Worse than Hoover


It’s actually a bit over the top and unfair to compare Barack Obama with Herbert Hoover – unfair that is, to the memory of Herbert Hoover.  The received image of the latter is the dour, technocrat who looked on with indifference while the country went to pieces.  This is actually an exaggeration.  As Kevin Baker convincingly argued in his Harper’s Magazine piece, “Barack Hoover Obama”, President Hoover did try to organize national, voluntary efforts to hire the unemployed, provide charity, and sought to create a private banking pool. When these efforts collapsed or fell short, he started a dozen Home Loan Discount Banks to help individuals refinance their mortgages and save their homes.  Indeed, the Reconstruction Finance Corporation, which became famous for its exploits under FDR and Jesse Jones, was actually created by Hoover.  Often tarred with the liquidationist philosophy of his Treasury Secretary, the establishment of the RFC was, as Baker suggested, “a direct rebuttal to Andrew Mellon’s prescription of creative destruction. Rather than liquidating banks, railroads, and agricultural cooperatives, the RFC would lend them money to stay afloat.”
Hoover’s tragedy lay in the fact that whilst he recognized the deficiencies of the prevailing neo-classical laissez-faire nostrums of his day, he could not ultimately break with them and accept that the economic tenets which he had grown up with were deficient in terms of dealing with the huge unemployment challenges posed by the Great Depression.  By contrast, Roosevelt was himself instinctively a fiscal conservative throughout much of the early stages of his political career (and campaigned as a gold standard man during the election of 1932), but ultimately had the vision (or, at least, excellent political instincts) to recognize the need to cut himself off from the dogma of the past and try something new in a persistent spirit of experimentation. Not everything FDR did worked, but his lack of rigid ideology and his bold spirit of economic experimentation ultimately did much to reduce the scourge of unemployment, even though such policies brought him into significant conflict with the economic royalists of his day.

Barack Obama’s style of governing largely reflects an acceptance of the status quo.   His “economic experts” also reflects this preference.  As Baker argued, “it’s as if, after winning election in 1932, FDR had brought Andrew Mellon back to the Treasury.”

To the extent that he displays any kind of radicalism, it is to roll back the frontiers of the New Deal and Great Society, in effect gutting the Democratic Party of its core social legacy.  This assertion will no doubt inflame the diminishing Obama supporters, who insist the president would never cut Social Security or Medicare, that he’s merely been exploring every possible route to a deal with the GOP.  But the evidence increasingly suggests otherwise.

Perhaps, as Salon.com’s Joan Walsh suggests, the president sincerely believes that the intense polarization of American politics isn’t merely a symptom of our problems but a problem in itself – “and thus compromise is not just a means to an end but an end in itself, to try to create a safe harbor for people to reach some new common ground”.   One finds further support for this view within Barack Obama’s own writings. A major theme of his 2006 book The Audacity of Hope is impatience with “the smallness of our politics” and its “partisanship and acrimony.” He expresses frustration at how “the tumult of the sixties and the subsequent backlash continues to drive our political discourse.”

There appears little question, then, that the President values compromise, indeed appears to enshrine it as the apex of all great Presidencies (ironically citing Lincoln’s compromise on slavery as a perfect illustration of this ideal).  But the problem with Walsh’s supposition is that the President’s accommodation with his political enemies, his apparent infatuation with a “third way”, suggests that he is being forced to compromise on a particular set of ideals and principles which he has hitherto embraced dearly.

But what is this President’s ideal? The only time in our national discussions where Mr. Obama has evinced any kind of passion has been during the debt ceiling negotiations.  He has, since the inception of his presidency, elevated budget deficit reductions and the “reform” of entitlements as major transformational goals of his Presidency (rather than seeing deficit reduction as a by-product of economic growth).  As early as January 2009, before his inauguration (but after the election, of course), then President-elect Obama pledged to shape a new Social Security and Medicare “bargain” with the American people, saying that the nation’s long-term economic recovery could not be attained unless the government finally got control over its most costly entitlement programs (http://www.washingtonpost.com/wp-dyn/content/article/2009/01/15/AR2009011504114.html)

In other words, Obama has been on about this since the inception of his Presidency.  Recall that it was Barack Obama, NOT the GOP, who first raised the issue of cutting entitlements via the Simpson-Bowles Commission.  The President has also parroted the line of most Wall Street economists as he has persistently characterized our budget deficits and government spending as “fiscally unsustainable” without ever seeking to define what that meant.  One of his earliest pledges was to cut the deficit in half by the end of his first term, in effect paying no heed to the economic context when he made that ridiculous assertion.

