How the Obama administration is misreading the recession

If there was one thing that seemed certain about the Obama administration, it was their commitment to Keynesian deficit spending to boost the economy out of its slump. But Keynes beware: With unemployment at a whopping 10.2 percent, and probably rising, the White House has begun trumpeting its commitment to Hoover-style deficit busting. On November 13, the White House warned cabinet departments of a spending freeze. The next week, while in China, Barack Obama told an interviewer the United States could suffer from a “double-dip recession” if it didn’t restrain public debt. And just this week, the White House declared its displeasure with House Democrats’ plans for a new job stimulus.

If the administration does block a new stimulus program--either directly or by reinforcing Republican complaints about government spending--that will have severe repercussions, not only on the economic recovery but also on Obama’s political standing. In a Gallup poll last week, Obama’s popularity dropped below 50 percent for the first time. That reflected, perhaps, the turmoil on Capitol Hill over the health care bill, but it seems primarily due to rising unemployment--which, without a new stimulus, will continue to rise over the next year.

Many previous recessions have been cyclical events precipitated by government efforts to stem the inflation created by a boom or other external events, such as an energy crisis. The severe Reagan recession of the early 1980s, for example, came about when the Federal Reserve under Paul Volcker jacked up interest rates to choke off inflation. As inflation eased, the Fed lowered interest rates, and the private economy quickly revived.

But the current recession, like the depression of the 1930s, did not result from the Fed’s attempts to curb inflation. It was the product of a slowdown in industrial production, which was caused by global overcapacity and foreign competition. According to a recent report from the management consulting firm Deloitte, all American industries except for healthcare and aerospace/defense--both of which government heavily regulates and subsidizes--have suffered from declining rates of profit since 1995. A slowdown in the telecom and other core private industries contributed to the recession during 2001-2002. This slowdown--epitomized most recently by autos, but not limited to them in the least--underlies the current recession.

This recession is often described as a financial crisis--and it’s true that the bursting of the housing bubble did precipitate the sharp downturn that began in late 2008. But the bubble itself was a product of global savings (particularly from the Chinese) seeking investment outlets in the United States, finding few in industrial sectors, and turning instead to Treasury bills and derivatives from the inflated housing market. That is, again, similar to the depression of the 1930s, which was precipitated by the stock market crash, but which was underlain by a downturn in auto and other key industries of the 1920s.