Thursday, November 20, 2008

Obama is checkmated by the past

Holman Jenkins has a great article today in the WSJ which reminds us that the recent election was chock-full of delicious ironies. Obama campaigned on an ambitious platform to extend the bounties of government to the masses in the grand tradition of FDR's New Deal (e.g., universal healthcare, income redistribution from rich to poor, discretionary monetary and fiscal policy to smooth out the vicissitudes of the business cycle, government-funded technology to save the planet, massive public works projects to upgrade our infrastructure, union-protected jobs to keep greedy capitalists at bay) but he is now faced with the disastrous consequences of those very same programs.

The origins of the crisis we're living through can be traced back to a variety of government-led or -sanctioned intervention in free markets: housing and mortgage subsidies which inflated property values and facilitated excessive leverage; Freddie and Fannie themselves, which used their taxpayer backing to assume $1 trillion in debt; Federal Reserve manipulation of interest rates, which led to a highly unstable dollar and asset prices; a highly progressive tax system which left federal finances hostage to cyclical tendencies in the economy; and parasitic unions that have all but killed their Detroit automaker hosts. To name just a few.

Obama is not going to be able to implement his agenda, because he is going to be busy for quite some time cleaning up the mess caused by the mistakes that his own agenda promised to repeat. We're not at risk of a massive expansion of government, we're already the victims of the expansions that began in the past. That's the silver lining to this absolutely miserable market. Some excerpts from the article:
Mr. Obama won't be building a legacy as the new FDR, but cleaning up after the last one.

Fannie Mae was a New Deal creation.

The UAW was born in 1935. For decades the UAW steadily traded away domestic auto market-share to imports and transplants to keep its aging membership toiling away toward their golden pensions and collecting wages and benefits twice those of their competitors. It worked for a while . . .

Fannie and its twin, Freddie Mac, have already come back for a second helping of taxpayer money as their once-profitable business model devolves into a politically directed subsidy machine for propping up home prices and delaying foreclosures. Their next meltdown, in government hands, is all but written in the cards.

AIG, an otherwise healthy insurance company that went bust betting on housing debt, has already consumed taxpayer loans and capital injections nearly as big as AIG's $200 billion market cap when it was one of the world's most admired firms. AIG still has a valuable insurance business, but ignoramuses in Congress and the press are busy destroying it. It will take years for the government to get AIG off its hands, and there likely won't be much value left for taxpayers when it finally does.

But the really giant sucking sound is the auto sector, getting ready to gobble up whatever hopes Mr. Obama might have had for an ambitious, forward-looking presidency. He and Nancy Pelosi naturally insist that any "bailout" must hit multiple bogies. They want UAW jobs to be preserved. They want the shibboleth of energy independence advanced. They want "green" cars to please the Tom Friedmans of the world.

All this makes sense to a politician, but not to any practical person, who knows that multiple bogies are bound to be conflicting bogies.

Those giant legacies of existing New Dealism known as Social Security and Medicare worked for a while too, but now their expected revenues are (in present value) about $99.2 trillion short of the expected outlays required to assure present and future workers their promised comfort in retirement.

Mr. Obama envisioned himself extending FDR's work. He may end up finishing George Bush's.

1 comment:

Mark Gerber said...

Thanks for pointing out these interesting articles.

I have often felt we made a fundamental mistake by not unwinding most of the New Deal programs after we recovered from the Great Depression. Then, we would be able to bring back similar, improved programs when new secular economic crisis emerged, such as now (probably). Instead, these programs grew into monsters that I believe are making this downturn more difficult and will continue to weigh us down even further. Also, our national debt has grown too large during good times (I know you disagree with this) further restricting our options during difficult downturns, such as now.

It's a shame that rugged individualism faded from the USA. While it has been fading here, it has been growing in China. I don't know where we go from here, but I believe 2007/8 will be epochal turning point in the history books for this country. On a qualitative level, I think the markets are reflecting the uncertainty of our transition.