In essence, the debt ceiling dispute is not forcing a compromise on this President, but is instead is viewed by him as a golden opportunity to do what he’s always wanted to do. That also explains why he won’t ask for a clean vote on the debt ceiling, why he has ignored the coin seignorage option
, and why he has persistently avoided the gambit of challenging its constitutionality via the 14th amendment, even though his Democrat predecessor has already suggested that this is precisely what he would do: Bill Clinton asserted last week that he would use the constitutional option to raise the debt ceiling and dare Congress to stop him (http://www.nationalmemo.com/article/exclusive-former-president-bill-clinton-says-he-would-use-constitutional-option-raise-debt).

It also explains why President Obama remains infatuated by bigger and bigger “grand bargains”, which seem to take us further away from averting the immediate economic catastrophe potentially at hand, which is to say national default.  The Administration, then, is not going for a bipartisan compromise, but going for broke on something which the President apparent holds sacrosanct.  In reality, true compromise would start with the notion of a clean vote on the debt ceiling or, at the very least, a minimal series of spending cuts that would avert the immediate risk of a default, whilst creating less deflationary pressures.

Have you actually seen the President ever get angrier than he was at his press conference announcing the collapse of the negotiations on the debt ceiling extension? Not even on health care “reform” can we ever recall seeing Obama this engaged, and manifesting something close to real emotion as he has here.  That does suggest something beyond mere political calculation; it hints at core beliefs.

And to what end?  Neither he, nor the Congress appear to recognize the downward acceleration in GDP triggered when the spending limits are reached if the automatic stabilizers are disabled because they are no longer funded as a consequence of the debt ceiling limitations (again, a LEGAL, rather than operational constraint – the debt ceiling reflects an UNWILLINGNESS to pay, rather than an INABILITY to pay).
So spending will be further cut, debt deflation dynamics will intensify, sales will go down more, more jobs will be lost, and tax revenues will collapse even further.  Which will set the whole process off again:  more spending is cut, sales go down more, more jobs are lost, and tax revenues fall more, etc. etc. etc. until no one is left working.  All are radically underestimating the speed and extent of the subsequent damage.
Unlike President Hoover, who inherited the foundations of a huge credit bubble from the 1920s and found himself overwhelmed by it, this President is worse.  He is, through his actions, creating the conditions for a second Great Depression because of his misconceived belief that too much government spending “crowds out” private investment, and takes dollars out of the economy when it borrows. And therefore, goes the perverse logic, when the government stops borrowing to spend, the economy will have those dollars to replace the lost federal spending.
And so after the initial fall, Obama believes, it will all come back that much stronger.
Except, that as my friend Warren Mosler insists, he is dead wrong, and therefore we are all dead ducks.
As Warren notes, have you ever heard anybody say ‘I wish they’d pay off those Tsy bonds so I could get my money back and go buy something.’?
Of course not!  Notes Warren:
“Treasury borrowing gives dollars people have already decided to save a place to go. Dollars that came from deficit spending- dollars spent but not taxed. If they were spent and taxed, they’d be gone, not saved.
Treasury bonds provide a resting place for voluntary savings. They are bought voluntarily. They don’t ‘take’ anything away from anyone. 
For example, imaging two people, each with $1 million. One pays a $1 million tax. The other doesn’t get taxed and decides to buy $1 million in Treasury bonds.  Pretty obvious who’s better off, and who’s still solvent and consuming.”

