Of Hope and Hubris

Less than six months after the 2008 election, and just past the 100-day mark of Barack Obama’s presidency, liberals have begun congratulating themselves on the triumph of their ideas. Paul Krugman on global warming:

The 2008 election ended the reign of junk science in our nation’s capital, and the chances of meaningful action on climate change, probably through a cap-and-trade system on emissions, have risen sharply.
But the opponents of action claim that limiting emissions would have devastating effects on the U.S. economy. So it’s important to understand that just as denials that climate change is happening are junk science, predictions of economic disaster if we try to do anything about climate change are junk economics. . .

And here’s Josh Marshall on same-sex marriage:

I think most of us can see that despite some painful setbacks, and likely more to come, time is definitely on the side of marriage equality in the United States. But are we hitting some sort of tipping point under a new administration and with a rush of recent successes in several states around the country?

Think back to the 2008 campaign and ask yourself: Did Obama and the Democrats win because of gay marriage and global warming? Obviously not. It was the economy, stupid. And yet in the wake of that election, liberals now believe they have a mandate to enact their entire agenda.

Ah, but what about the economy? Megan McArdle has a 1,070-word article at the Atlantic Monthly examining the basic math of Obamanomics. It’s so good, it feels unfair to attempt to characterize it by excerpts, but here is the key part:

It’s probably no exaggeration to say that Obama’s presidency will ultimately stand or fall on its handling of the financial crisis. And at this point, with respect to all the frantic activity, the polls seem to be saying, so far, so good. . . .
Of course, Jimmy Carter’s early approval ratings hit 70% before beginning their long downward slide. And Bush’s ranged as high as 95% after 9/11. As the Wall Street prospectuses all say, past performance is no guarantee of future results.
Still, Obama’s performance thus far ought to offer some clue: has he set the stage for economic victory, or defeat? In some sense, for all its exertions, the Obama administration hasn’t actually done all that much.

Megan then proceeds to dismantle the fiscal assumptions of Hope, and you should read the whole thing. It is not unfair to summarize her analysis in three words: It Won’t Work. The stimulus-and-bailout policies have not addressed the fundamental problems of the economy — namely, an excess of debt and a shortage of capital to spur job creation — while the entitlement trainwreck of Social Security and Medicare loom immediately ahead. By piling on new trillion-dollar deficits, at a time when the recession will result in significant tax revenue shortfalls, the Democrats are steering the economy into a stagflation trap.

If the economic situation actually worsens between now and fall 2010 — and there are many reasons to believe it will — the public-opinion polls of April 2009 will have proven a false omen, which served only to swell the pride that went before the fall.

UPDATE: Welcome Red State readers and other disciples of blog-fu sensei Moe Lane, who says:

Not to be a broken record about this, but I didn’t need Megan to tell me that we enjoy, ah, suboptimal economic oversight. . . . Or that the current administration seems to default to style over substance.

So how come we can see this and yet (if polls are to be believed) Obama’s approval rating is at something like 110 percent? Might I suggest that we are paying the price of an educational system that renders a majority of Americans ignorant of, or misinformed about, basic economics?

UPDATE II: At The American Spectator, commenter “Indiana Alex” summarizes a fundamental problem with Obamanomics:

The shortage of capital is going to be even more severe given the extent of government borrowing.

This is why stagflation is the inescapable result of the current policy. Begin with the fact that the collapse of the “housing bubble” has left millions of Americans saddled with a huge debt load for illiquid assets (i.e., their homes) that cannot be sold for a profit or leveraged to acquire additional liquidity. Now, consider that the stock-market collapse (i.e., from a 14,000 Dow to an 8,000 DOW in less than three years) has severely depleted the 401Ks and IRAs of tens of millions more Americans.

Between the declining market value of their homes and the declining market value of their retirement accounts, these individual Americans who had positive net worths in 2005 are now in no position to make new investments that would create jobs. The total supply of American capital has thus been diminished by a sum of however many trillions.

The Obamanomics answer to this is for the government to borrow many trillions more, in order to fund an expansion of public-sector programs. And government must borrow this money from the same global credit pool already depleted by the loss of capital caused by the collapse of the bubble.

Guess what? Foreign investors balked at the last offering of Treasury notes. As a result, the Federal Reserve bought the unsold balance of this new debt, which means . . .?

Very good, class! The Fed will just turn on the printing presses to produce “new” money to account for the additional federal debt. This is inflation, which further erodes whatever asset value individuals had after the collapse and therefore leaves them less able to make new job-creating investments than they were before the enactment of these stimulus-bailout policies.

The erosion of currency value makes U.S. debt even less attractive, since inflation will cheat investors out of what interest would be paid on new bond issues. Thus, Geithnerism/Obamanomics results in a federal fiscal/economic policy that is chasing its own tail, a descending spiral of recession and inflation.

This is not merely The Road to Serfdom, but the road to Weimar America. Even if Obama, Geithner, Pelosi and Reid wised up tomorrow and suddenly reversed course by enacting sound policy, it might take 18 to 36 months of serious economic pain before we’d see anything like a real recovery. And since there isn’t the slightest hope that they’ll do the right thing, this crisis is going to get much worse over the next several years.

Things are about to get very, very bleak, and I’ve heard some informed investors talk about the Dow not reaching a bottom above 4,000.

UPDATE III: Professor Thomas Woods:

In a nutshell, the point is that when the government’s central bank intervenes in the economy to push interest rates lower than the free market would have set them, the result of its tampering is a massive cluster of errors . . . on the part of investors and consumers alike.

Of course, the professor’s new bestseller, MELTDOWN, has been a must-read recommendation here for weeks. He makes clear that it is a fundamental error to describe the Bush administration’s fiscal/monetary policies as “conservative.”

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