Mosler’s take on the Obama speech

Warren Mosler has an interesting take on the Obama speech. While acknowledging that Obama’s policy recommendations  fell short of the mark, he also observes that they involved some clever triangulation, setting a trap that John Boehner stumbled right into initially.

Hence Boehner’s change of course on the recent weekend talk shows, where he embraced the idea of “middle class” tax breaks. No idea what impact this tactical intrigue will have on election day, if any. And economic policy is still suboptimal, with both parties ignoring the fact that every dollar of revenue the federal government collects was first created by a deficit expenditure. But at the margin it’s still a positive development, and creates room for beneficial compromise over sunsetting tax cuts.

Obama’s Speech Gets a Shrug

Executive Summary

• The President proposed nothing bold or impactful; it was a campaign season stump speech and little more.
• Despite all of the rhetoric from the right, this is emphatically not a “liberal socialist” administration. It fits squarely into the conservative New Democrat tradition.
• There are large structural challenges facing us – demographics, global tax and talent competition, and the like – but we’re obsessed with the one ‘structural’ issue that is far less threatening: federal deficits.
• We seem to have safely exited a soft patch; it continues to be an old school recovery (industrial versus consumer), and we shouldn’t underestimate the critical role that federal deficits have played.

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Markets largely shrugged off the President’s speech on Wednesday.  What they gained just prior to and during his talk was given back by the close, for a small gain on the day.

We agreed with the tepid reaction, as it was basically a campaign season stump speech that offered nothing bold or new.  Obama merely assailed the opposing party’s pretzel logic by reiterating his party’s own, rehashing the same old nonsense that we’ve had to endure for the last three decades or so. 

Both parties have some good (and plenty of bad) ideas, but national policy making remains mired in a frustrating trench war. Unfortunately, President Obama did a fine job of reinforcing that on Wednesday.  Some of our thoughts while listening to him:

High Value Added vs Low Value Added Employment

As evidenced by his endorsement of R&D tax credits, the President (like most policymakers and economists) continues to favor high intellectual value-added industries and employment. All fine and good, as the ultimate aim is higher output per capita. But it perpetuates Washington’s tendency over the last several decades to sweep the issue of low value-added work and income under the rug.

Not all Americans will become college graduates, much less engineers or researchers. And a developed country with strong environmental and labor regulations needs to think more carefully and more creatively about how its least productive citizens can earn a reasonable living.

Tax goodies like Obama’s “Making Work Pay” are reasonable (though minor) palliatives. Lower tax burdens on employers would have more powerful and lasting effects, though that will sound counter intuitive to some (and corporations have done all they can in the past decade to destroy whatever social trust and goodwill they’ve earned).

A full payroll tax holiday would certainly help, at least temporarily, but it’s reportedly not even on the Administration’s radar. Too bad for Congressional Dems, as that is the most powerful campaign tool at Obama’s disposal, and it’s one that would actually have an immediate and positive impact on incomes and employment.

In any case, as President Obama’s tenure in office lengthens, the hysterical claims about a liberal socialist agenda become increasingly bizarre. This is not a radical administration, folks, despite what certain pundits keep telling you. They fit squarely in the New Democrat model of the 1990s, which is a pretty conservative one.

Hiring Here vs Hiring There

Obama played up the Dems’ threadbare meme about “tax loopholes” encouraging companies to hire overseas. This is pretty much BS.

One of the primary shortcomings of our tax code — and it distinguishes ours from almost all others — is its treatment of income earned abroad. The tragedy of our draconian tax on repatriated corporate profits is that it prevents American workers from having any shot at sharing in the benefits of globalization.

Instead of acknowledging and addressing this problem, the President gave the familiar refrain of ‘rewarding companies that keep jobs here’. In some ways, this can be effective, for example, in fostering certain high tech industries.

But it still ignores the realities of economic specialization, and when applied to the general economy, it’s classic political double speak. It simply means that corporations and/or domestic wage earners will be punished for any successful decisions that involve the employment of capital abroad.

Entitlement Reform – Coming Soon to a Country Near You!

At a certain point in the President’s speech, it began to sounds as though his fiscal commission’s recommendations are already handwritten on the wall. Watch for a major entitlement reform effort — which some people argue doesn’t even fall under the commission’s purview — once it has submitted its findings to the Administration.

If that becomes a 2011 or early 2012 project, Obama’s reelection hopes could be in serious trouble; not because the GOP can use it against him (if they do, the hypocrisy will be palpable) but because it will alienate substantial parts of his base.  Perhaps this explains why he pushed so emphatically on not allowing social security to be privatized, a topic that has not featured in the national policy conversation for five years.

