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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

Obama's got problems « Previous | |Next »
November 4, 2010

The Obama administration has some problems on its hands after the Republicans gained control of the House in the historic mid-term elections. It faces a hostile opposition, and even if the Republicans do not have the power to move the Republican agenda forward, they will be determined to stop the Obama administration from doing some of the things it wants to do.

MoirA Obamawounded.jpg

Will the Democrats tack to the right? Will they stand and fight for Barack Obama's liberal agenda, including health reform? Or will they declare that liberalism, American style, is dead as the Blue Dog (conservative) Democrats want them to: ie. legislation serving corporate interests in order to perpetuate their own power. No doubt the corporate media's questions directed at the administration will become essentially Republican talking points reshaped as questions.

Will there be a "do-nothing Congress" engaged in "partisan bickering"? You bet. The compromise, common ground and working together talk will hit the wall of the unforgiving rhetoric and masculist aggression of movement conservatism that says it expresses the will of the people. No doubt the Democrats would have seen this Republican wave coming for a year or more and have prepared for it. Have they?

A gridlocked Congress isn't going to help address the America that has a sick economy, a looming lost decade, millions of people out of work and millions more fighting to keep their home. American infrastructure is crumbling and the nation lags in education and innovation. The normal course of action for a country in the position of the US (chronic current account deficits, high debt levels) is to depreciate the currency and/or increase import barriers, and renegotiate and restructure debt. The economy is going to dominate the next two years and the Presidential elections.

To survive Obama has to turn the economy around whilst fighting the Republicans. Can he do it, with an expansionary fiscal policy out the window ? I cannot see the economy had come roaring back to life as it did under Clinton in 1996. Unemployment will decline, although it might take decades because firms will have to start investing again when a lot of their current capital will have depreciated.

The Republicans want to reduce the government deficit and extend the Bush tax cuts that are due to expire on 31 December and will increase the deficit. They will duck the real business of cutting spending, having ring-fenced huge departments such as Defence; and they will oppose any high deficit job creation scheme in the name of downsizing big government and reducing the deficit. Republicans will try to paint Obama as a big-government liberal out of touch with America, who’s responsible for the continuing bad economy.

They Republicans don’t believe in stimulating economies. They think markets eventually clear — once the pain is sufficient.Their proposed austerity measures will put the US into a deflationary spiral.

With fiscal policy out, there are the weapons in the Federal Reserves limited arsenal.The QE2 package (the Fed will purchase $600 billion in Treasury securities through the end of the second quarter of 2011) may be modestly helpful in terms of making credit more available to small businesses, encouraging a little more refinancing to enable more spending, encouraging net exports, and breaking the deflationary psychology that may have been a factor in so much cash sitting idle.

With no strong sponsors for stimulus in Washington, the likelihood that the American economy will muddle along at high unemployment rates is now great. Quantitative easing by the Fed won’t do the trick alone. Lower rates are only one side of the equation, demand for loans and investment in a growing economy is the critical other side. However, that’s Keynesianism. ..and the deficit hawks are circling.

As Robert Reich puts it:

We know that when the private sector is unwilling or unable to spend and when consumers are under a huge debt load, government is the last remaining spender, at least in the short term. Long term deficits do have to be reduced, but unless we get the economy growing in the short term through government spending, we're all going to be experiencing a much longer and more painful so called recovery.

The Republicans will try to ensure that Obama wears the blame for the long slow painful recovery.

| Posted by Gary Sauer-Thompson at 8:46 AM | | Comments (10)


I'm not sure I see the point in following US politics in detail any more. They seem to have become a nation of armed and dangerous lunatics. The question now seems to be "How can we defend ourselves against this horror?"

As Digby notes at The Hangover 'Only 47% of the members of the Democratic “Blue Dog Coalition” won re-election. 95% of the members of the “Progressive Caucus” won re-election...'
So going more right wing may compound the problem. Paul

We can expect the “white right” to throw many a temper tantrum.

I dont see the US passing any climate change legislation to curb emissions from fossil fuels in the next few years.

Republican victories in Congress are likely to curb national alternative-energy policy but the Californian results look set to help the sector.

In America’s economic policy mix is a threat to the world at Vox Philippe Legrain says that instead of threatening others, the US should put its own house in order.

The Federal Reserve helped cause the mess we are in and is now sowing the seeds for the next crisis. Having wrecked the US economy by encouraging a huge debt-fuelled bubble to inflate, the Fed now finds itself unable to ensure recovery. Even with near-zero interest rates, indebted consumers don’t want to borrow and fragile banks don’t want to lend. Businesses that could generate growth are either starved of credit or too uncertain about the future to invest. As the Fed pumps out ever more money, banks invest it in higher-yielding Treasuries, pocketing easy profits and paying out ill-deserved bonuses, while much of it leaks out overseas. The net result? Hardly any additional US growth.

The US has big economic problems.

With a political hiatus before the swearing in of the new Congress in January, the efforts to invigorate the recovery are for now resting with the Federal Reserve. its policy is zero interest rates and $600 billion of Quantitative Easing (pumping more money into the financial system) to ease the liquidity trap.

The GOP's answers to resolving the ongoing economic crisis for ordinary Americans is that America just needs more of the same "medicine" that got them into the mess to start with--deregulation, privatization, tax cuts, and militarization.

The argument that is Americans need "more" deregulation and tax cuts to cure the problem caused by deregulation and tax cuts.

They will ensure that tax cuts are extend to the wealthy, who have garnered an increasingly huge share of the income stream from GDP growth, as they cut out the safety net from those whose wages have stagnated and declined because of their policies.

The GOP policies generally suggest that spending on military might is just dandy, but spending on the public infrastructure and safety net for the vulnerable is wasteful; that that tax cuts for the super-rich are fine, but earned income tax credits for the poorest are not; or that deregulation of banks will lead us to growth while regulation to include a consumer protection agency will hamper banks' ability to make profits.

The GOP agenda won't be likely to be enacted because of the gridlock.

According to Economists View the:

Republicans are likely to take advantage of the gridlock by introducing legislation they know won't pass, but scores political points by forcing Democrats to vote against it (this is something the Democrats don't so as well as Republicans). They'll then use the noise machine to talk about how terrible this is for America.

It will be one bill after another designed purely to bring about a political fight.

In QE2 is a dangerously blunt instrument in Business Spectator Mohamed El-Erian says that the Federal Reserve is virtually on its own among US policymakers in meaningfully trying to counter the sluggishness of the US economy and the stubbornly high unemployment. He adds:

Other government agencies are paralysed by real and perceived constraints, seemingly happy to retreat to the sidelines and let the Fed do all the heavy lifting. But liquidity injections and financial engineering are insufficient to deal with the challenges that the US faces. Without meaningful structural reforms, part of the Fed’s liquidity injection will leak right out of the US and result in yet another surge of capital flows to other countries.

Australia does not need this extra liquidity. Inflation is on the move and our exporters (excluding the miners) can ill afford further appreciation in the Australian dollar.

Australia--along with other nations---is wearing the cost of the US action.

The Federal Reserve is using QE to drive down the value of the dollar. A cheaper US dollar means increased American exports and more expensive imports for American consumers.