Download What Now, President-Elect Obama

Manila Bulletin
Business & Society
November 24, 2008
What Now, President-Elect Obama?
The euphoria about the election of the first Black President in the U.S. contrasts
significantly with the continuing decline in consumer confidence in the U.S.
Sales of
consumer goods and services, especially consumer durables, are plummeting. Is the United
States heading for a Great Depression similar to what happened in the U.S. in the early
1930s? Or will the U.S. retrace the protracted recession and deflation that Japan experienced
during the decade of the 1990s and the early years of this century?
After rereading the best-selling book by the late Harvard professor and diplomat John
Kenneth Galbraith entitled The Great Crash 1929 (The anatomy of financial disaster), I am
convinced that the probability of a great depression is the U.S. is practically nil. The
conditions that prevailed on October 12, 1929 (Black Thursday) and thereafter are very
different from those of September 15, 2008 (Black Monday) and thereafter.
The Great
Crash of 1929 was precipitated by a stock market crash that was the culmination of years of a
speculative fever which involved millions of ordinary and unsophisticated investors very
susceptible to rumors and panic. When the crash occurred, the Federal Reserve System took
a very passive attitude and rejected any affirmative monetary policy to prevent a depression.
The fiscal authorities insisted on a balanced budget. As Galbraith wrote in The Great Crash:
"The rejection of both fiscal (tax and expenditure) and monetary policy amounted precisely
to a rejection of all affirmative government economic policy. The economic advisers of the
day had both the unanimity and the authority to force the leaders of both parties to disavow
all the available steps to check deflation and depression. In its own way this was a marked
achievement--a triumph of dogma over thought. The consequences were profound."
2
There was absolutely no knowledge then of Keynesian pump priming, which only came
later during the era of the New Deal of the mid-1930s. The stock market crash was followed
by a panic in the banking sector. The unemployment rose to as high as 25% of the labor
force. The U.S. economy was the only engine of growth in the global economy. World
financial markets were completely illiquid.
The circumstances surrounding Black Monday are quite different. There was no stock
market crash, although stock markets all over the world have been on a roller coaster mode.
The financial tsunami started about a year ago with the real estate bubble occasioned by the
subprime crisis. The Federal Reserve System has been very proactive in addressing the
meltdown. Almost a trillion U.S. dollars are being employed for strengthening the banking
sector and for pump priming. There is no panic in the banking sector. Unemployment
remains single digit in most advanced economies, except Spain where the real estate bubble
has been worst. The U.S. slowdown is partly counteracted by relatively high rates of growth
in the so-called emerging markets, starting with Brazil, Russia, India and China. Some
regions are awash with liquidity with their sovereign funds actively looking for alternative
investments.
European governments have not hesitated to intervene massively in their
respective economies to prevent a depression.
If a great depression can be avoided by the U.S., is it still possible that the U.S. will
experience a Japan-like protracted recession? My own opinion is that it is highly unlikely for
the U.S. economy to mimic that of Japan. The main reason is that the economic woes of
Japan have been mainly due to its demographic crisis. Its rapidly aging population, coupled
with its reluctance to open up to immigrant workers, have depressed both consumption and
investment expenditures. The only way it could partially recover in the last three years was
to take advantage of the rapid growth of the Chinese economy by exporting significant
amounts of capital and consumer goods. But an export-led recovery is not sustainable.
3
Unless Japan is able to revive domestic consumption, it will continue to stagnate and be
caught in the so-called liquidity trap. No amount of credit loosening or fiscal stimulus will
work.
The U.S. population is still a very young population, thanks to its openness to
immigrants. In a relatively short time, consumer confidence can be restored by a proactive
Government that is willing to combine the power of the market and the prudent use of social
expenditures and government activism.
Especially under the leadership of a Democrat
President, the United States can replicate the social market models that are common in
Europe. In the short term (one to three years), President-Elect Obama and his economic team
may complete the round of fiscal stimulus packages to support output and employment. The
budget deficit for 2009 will easily exceed one trillion U.S. dollars. Then, they should
implement a health care plan for the poor, grant tax relief to the middle-class and invest in
projects for energy reliance. Over the longer term, the U.S. must restore fiscal balance and
introduce reforms in health care, the tax system and education. Finally, there must be a longrange revitalization of its infrastructure.
The U.S. economy is one of the most flexible in the whole world. As long as there is a
bipartisan effort to build on the strengths of the market economy and address its weaknesses
through appropriate government action and regulation, I am sure that before the first term of
President-elect Obama is over, we shall see the U.S. growing again at rates of 3 to 4 percent
annually. Its recovery will be helped by the continuing dynamism of the emerging markets
that will provide its business sector with both export markets and the lower-cost labor it will
need to bring down the costs of production of its goods and services. For comments, my
email address is [email protected].