Thursday, March 12, 2009

The Gamble

From The Hill today:

Some Democrats have started to worry that voters don’t and won’t understand the link between economic revival and Obama’s huge agenda, which includes saving the banking industry, ending home foreclosures, reforming healthcare and developing a national energy policy, among much else.

While lawmakers debate controversial proposals contained in the new president’s debut budget — cutting farm subsidies, raising taxes on charitable contributions, etc. — there is a growing sense that time is running out faster than expected.

Democrats from states racked by recession say Obama needs to produce an uptick by August or face unpleasant consequences. Others say that there is more time, but that voters need to see improvement by the middle of next year.

The most optimistic say Obama and Democrats in Congress will face a political backlash unless the economy improves by Election Day 2010.

“We’ve got to see an uptick by August or the Democratic majority is in jeopardy,” said Rep. Bart Stupak (D-Mich.), whose state had an 11.6 percent unemployment rate in January.

This is the gamble the Obama Administration has chosen to take: frontload as much of their agenda as possible this year, and hope that this recession follows postwar historic models and ends no later than early 2010.

No contraction since 1933 has lasted longer than 16 months. Obama is betting his party's congressional majority on this recession following that pattern, quite possibly figuring the American economy is going to recover as a matter of course no matter what he does, so he might as well enact as much of the Democratic agenda as possible while he can play the "crisis" card.

There are two major risks inherent in this wager. First and most obviously, if this recession really is different from previous experience and lasts much longer, the gamble fails and Obama takes the blame. That one is easy to understand.

Secondly, but perhaps more significantly, Obama is taking a terrible risk in possibly short-circuiting a normal recovery by his massive increases in borrowing, spending, and future tax increases. There is precedent for such a crash. FDR killed a nascent recovery by enacting class-warfare tax increases and boosting federal giveway spending to preserve his 1936 reelection. The economy crashed again in 1937 as a result. Obama runs the same risk.

Additionally, nobody in the Obama Administration is talking about inflation right now--and for good reason; they want to spend a whole lot more money, and they don't want voters to associate today's spending with tomorrow's inflation. But blasting an additional couple of trillion in federal borrowing and outright money-printing carries a tremendous inflationary risk. If that inflation kicks in within the next 20 months, congressional Democrats will pay the price in 2010. Even if it holds off past next year, Obama's own re-election bid could very well be hostage to a 1970's-style inflation hangover.

Thus, the gamble: boost up the budget, and the federal government's influence over the economy and as many people's daily lives as possible, hope that a recovery bails you out, or failing that, that you can fall back on the old faithful scheme of "tax and tax, spend and spend, and elect and elect." In other words, lard around as many spending programs as possible, then run on "vote for us, or those mean Republicans will take away all the goodies."

It's an all-in wager. If we were watching a poker game, it'd be great entertainment. The problem, of course, is that Obama's pot is composed of other people's money.

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