Obama-nomics

It is impossible not to like Obama as a person. But I'm nore sure about his economic policies, and it is on those that he will ultimately be judged. In Money Week this week I explain why. Here's a taster.

He speaks like an angel. His wife, everyone agrees, is poise, intelligence and grace personified. Even the first puppy, a Portuguese water dog called Bo, appears to have been blessed with the ability to charm cats, never mind the world’s media.
And yet, 100 days into his Presidency, the outlines of Barack Obama’s economic strategy are becoming clear. We have the key point of Obama-nomics. And there is just one snag. Rather than slowing down the global recession, or even turning it around, the steps the American President is taking appear more likely to prolong it.
Obama is in thrall to a very 1960s-style form of industrial policy. He is promoting mergers, rescues and ‘grand projets’ that would make a French enarque purr with pleasure.
But he is ignoring the real issues that caused the virtual meltdown of the global economy last autumn. And he is promoting a style of hyper-interventionism that is completely unsuited for the networked, decentralised economy of the 21st-century.
No one can doubt the energy and commitment of the President.
In his first three months in office, he has sunk hundreds of billions into vast spending packages, bailed out the collapsing American auto industry, and launched a swinging clampdown on offshore tax havens.
"We can't go back to an economy that's built on a pile of sand, on inflated home prices and maxed-out credit cards, on overleveraged banks and outdated regulations that allow recklessness of a few to threaten the prosperity of all," he said in a speech on the economy last week.
Ambitious stuff. The trouble is, the reality is lot murkier than some of the high-flown rhetoric.
Start with the auto industry. Last week, Obama pushed through a rescue for the auto giant Chrysler that, via bankruptcy, will create a new entity, jointly owned by the employee association, the American and Canadian governments, and Italy’s Fiat. Bond-holders and hedge fund manager who may have had stakes in the outcome were quickly hustled aside.
The Chrysler rescue package looks set to serve as a template for the much larger bail-out of General Motors, a company in just as poor shape as Chrysler but with even more jobs at stake. Fiat may well step up to the plate again – the Italian company looks set to take control of its European brands Vauxhall and Opel as part of that rescue.
Let’s put this as kindly as we can. If the answer to what’s wrong with the economy is Fiat, you must have been asking the wrong the question.
In reality, Chrysler has been a dog of a company for more than a generation. Ever since poorly engineered, gas-guzzling cars with built-in obsolescence went not-very-surprisingly out of fashion in the early 1970s it has struggled to come up with a new role for itself. Daimler Benz chewed its way through tens of billion of euros trying to re-invent it, and completely failed – and Daimler, let us remember, is, along with Toyota, the finest auto company in the world.
The idea that a combination of Fiat, the White House and the auto workers union can turn things around is absurd. That, however, is what is about to be attempted – first with Chrysler, and then, on a far larger scale, with GM.
The reality is that the Americans are not very good at making cars, and would be better off closing down their whole industry much as the British did in the 1980s. Autos are turning into a Japanese-German industry, just as, say, aerospace is an American-French industry, or banking an American-British industry. There is no point in sinking billions into denying that simple reality.
The big danger the world faces right now is a revival of protectionism. If Chrysler and GM are part-owned by the American government, and are still struggling to compete, how long will it be before there are demands for curbs on their competitors? How long before there are restrictions on those irritating European, Japanese and Korean cars people keep buying. Not long.
Worse, he is propping up an industry where everyone acknowledges there is too much capacity – and so postponing the inevitably moment when the industry is slimmed down to a handful of companies that can actually make money. As for an exit strategy, no one has mentioned it – but getting out of Iraq is likely to be child’s play compared with getting out of Chrysler and GM.
The same mistakes are likely to be played out elsewhere.
Obama had launched a crack-down on what he terms ‘tax avoidance’. In fact, it is just American companies shifting profits around the world. It doesn’t make any sense to treat the likes of Boeing or Microsoft of McDonald’s as US companies. They are multi-nationals that happen to do some business in America.
Whatever the problems of the global economy, they aren’t going to be fixed by either a retreat in protectionism or an attack on globalisation. But when you look past the rhetoric, that is precisely what is happening. Both are only going to postpone the eventual recovery from this recession – and leave the US economy that emerges a lot weaker.
Meanwhile, money is being squandered on French-style ‘grand projets’ such as attempting to introduce high-speed trains to the US. But trains struggle to make money even in small, densely populated countries: they have little chance of prospering in a huge, thinly populated one such as the US.
In truth, the root causes if the credit crunch are well-established. Monetary policy was too lax for too long. And the trade imbalances – mainly between the US and China – created a system in which too much capital was being re-cycled through the global capital markets than could be safely handled.
Nothing much, however, is being done to address either issue.
The rhetoric of Obama-nomics is sweetly judged. The reality is that many of the policies he is pushing are only going to deepen the problems of the global economy – and they certainly aren’t going to start fixing them.