Barack Obama Ignores Economic Reason

Jeremy Warner, Daily Telegraph June 25, 2010

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By Jeremy Warner Published: 8:17PM BST 24 Jun 2010

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Rarely has the dismal science of economics inflamed such passions. While the "cuts versus growth" debate has been building steadily for more than a year on both sides of the Atlantic, over the past week it has exploded into open international hostilities.

A compromised form of words will already have been agreed for the communiqué to follow this weekend's meeting of G8 and G20 leaders; the sherpas who do the preparatory donkey work for these stage-managed events will have ensured it.

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But behind the anodyne platitudes of any statement, the tensions have reached fever pitch. Gone is the co-operative consensus that, in adversity 18 months ago, brought G20 nations together to fight the downturn.

In its place lies a clear line of demarcation that almost exactly mirrors our own political debate in Britain over the economic consequences of George Osborne's Emergency Budget cuts. Yet though this debate masquerades as high intellect, it has about as much to do with economics as the outcome of the World Cup.

President Barack Obama, backed to some extent by Nicolas Sarkozy of France, wants economic stimulus to continue until the global recovery is unambiguously secure. In the opposite corner is Germany's Angela Merkel, now oddly aligned with Britain's new political leadership in thinking the time is right for fiscal austerity.

Like much of what Mr Obama says and does these days, the US position is cynically political. With mid-term elections looming and the Democrats down in the polls, the administration hasn't yet even begun to think about deficit reduction. Obama is much more worried by the possibility of a double-dip recession and the damage this would do to his chances of a second term, than the state of the public finances.

As it happens, the public debt trajectory is rather worse in the US than it is in Europe, yet Obama has adopt

By Jeremy Warner Published: 8:17PM BST 24 Jun 2010

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As it happens, the public debt trajectory is rather worse in the US than it is in Europe, yet Obama has adopted an overtly "spend until we are broke" approach in a calculated bid for growth and votes.

Part of the reason he can afford to do this is that the dollar remains the world's reserve currency of choice. For some reason, international investors still want to hold dollar assets, which for the time being gives the US government an almost limitless capacity to borrow. As we know, not everyone enjoys this luxury.

Mr Obama's cheerleader-in-chief in arguing the case for continued international deficit spending is the American economist Paul Krugman. This hyperactive Nobel prize winner has achieved almost celebrity status for his extreme neo-Keynesian views. Unfortunately, his frequent polemics on the supposed merits of letting rip public spending long since ceased to be based on objective analysis, and are instead argued as a matter of almost ideological conviction. He's as much a fundamentalist as the "deficit hawks" he mocks.

As it happens, nobody is asking America to axe and burn with immediate effect, though you might not think this to read Professor Krugman's ever more hysterical commentaries on the fiscal austerity sweeping Europe. But some sort of a plan for long-term debt reduction, other than blind reliance on growth, might be helpful.

Chancellor Merkel's approach looks equally political. With her own position under some threat, she has taken, with growing conviction, to preaching the teutonic virtues of fiscal discipline and long-term economic planning. Self-flagellation is judged to play as well with German voters as profligacy does with Americans.

These culturally very different approaches to politics and economics were brilliantly described by the German finance minister, Wolfgang Schauble, in a recent newspaper article. "While US policymakers like to focus on short-term corrective measures," he wrote, "we take the longer view and are therefore more preoccupied with the implications of excessive deficits and the dangers of high inflation… This aversion, which has its roots in German history, may appear peculiar to our American friends, whose economic culture is in part shaped by deflationary episodes. Yet these fears are among the most potent factors of consumption and savings rates in our country."

Just as America takes its popular understanding of economic catastrophe from the Great Depression of the 1930s, for Germans it is the great inflations of the inter- and post-war years, the first of which destroyed middle-class savings and contributed to the rise of political extremism.

There are no rights and wrongs in this debate, but by implicitly criticising Germany for not doing enough to stimulate domestic demand, Mr Obama displays his usual lack of understanding of foreign affairs – or rather, perhaps deliberately chooses to dismiss perfectly legitimate alternative approaches to the same problem.

Few countries did as much as Germany to sustain economic activity in the downturn. What's more, despite the rhetoric of deficit reduction, its fiscal stance remains expansionary throughout the remainder of this year and is only mildly negative next year. The goal of returning to balanced budgets by 2015/16 is entirely reasonable given the demands and constraints of an ageing population, is in line with the same ambition set by George Osborne this week, and can in any case be suspended if the economy begins to shrink again.

As Mr Schauble has repeatedly pointed out, seeking to engineer greater domestic demand by taking on more government borrowing is, for Germany at least, counter-productive, for Germans do not feel confident in their spending unless cushioned by adequate savings. Some might think these the sort of old-fashioned virtues that need to be relearnt in more profligate advanced economies, such as America and Britain.

I don't want to push the argument too far, for there is no doubt that by exporting debt to its neighbours, Germany played a central role in the fiscal crisis that has engulfed the fringe nations of the eurozone. There is no obvious answer to these inherent fault lines within the European monetary union, other perhaps than a return to sovereign currencies.

But to expect Germany to become less competitive so that the Greeks and Spaniards can be more so is absurd. It's a bit like arguing that elite marathon runners should slow down to allow others to catch up.

In berating others to carry on spending, Mr Obama is being neither politically wise nor economically sound. He should instead be attending to his own back yard by mapping out some sort of credible, long-term plan for returning the US to balanced budgets.

David Cameron is going to find himself ahead of the curve among the G8 this weekend, for his own plans for fiscal retrenchment are, if anything, rather more advanced and detailed than even those of Germany. In Britain, only the Labour Opposition and its supporters still think this the wrong approach – but given they were the ones that got us into this fiscal mess in the first place, they would do, wouldn't they?

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