Rosy Sce­nario back in town

For all Obama’s in­tel­li­gence, he’s never shown a real grasp of macro­eco­nomics

Finweek English Edition - - In The Spotlight - HOWARD PREECE howardp@fin­week.co.za

SHE FIRST MADE a for­mal ap­pear­ance in the United States in the early years of Pres­i­dent Ron­ald Rea­gan’s terms of of­fice in the Eight­ies. Eco­nomic re­al­ity then fre­quently didn’t meet ex­pec­ta­tions. How­ever, Wash­ing­ton in­sid­ers in­sist Rosy Sce­nario had been around a long time be­fore that – and that she’s still very much in ev­i­dence to­day.

Truth is that all pres­i­dents lean strongly to­wards Rosy. If they hap­pen to have a nat­u­ral gift for charm­ing vot­ers and the me­dia – as Rea­gan did and Pres­i­dent Barack Obama has – they might even mostly avoid, for a long time, ques­tions about dif­fer­ences be­tween eco­nomic re­al­ity and ear­lier sce­nar­ios.

Obama is cer­tainly winning over large sec­tions of the world to his side – tem­po­rar­ily at least. But ul­ti­mately he risks los­ing the US if his largely thumb-suck eco­nomic pro­jec­tions end up badly off line. Obama has made clear he holds a dis­mis­sive – or, at most, mod­estly sup­port­ive – view of vir­tu­ally all his pre­de­ces­sors of any party in the White House.

But he’d be well ad­vised to re­mem­ber some key words of the last US head-of-state from the Demo­cratic Party, Bill Clin­ton. It was Clin­ton who fa­mously noted in his win over Ge­orge Bush (se­nior) and in the 1992 pres­i­den­tial con­test: “It’s the econ­omy, stupid.”

Obama can cer­tainly talk most elo­quently on the econ­omy – as in­deed he can on al­most any­thing else. How­ever, he’s a ca­reer politi­cian who stopped off briefly to fol­low a po­lit­i­cally linked le­gal/so­cial ac­tivist ca­reer be­fore be­com­ing a state se­na­tor for Illi­nois in 1996. Then in 2004 he won one of the two Illi­nois seats in the US Se­nate.

As a na­tional Se­na­tor he recorded the most po­lit­i­cally par­ti­san record of any mem­ber of that body. He’s largely con­tin­ued that one-track ap­proach since tak­ing con­trol of the White House at the beginning of this year.

For all his enor­mous un­doubted in­tel­li­gence, he has never shown a real grasp of all the com­plex­i­ties of macro­eco­nomics. That’s pre­sum­ably not be­cause he doesn’t have the abil­ity: it’s be­cause in the crunch he doesn’t, at this stage at least, have the in­cli­na­tion.

He’s strongly en­cour­aged in that view by the “Obama can do no wrong” sen­ti­ments that dom­i­nate the US’s main­stream me­dia – for the mo­ment.

For many years I’ve re­garded Robert Samuelson, eco­nomics colum­nist at The Wash­ing­ton Post and Newsweek, as a par­tic­u­larly strik­ing ex­cep­tion to this party-be­fore­coun­try jour­nal­ism.

His col­umn in the Post of 18 May – head­lined “Obama’s risky debt” – es­pe­cially bore out that view.

Samuelson asked: “Just how much debt does a pres­i­dent have to en­dorse be­fore he’s la­belled ir­re­spon­si­ble?” He con­tin­ued: “Ap­par­ently, much more than the amounts en­vi­sioned by Pres­i­dent Obama. The fi­nal ver­sion of his 2010 bud­get is a case study in po­lit­i­cal ex­pe­di­ency and eco­nomic gam­bling.”

Samuelson noted: “From 2010 to 2019 Obama projects an­nual deficits to­talling US$7,3 tril­lion on top of the $1,8 tril­lion for 2009.

“By 2019 the ra­tio of pub­licly held Fed­eral debt to gross do­mes­tic prod­uct would reach 70%, from 41% in 2008. The Con­gres­sional bud­get of­fice, us­ing less op­ti­mistic eco­nomic fore­casts, raises th­ese es­ti­mates. It has the debt/GDP ra­tio at 82% in 2019.”

So what dis­tin­guishes the vary­ing lev­els of op­ti­mism/pes­simism? There are var­i­ous fea­tures but, cru­cially, they re­late to the lu­di­crously over-the-top as­sump­tions about US eco­nomic growth that Obama has made. He’s pre­dicted the US econ­omy will shrink 1,2% in real terms this year.

No prob­lem there. But Obama adds that US GDP will rise by 3,2% next year, go­ing on to a bumper 4% in 2011 and an av­er­age 4,4% for 2012/2013.

If those fore­casts prove ac­cu­rate – or even some­where nearly so – that will mean within 12 months the US and global economies will be back in great con­di­tion.

But now there’s a prob­lem. There isn’t one lead­ing Amer­i­can or in­ter­na­tional eco­nomics or­gan­i­sa­tion that thinks this par­tic­u­lar ver­sion of Obama and the Rosy Sce­nario has any hope of be­ing re­alised.

Per­haps the most use­ful US eco­nomic fore­cast unit is Blue Chip. It pro­vides the av­er­age eco­nomic pre­dic­tions of all the top Amer­i­can an­a­lysts. Blue Chip reck­ons that af­ter neg­a­tive growth this year, US GDP will in­deed re­cover. But Blue Chip doesn’t see that GDP go­ing above 3%/year in any year be­tween 2010 and 2013.

If that view is cor­rect – and re­mem­ber, it’s not any in­di­vid­ual fore­cast but the sum­ma­tion of lead­ing pre­dic­tions – the cur­rent Te­flon po­si­tion of Obama could look a whole lot dif­fer­ent a cou­ple of years and more down the line.

Obama might also then have to tear up many of his most cher­ished do­mes­tic ac­tivist am­bi­tions – in­clud­ing those su­per-Green ideas that threaten to leave the US with a chronic short­age of in­dus­trial power gen­er­a­tion a few years ahead.

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