Someone please explain this basic economic tenet to the President so that he can effect a genuine compromise, not a destructive “grand bargain” which will suck trillions of demand out of a still fragile economy. The predictable result is of his current stance is that, even as he claims to recognize the interlocking nature of the problems facing us and vows to “solve the problem” once and for all via a “grand bargain”, Obama is in fact tearing apart most of the foundations which were tentatively initiated under Hoover, but which came to full fruition under FDR.   If he continues down this ruinous path, $150 billion/month in spending will be cut.  Such economic thinking isn’t worthy of Mellon, let alone Herbert Hoover. 

10 Responses to Worse than Hoover

  1. It's even worse than this. I commented a Credit Writedowns a couple of days ago that this is not like 1937 but more like 1930. The global economy is unstable and all it will take is a shock to produce another Credit Anstalt moment.The US is unstable politically and still in the throes of both a financial and real crisis, trying to save the financial sector from massive losses. The EZ is imploding, trying to save the financial sector, chiefly of the core, from massive losses, as well. Japan is reeling from the disaster, compounding its decade long difficulties. China is contracting as it tries to cool inflation, which very often results in a hard landing. Australia and Canada arguably experiencing credit bubbles that have not yet popped. All it will take is a push to set the dominoes falling.Worse, unlike 1930, the US is now the world's only superpower and the world's largest economy and import market. If the US contracts, especially quickly, the result could be catastrophic globally. As Marshall points out, this is house of cards is teetering due to a combination of neoliberal misunderstanding, ideological rigidity, and political gridlock.As Michael Hudson has observed, the debt ceiling kerfuffle is a "staged crisis" just as TARP was, in order to blow a gib kiss to the finance capital at the expense of the real economy — productive capital and workers. The financial sector, including insurance, has long lusted to get their hands on the Big Three, especially — SS, Medicare and Medicaid. The big donors that control the political process are pushing for cuts to social spend and equal or greater cuts to taxes, based on the neoliberal mantra that government spending crowds out the private sector and lower taxes on "job producers" lift all boats. The manufactured crisis is being used to allow a Democratic president to do what a Republican president could not do, cut the Big Three and transfer more and more of the pot to economic rent.This is an increasingly dangerous situation. Political instability is increasing as well as economic inequality. Economic inequality now exceeds many Third World "banana republics." Historically, the greater the economic inequality, the greater the political and social instability.

  2. William Daley is calling the Shots

  3. How did we go from the Wall Street meltdown causing the great recession to all the sudden social security and medicare spending being the problem? Has anyone asked Pres. Obama that simple question?

  4. Which horseman of the Apocalypse would this be then?

  5. The focus here, like most media outlets, is too focused on obama. The president does not write legislation, he spends the majority of his time begging congress for scraps…in most cases the president will shift his ideals to the reality of congress. Obama is no exception…

  6. Mr. Hickey, are you saying that the reason Obama is angry about negotiations falling apart is not because he is passionate about debt reduction but because he is committed to giving the real power-brokers of America, the financial sector, what they want? Is the real grand bargain one Obama has made with our corporate masters that sells out the American people in return for his re-election?

  7. Anonymous 11:54 PM, I don't know what Mr. Hickey is thinking, but your summary certainly seems accurate. Obama truly appears to mistakenly believe that lowering unemployment is not important and anyway would cause inflation, and he seems to believe that keeping wages for ordinary workers (not CEOs) flat or even downward-tending is the only way for the US to remain "competitive," so it's likely he believes massive austerity, deflation, and umemployment will "discipline" workers in the long run and make them compete harder with each other and thus "win the future." Voters may have other ideas, though, so even lots of donations from the plutocracy may not get Obama reelected. He seems to be surrounded by purely non-specialist political advisors who are as delusional as he is.

  8. Joan Walsh suggests, … "to try to create a safe harbor for people to reach some new common ground”.Harbors, safe or otherwise, are not the place to find ground, even common ground. Indeed if you find it you've run aground.

  9. Obama must be part of a giant con. Social Security was solvent until 2037, but Obama says it is in crisis. The Simpson ploy just set the stage for this phony exchange going on now. Medicare is in crisis, this after Obamacare made the insurance companies the major players in future health care. This playing out as if they are working from a written script.In the third act the Grand Bargain will be unveiled and the curtain will go down on the American dream and the middle class.

  10. Please,please,please, would some REAL Democrat primary this sad excuse of a President?