An especially cynical interpretation is that the President was intentionally crafting a sound bite for 2012, in case entitlement reform does threaten to bite him (he certainly was tactical about teeing off on the next potential House Speaker, John Boehner). We’ll see.

Takeaways

So the campaigners keep fiddling as unemployment and pessimism keep rising. We had hoped – naively, in hindsight — for better. As a result, our outlook is little changed:

European sovereigns and continental banks remain the critical risk to the global payments system and global economy.

Demographic trends indicate that the “new normal” of slower growth and lower interest rates and asset returns is actually a return to a much older normal, or a “more normal” normal. The demographic transition, which has been juicing major economies and markets for almost 150 years, is finally running out of steam in most developed economies.

Unemployment is going to remain stubbornly high given the current policy outlook, whether the GOP takes over the House in January or not.

If there’s good news, it’s that we seem to have escaped a soft patch with economic recovery intact (important to remember that there’s still a business cycle, even when secular trends are negative). While the public-to-private sector “hand off” is not unfolding as it has in recent recessions (for example, consumer credit continued to contract in July), it seems to be unfolding nonetheless (though this could be threatened by negative shifts in age structure in 2012 and beyond). 

Let’s just hope that mebers of the new political order in 2011 don’t underestimate the extent to which federal deficits have made this recovery possible. We know that in some quarters they sing a very different tune about deficits, e.g., in the editorial pages of the WSJ or IBD. But to put it bluntly, they’re wrong. 

It takes some time and effort to get one’s head around the concepts involved, but arguing that federal deficits have made the recent recession worse is like asserting that massive gold discoveries in South Africa in 1896 caused the Long Depression of 1873-1896. Neither statement makes any sense whatsoever.

Obama’s Speech, Labor Markets, and the Old Normal

Employment conditions in the U.S. still sluggish: one has to wonder why the White House wants to boost capital spending when it is the labour market that is in need of the most help right now

Millions of our friends and neighbors around the country are looking for work, wondering how they will pay this month’s rent or put food on the table for their families.  At a speech in Wisconsin on Monday, the President made clear that turning our economy around is his top priority:

 

I am going to keep fighting every single day, every single hour, every single minute, to turn this economy around and put people back to work and renew the American Dream, not just for your family, not just for all our families, but for future generations.

 

At 2:10 p.m. EDT today, President Obama will announce a set of targeted proposals to help our economy continue on a path to recovery during a speech in Cleveland, Ohio.  I know many of you have questions about what this Administration is doing to support working families and small businesses who are struggling to get by.  So immediately following the President’s remarks, I’ll be hosting a live chat to answer your questions about what we’re doing to help Americans find jobs and to rebuild our economy for the long term.

In about ten minutes, we’ll hear what those “targeted proposals” are.  But based on the trial balloons to date, it seems unlikely that the President will announce anything today that (1) will have an immediate impact on anything other than expectations (and he risks clouding expectations, if his speech creates even more uncertainty about the future trajectory of tax policy) and (2) can be enacted without Congress (which in the midst of an election and then the end of a session — possibly with the GOP in control of the House again –might not be able to accomplish much of anything in 2010).  And the Administration’s rhetoric is still laced with counter productive promises like, ‘without worsening the deficit’.

If President Obama wants to do something powerful for his “friends and neighbors around the country,” he should enact something like Warren Mosler’s idea for an immediate year long payroll tax holiday.  It might even be possible to do it under the auspices of Treasury, without having to wait for Congressional approval.  It would have a positive and immediate economic impact, and might even take the edge of the drubbing his party is expected to receive in November.  If Obama refuses to pick it up, then the GOP should in the next Congressional session; see David Frum’s recent advocacy of this measure.

One other interesting point in Rosie’s email: 

Statistics, damned statistics and lies: what we are currently seeing in the U.S. economy is not normal given all the fiscal and monetary stimulus that it has received

He’s right, it’s not normal.  Or is it?  As we’ve pointed out previously, it could be that what we’ve all become accustomed to as “normal” in the past sixty years was anything but, given that so many of those trends were driven by the profoundly abnormal presence of a demographic cohort like the baby boom, and tailwinds like global financial and trade reintegration. 

In fact, it could be that PIMCO’s “new normal” is a return to a true normal.  If so, we need to reconsider many of our assumptions about economic growth and financial market performance in developed nations.