The President and his innermost circle of advisors, like their respective Chinese counterparts (but unlike the useful idiots who front for the President), are probably well-aware of the likelihood that the whole Krugman/Geithner/Bernanke agenda of combining a counter-productive tax policy (ostensibly to raise revenue) with massive and continuing deficit spending (ostensibly to limit unemployment and to spark an economic recovery) and what the Fed calls an “unconventional monetary policy” of buying vast amounts of government bonds and mortgage-backed securities (to hold-down interest rates and get out of the way of the recovery), is a deeply-flawed strategy.
The President, unlike Krugman and the other true believers, probably knows that even Keynes himself (eventually) knew better than to expect a package like this to lead to significant growth and a sustainable recovery from a recession. The President, like the Chinese, may be an instinctive Leftist in his preference for central-planning over free markets, but, like the Chinese, he also recognizes that economic prosperity is the key to maintaining the power and influence of one’s country. He almost certainly knows that we cannot keep the bond vigilantes placated (and the Chinese out of the South China Sea) for too much longer without significant economic-growth.
Not only that, Mr. Obama probably also knows that even if the American economy survived the massive assault inflicted upon it by his monetary, fiscal, and regulatory policies during his first term and somehow started to recover, our economic situation would get much worse before it had much of a chance of getting better: inflation would set in before unemployment started to abate, and neither raising the interest rates nor holding them down would be a good solution. Raise the rates and you slam the equities markets, stifle the lowering of unemployment, and jeopardize the recovery, which would carry enormous political risk; leave the rates low and you exacerbate the trashing of the dollar. And of course further trashing of the dollar would ratchet-up the likelihood that the bond vigilantes would act up and the Chinese would tell us, in effect, “Pick your poison” – they would refuse to continue to maintain the level of their holdings of our Treasuries unless we made geopolitical concessions.
The President’s persistence in his agenda, in the face of this probable level of awareness, confuses observers because the President does not fit conventional American analytical-models: he is a hard-core Leftist on matters such as the welfare state, social issues, energy policy, and re-distribution via tax-policy, from which people tend to infer that he is as ignorant as your average Lefty when it comes to fiscal and monetary policies and is thus oblivious to the risks of implementing the fiscal and monetary policies he has pursued since his inauguration. (The President also confuses observers by displaying qualities more often associated with a puppet than with the puppet-master, but that is a topic for another day.) What analysts fail to consider is that the President, like the Chinese (but unlike his true believers), may understand and appreciate free-market capitalism and conservative fiscal and monetary policy, and that he may (eventually) get around to cutting tax rates, cutting back on regulatory interference with the private sector, and balancing the budget by making cuts and reforms in entitlement programs, but that his short-term mission, his paramount ambition, is to extend and make permanent his political power and control. Also like the Chinese, the President may consider his party to be more important than his government and his constituents, and in the short term he may be fully prepared to have the country continue to suffer all the adverse consequences of his current fiscal and monetary and regulatory policies, so long as the process of politically implementing those policies (e.g., the fiscal cliff fiasco) serves his higher purpose of neutering the Republican Party by putting it at odds with itself over unpalatable counter-strategies.
So, how would the President reconcile his conflicting ambitions of achieving Chinese-style political control (and Chinese-style limitations of individual liberties) and at the same time achieving economic growth via sound monetary and fiscal policies? If he runs the economy into the ground, he is the ruler of a powerless nation, one that is easy prey to those who would like to control us in order to capture our markets, our technologies, and our energy resources. If he switches to conservative fiscal and monetary policies that would lead to recovery and sustained growth in our economy, he does himself and his party severe political harm because those policies would pull back on the welfare state and initially cause even-greater unemployment and possibly even trigger another recession.
In my opinion, the President’s solution, his agenda, is this: he keeps the economy in Neutral (the “Goldilocks economy” – not too hot, not too cold) for long enough to enable his political party to reclaim control of the House of Representatives in 2014 and politically cripple the Republican Party for a generation, which positions him to complete the “transformation” (his term) of America by channeling the domestic social- and political- controls of his Chinese role-models. Then, once single-Party control is effectively in place, he and his Party can finally get around to converting to conservative, Republican-style fiscal and monetary policies that lead to growth rather than vulnerability, while maintaining military strength, curtailing most elements of the welfare state, and reducing individual liberties – in other words, “state capitalism.”
And that is our likely future.