Letter from an Economist
John Birchall
10 Nov 2008
UK economist John Birchall explores what the election of Barack Obama as American president will mean for the economy of the US.
The 5th November 2008 will probably become as infamous as the 22nd November 1963. For those not familiar with the lives of American presidents the second of the two dates is the day John F Kennedy was assassinated. The former is, I imagine, firmly stored in the memory as the day Barack Obama became President-elect of the United States. Poor Mr Obama is being seen as a one-man changer of everything. This applies to the Middle East, US-EU relations and host of other issues that have been troubling world leaders for rather a long time. Some of these will remain beyond his ability to address but perhaps he can herald in a new range of economic policies? Too left? His critics see him as too far left for the comfort of many within his own party. They fear that an essentially conservative nation will punish the Democrats if Obama suddenly becomes wedded to the "big picture" and dares to look beyond the shores of the US and conventional right-wing economic theory. In fairness he did occasionally mention the need to protect American jobs during his two year election campaign and some have latched onto this as evidence of a "pro-protectionist" stance; but Obama is the consummate politician and if he looks to Congress he will note that the Democrats have sizeable majorities and so actually doing something that maybe considered "radical" will be possible. Platform of change Obama stood on a platform of change and that in itself is radical, so the more progressive philosophy on offer to the US electorate was afforded nearly 53% of the popular vote. In fairness, some may not have appreciated just what they might have been voting for and Obama did not put a great amount of detail into many of his speeches but proposals on health care, tax breaks for the middle classes were denounced by Senator McCain as a "socialist" and a "re-distributor" - so the "right" of US politics do fear the possible benefits of a president who actually puts the interest of people above that of Wall Street and the profiteers. Radical economic strategy Now, that does begin to make one wonder if President-elect Barack Obama might just be about to embark on a more radical economic strategy than the US has seen for quite a while. He has a mandate to at least experiment with policies that have not been used for quite a while. His first real test will be how he addresses the financial crisis. The lack of liquidity and confidence in the banking sector, the drop in output in the productive part of the economy and the continued increase in unemployment all cry out for a fiscal stimulus to lift an economy out of a period of depression. National debt Yes, this may require a federal deficit of US$ one trillion, but think of the alternatives - mass unemployment, continuous falls in national income and the temptation to re-build protectionist barriers. Such an increase in national debt would add to the cost of interest repayments for the federal sector but with rates set to be low for the foreseeable future the real cost to future taxpayers will be less than the payments needed to rebuild the damage done by a long period of recession and negative growth. It will be interesting to see if Obama, who distanced himself from anything that the Bush administration had uttered about greed-based economics, reacts to the true words of FD Roosevelt. Enlightened government These were, and they formed part of his second inaugural address "we have always known that heedless self-interest was bad morals; we know now that is also bad economics". Surely now is the time to finally lay to rest the idea that simple self interest does not lead to subsequent periods of economic disaster for the majority of citizens and its very dislikes enlightened government intervention to take place. Maybe we are about to see an era of good morals and good economics being perfect complements to each other. Those most in need and those who are considered to be vulnerable will be the first to helped, health care for all Americans will become a reality and those who become unemployed during the economic downturn will be adequately supported by those remaining in work. Essential public services Tax cuts for the rich will no longer be the automatic reaction to any supposed economic problem and the state will maintain essential public services. In so doing the least able to protect themselves will be made less vulnerable to the ravages of economic downturn and the jobless figures will be reduced by careful injections of tax payer's money into the economy. President Obama may actually listen to some of those who have gathered around him since his election and produce a twenty first century New Deal. A new deal If he does he will have endeared himself to those who voted for him, helped the other economies of the world who rely on the US market to be the driver of growth and he will have defeated those who continue to quote the other F D Roosevelt sound bite, namely "we have nothing to fear but fear itself". The coming days and weeks will be interesting and may yet contain a genuinely "radical" era in US economic policy.
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