In the Shadow of Hoover

While he was in China, Barack Obama made a bizarre declaration that
the US government must reduce its budget deficits in order to avoid "a
double-dip recession." The remark was alarming because it suggests the
president may not fully understand the country's economic predicament.
Deficit spending is a cure for our troubles, not the cause. If Obama
follows through and actually reduces the red ink, the Great Recession
could be born again with new fury.

In an interview with Fox News, the president said: "It is
important to recognize if we keep on adding to the deficit, even in the
midst of this recovery, that at some point people could lose confidence
in the US economy in a double-dip recession." Maybe he didn't mean it.
Or was merely nodding to Chinese leaders, our leading creditor, who had
scolded him for profligate spending.

Still, his backward logic gave me a chill. If Obama acts on it, he
will be walking in the footsteps of Herbert Hoover, not Franklin
Roosevelt, and I fear his presidency could be doomed as a result. I know
that sounds too strong and brutally unfair, given the president's
energetic vision for the country and his early efforts to stimulate
economic recovery. But history is often unfair to leaders who do not get
their priorities straight and fail to deliver what they promise.

Hoover was the Republican president from 1929 to 1933 and faced a
far more dramatic unwinding of the economy after the 1929 stock market
crash. In popular memory, he was blamed, somewhat unfairly, for causing
the Great Depression. People came to loathe him personally for the
repeated pep talks--"Prosperity is just around the corner"--and
Democrats ran against "Hoover" for many years after.

Barack Obama is a towering political talent by comparison, but also
has troubling similarities. In an age of limited government, Hoover
preached "volunteerism" and worked earnestly to persuade business to
cooperate with labor and "do the right thing." Obama's softball approach
to the financial crisis reveals a similar reluctance to use government's
powers to compel results. Instead of directing bailed-out banks to lend
more aggressively, Obama asked them nicely. The bankers blew him off.
His economic stimulus was a good start, yet clearly insufficient.

If Herbert Hoover was guilty of anything, it was ambivalence and
confusion of purpose. Hoover was a very intelligent technocrat who
sincerely tried various sound measures to relieve the general suffering.
But Hoover never found the will to follow through decisively. He was
pulled in an opposite direction by failed market orthodoxy that was
still influential. To his subsequent regret, Hoover heeded the steely
advice of Treasury Secretary Andrew Mellon: "Liquidate labor, liquidate
stocks, liquidate the farmers, liquidate real estate." In other words,
let nature takes its course. Clear away the wreckage and capitalism will
heal itself.

In the era of big government, Obama is a far more activist
president, but he has followed a less brutal version of the same
conservative thinking. Pour billions first into restoring the financial
system, then it can revive the real economy. That approach was
backwards, as nervous members of Congress are beginning to grasp.

Like Hoover, Obama is pulled between opposing imperatives. Deficit
hawks demand he get control over the budget deficits to restore
confidence among investors (those Chinese creditors who buy our Treasury
bonds). Bleeding-heart politicians, on the other hand, want him to focus
on rescuing the folks (who need jobs and foreclosure relief and can renew
consumer demand for businesses). Obama would like to do both, but
hesitates to choose decisively.

Blaming this on his center-right advisors--Timothy Geithner, Larry
Summers, Rahm Emmanuel--is too easy. Obama picked them. He obviously
agrees with their reluctance to go full bore in behalf of the real
economy. Geither and Summers, meanwhile, are taking victory laps for
saving the country. Ordinary citizens wonder what they are talking
about. Obama should tell them to shut up with their self-congratulations
(better still, he should replace them with more imaginative policy
thinkers).

Piling up more government debt is undesirable and involves risk, but it
is not as bad as a low-grade depression that would go on for many years
without relief. In this crisis, the United States is astride a
fundamental disjuncture that only the federal government can repair by
borrowing tons of money and spending it--force-feeding recovery, then
cleaning up the balance sheet afterward.

The awkward truth about capitalism is the machine does not function
unless someone is borrowing money and spending it. The genius of the
capitalist system is that it recycles surplus wealth--savings and
profits from past economic activity--by lending the wealth for new
production and consumption. When nobody in the private economy can
borrow and nobody will lend--neither households nor business and
finance--government has to step up to the task. In a crisis like this,
if the federal government declines to get things moving again by
borrowing and spending, as heavily as necessary, then the economy will
stumble along far below its potential (that is, higher unemployment,
weaker production, more failures). If Obama decides to curtail the
deficits now, he is disarming unilaterally.

In history, even FDR wanted to have it both ways, but New Dealers
learned from painful error they could not serve both masters. In 1936,
they decided the recovery was complete so they reduced federal spending
and raised interest rates. The depression was resumed with new
viciousness. Obama and advisers now seem to think they are out of the
ditch and can safely tilt toward fiscal responsibility.

The truth is, nobody knows what comes next. Just as plausibly, the
trouble is not over but may even get worse. Instead of cresting,
unemployment could rise further for another year or more, spreading the
suffering and loss more widely. If the "recovery" proves to be an
illusion, then another stock market break might follow. Uncertainty is
still in the saddle.

Liberal-labor forces, in and out of Congress, are mounting a
counter-attack on Obama's timidity and demanding major new spending for
direct job creation. The president has agreed to a "jobs summit" to
consider the problem.

This is an opening for Obama to announce a major "course
correction." If he states the gravity of the situation honestly, people
will not be angered by his truth-telling. They already see things are
worse than officials acknowledge. If Obama opts instead for half-way
measures--too little too late--then he will fall squarely under Hoover's
shadow.

Herbert Hoover tried to emphasize the positive as the economy
continued to unwind. He expressed his deep faith in the country's future
and offered helpful suggestions for coping. Americans were at first
reassured, then gradually they became angered as they saw the
president's optimism contradicted by events. In the end, Hoover's good
intentions frightened people. Hearing from the president, again and
again, that things were getting better, when they knew otherwise, told
them he was indifferent to their plight or, more frightening, he had
lost touch with reality.