Why Obama is an Economic Genius
I know in the past I’ve been critical of Obama’s economic policies. I know that I’ve said that his proposed policies undermine economic health and violate free market principles. In light of the American Insurance Group’s (AIG) use of federal bailout funds to grant bonuses to executives and Obama’s condemning response to it, however, I admit that I have to reform my opinions.
Allow me to explain my reasoning. As the federal government adds to the list of restrictions on how corporations are allowed to spend bailout funds, some economic conservative pundits are criticizing politicians for “micromanaging” the economy. They say that saving industries that made poor decisions encourages moral hazards and further bad behavior.
These conservative pundits point to AIG’s continuing bad behavior as an example of how the bailouts have failed. Meanwhile, liberal pundits see the opposite trend — corporate “misuse” of funds is proof that people can’t be trusted to act in their own best interest, so they need the sublime hand of government intervention to save them from themselves. Obama, being an expert in economic psychology, has got both of these groups fooled.
What Obama is doing is invoking Bush’s philosophy of “abandoning the free market principles to save it,” only he’s not doing it in the way you might think. Obama is pursuing a liberal policy agenda in order to coerce the free market into correcting itself.
The coolest, and most admirable, part of Obama’s plan is that he’s doing it in complete secrecy, promoting policies for one reason, and using political doublespeak so that the market won’t guess his agenda. By now you’re probably asking, “If the plan is so secret, and he hasn’t revealed it to anybody, how could you know what’s going on?” While I don’t actually know what the President is thinking — he wouldn’t reveal the plot even to me — the evidence of his secret plan is so obvious, if you’re looking at the right places, that the conclusions are inescapable. Here follows the infalliable logic of the “Obama plan.”
When Obama pursued a policy of bailing out failing companies, he was reacting to a recession. People feel comforted when they’re getting bailed out — regardless of the possibility that it was their own mistakes that led to the problem. During a recession, market actors get nervous, even if their particular industry isn’t directly related to the source of the problem. Nervous market players tend to be jumpy, making recessions that much worse by propagating the volatility in markets.
Obama’s no dope, however. He knows that government intervention in the economy cannot fix long-term problems. He knows that fiscal stimulus is just a way of restructuring debt, so that it comes back to bite you harder in the ass later.
He knows that recessions are caused when the demand for a particular bubbled sector is physically unsustainable and must collapse. He knows that providing stimulus continues the same unsustainable practices, and props up the same bad firms and that, eventually, the market will eventually correct itself. He knows that avoiding market correction will make it that much worse when it does happen. He knows that central planning is inefficient and is not foolish enough to try to predict, or appoint a “czar” to guess, which sectors are, in fact, sustainable.
You, of course, see the dilemma that Obama is facing. People in the bad sectors react positively to government bailouts, but the economy ultimately doesn’t. If the people in the “bad sectors” are politically powerful, that puts further pressure to deny the obvious logic of the corrective market forces. If then, people expect a bailout, but one does not come, the short-term recession pains are, perhaps, greater than they have to be.
The problem is, while Obama is astute enough to see the problems with using government stimulus to avoid a recession, that people in the economy just think they need a bailout — and why shouldn’t they? The government — pre-Obama, of course — has been interfering in markets for decades, providing subsidies, bailing out their darlings, creating moral hazards, etc. We don’t have a free market today, so people have forgotten how they need to behave to survive, and thrive, in a free market.
This is where Obama’s solution comes in.
Step 1: Propose massive bailouts to calm down markets that are unused to government intervention. Step 2: Convince the American public that the economy will be worse off without lots of government intervention. Step 3: Start to let the money flow, but keep an eye on how the money is being used. Alert the media when companies spend the money in ways that the public, most of whom are not CEOs of large corporations, don’t understand and think is wrong. Step 4: Use that as an excuse to attach heavy strings to the bailout funds, so that any corporation which accepts the money will be a virtual slave to micromanaging politicians. Step 5: Appoint an incompetent “bailout czar,” one who knows nothing about running a business, to dictate the conditions by how the CEOs have to use the money. Watch the market react as the companies lose their competitive edge. Step 6: Sit back and relax. CEOs will come to their senses, realizing how government interference makes their own companies, and markets in general, less productive, and that the costs of the strings are simply not worth the trouble of having the bailout money. Eventually, people will realize how their mistakes and bad behavior was largely a result of signals from the Federal Reserve and federal government and demand that governments stop interfering with markets, altogether.
The plan is beginning to take hold as step six of the plan is slowly coming into place. Many banks are already trying to figure out a mechanism to return their share of bailout money. Some of these include small local banks, but also some big players like Goldman Sachs and Wells Fargo. Signature Bank of New York, for example, announced that they would returning $120 million to the treasury because of new executive pay restrictions in the economic stimulus package. Other banks that wanted bailouts for themselves have officially backed out.
As the economic crisis continues, and bailout funds continue to be divvied out, companies will seek to use that money in what they perceive is the optimal way. Fannie Mae and Freddie Mac, leaders of the subprime institution, have decided to give their own round of executive pay bonuses at a half a million dollars a pop. While the bonuses help attract the talent, the American people don’t understand this. Quite understandably, they want to end the recession and preserve frugality with their own money.
Obama knows that the only way to end the recession for real is to return to the logic of the free market — decentralized actions help coordinate information about market needs better than any central planner. However, to an economy that isn’t used to lassez-faire economics, we needed to learn this lesson the hard way. Obama’s bit of reverse-psychology is an economic masterstroke.
But, don’t tell the CEOs, because it’ll only work if they don’t realize it’s happening.
