Obamanomics

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With this week's euphoria already fading fast (just take a look at the lastest employment fig's), it's time for the rubber to meet the road. Let's start by taking a look at how the new president's economic policies might play out.

Obama's election -- combined with our having been recently dragged to the precipice of the Valley of Death and not liking what we saw - signals a shift (albeit a relatively slight one) in the way the nation's economy will be tweaked by the executive and legislative branches.

For twenty-five plus years, the modus operendi in that matter has been guided by three dominant themes: laissez-faire, monetarism and supply-side. In its simplist form, this translated into a working model / philopsophy of:

"Get out of business' way, feed their appetite with loose money and reward the Investor Class for its successful risks so they'll keep doing it over and over again. And always keep a vigilant eye on Enemy Number One: inflation."

Simple; yes--but I'm not lecturing a grad-level class at MIT here, am I?

The current popular perception and consensus is that such a mix eventually proved to be toxic; creating a stacked deck tilted in favor of that Den of Thieves called Wall Street. Capital effiency was lost as these suspects devoted their intellectual firepower to trading paper with little (or no) basis in the real world. Exhibit A: $50 trillion in mortgage credit swaps written on top of just $5 trillion in actual mortgages! You don't think that extra $45 trillion actually went into anything productive now, do you?

So not only was this deck stacked, but it was also being used to setup the proverbial House of Cards your neighborhood Amway recruiter never mentions when she invites you over for a little chat. The poop hit the furnace, of course, when the housing industry (aka the witting accomplice) was no longer able to push any more home buyers into this Ponzi scheme. After all, it was running out of farmland to torch into suburban tracks and (even more troubling) there was this minor little issue of an economy that for some reason didn't seem well prepared to match wits and muscle with the rest of the world.

The mask was unveiled, and Joe Everyman (as opposed to Joe the Plumber) was shocked to see the pimples. After all, a 40% six-week drop in a one's 401K tends to do that. The party of free markets and deregulation was held to blame, the people spoke and Fox News's HR deparment was flooded with incoming resumes from GOP hacks suddenly looking for work.

Enter Obama, who is about to feel like a first responder at the scene of a head-on highway wreck. If you hear a gut-wrenching scream over the next few weeks, don't fret; it's just the Democrats getting their transition briefings. But that's their entry fee, now what's their plan?

The President-elect appears to be what we might call a neo-Keynesian. Before Friedman (the monetarist) and Laffer (the supply-sider) starting whispering in Dutch Reagan's ear, John Maynard K was the darling of the so-called Dark Science. The Econ 91 (as opposed to 101) summary of this model goes somehting like this:


"Spend and cut taxes during recessions as a way of priming the pump. Coversely, cut spending and raise taxes during booms as a way of both controlling inflation and to stock away a rainy day fund. The yardstick is Enemy Numer One: unemployment."

The common denominator in both approaches is the value of tax cuts. But the difference is that whereas the supply-side school thinks they should be a) permanent and b)geared to the investor class; the demand-siders believe in timing and that there is more bang for the buck when it is directed to the lower end of the food chain, where it is more likely to be pushed immediately into the economy.

It is that latter argument that appears to be Obama's leaning. We heard of those "tax cuts for those making under $250,000" while at the same time he was whispering of hikes at the upper end (income, capital gains, dividends, etc). He is also on-record as supporting a new stimulus plan; this one directed to the 'economy' as opposed to the financial markets -- possibly in the form of an FDR-style infrastrucure builing / job creation program. Interestingly, McCain, his fellow Republicans and Wall Street all seem to agree with that idea -- there are no atheists in foxholes, afer all.

But there are some HUGE complications facing the new president and this approach. As mentioned, that prior HUGE stimulus round was directed not at the economy (so to speak) as a whole but at the banking & finance industry. That bullet is going towards cleaning up past sins and doesn't address the fundamental megatrend types of structural issues facing our commerce engine. And there are only so many bullets one can fire before the six-shooter is emptied.

Secondly, there's the question of 'paying the piper.' The new stimulus / new tax cuts concept is expensive enough, but we also have this little money drain (to the tune of $12 Billion per month) of two wars going on concurrently.

Any economist worth his tenured salary will warn against the perils of waging a war without paying for it. Just look at Viet Nam for proof: both LBJ and Nixon knew that their Silent Majority subscribers would join ranks with the student left if they were presnted with the tab for that war (i.e a tax hike). This was a risk neither wanted to take; so neither did.

Ford and Carter were both Oval Office victims of that approach. So, too, was the national ecomomy. It took until the early 80's and the dawning of the microcomputer boom before that demon was exorcised. Obama and his advisors are now faced with a "damned if we do, damned if we don't" scenario.

They didn't think this would be a walk in the park now, did they?


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