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.
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.
Update
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.
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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?"