulus is withdrawn too soon, as happened in the 1930s and in Japan in the late 1990s. There will then be a relapse into recession, because the private sector is still unable, or unwilling, to spend. The other danger is that stimulus is withdrawn too late. That would lead to a loss of confidence in monetary stability worsened by concerns over the sustainability of public debt, particularly in the US, the provider of the world’s key currency. At the limit, soaring dollar prices of commodities and rising long-term interest rates on government bonds might put the US-- and world economies-- into a malign stagflation. Contrary to some alarmists, I see no signs of such a panic today. But it might happen.

It's a shame that the Republican Party and their media allies have put narrow partisan political gain way ahead of the national interest-- and have spent the last half year bitterly obstructing and sabotaging all the efforts Obama has made to clean up the mess they created. They created? Yes-- absolutely. Yesterday Megan McArdle pointed to a prescient column in the NY Times by Paul Krugman... from 2002. Read it closely:

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Last night I was talking with Digby about the health care debate. We both decided to write posts about Bart Stupak's subcommittee hearing yesterday with 3 Insurance Industry CEOs. Digby came up with something that should shock anyone who sees it-- the rationale for why conservatives oppose Obama's change agenda, including, of course, real health care reform. (Apparently corrupt lobbyist Tom Daschle is also opposing it now.) Digby's post includes a hint of how our health care dollars are spent and why the U.S. health care system is the least effective-- dollar for dollar-- in the industrialized world... and why the Medical-Industrial Complex and their bought out shills in Congress-- are fighting so hard to keep it in place. In the past 5 years $14.9 billion of what gets spent on health care has gone to pay CEOs. Just CEOs.

This afternoon the Baucus-Grassley Insurance Industry Bailout, which they're trying to pass off as health care reform, leaked. These two lowlife crooked politicians give people like Tom DeLay, Duke Cunningham and Mahmoud Ahmadinejad a bad name: less affordability, less Medicaid availability, strong individual mandate. And of course there is no public option. No bill would be better than this bill-- and I assume that is exactly what Baucus and Grassley are aiming for. Nancy Pelosi punched back immediately: "I have every confidence that we will have a public option coming out of the House of Representatives that will be one that is actuarially sound, administratively self sufficient, one that contributes, adds to competition, does not eliminate competition. It may not be called a public option, but it will be a level playing field, public option by whatever name, level playing field... I feel confident that we will and that what we put together will be reconcilable, conferenceable, whatever the word is, with the Senate of the United States. I feel very comfortable about it. And I believe that, for us to have substantial health care reform, this has to be a part of it. I’m so pleased that President Obama has been so positive in his statements, as well."