PRESIDENT Obama is now thinking about what comes after his “Hundred Days.” Although the president’s first legislative period was modeled on Franklin D. Roosevelt’s original “Hundred Days,” Obama, a big FDR fan, may find more in FDR to emulate.
But to make the next period smoother, Obama will want to look at what caused him trouble in those early Roosevelt-redolent months. Three market-depressing factors stand out:
The president’s willingness to spend. Obama doesn’t have the temperament of a big spender. But he has proven himself willing to go along with spending once economists or reformers justify it — witness his $787 billion stimulus package, and the multitrillion-dollar budget. Markets, however, recognize that federal spending is a relatively inefficient way to promote growth. That’s one reason for the Dow’s painful drops after Obama’s election.
Through packages like the stimulus law, the administration has put us on the course Japan followed in the ’90s. Japanese leaders implemented stimulus after stimulus; when one didn’t work, they tried another. The ’90s came to be known as the “lost decade,” for at the end Japan had higher unemployment. The nation’s stock market had not recovered and national debt ranked up there with war-torn Lebanon’s. The danger for America is that we replicate the sad pattern.
Obama says he’ll curtail the deficits that his stimulus package and budget portend. This promise doesn’t seem keepable. The economy must grow if deficits are to narrow, and Obama has taken too few measures to create growth. Tax cuts for capital, a commitment to lower income taxes, assurances that property rights matter as much as income distribution — these would create an environment in which new businesses might start and old ones revive. But such concepts are not yet welcome in the presidential salon.
His comfort with economic redistribution. The president seems to see no consequences from imposing heavier taxes on higher earners and eroding their tax deductions. This, even though those rates and deductions make the difference between choosing to work or invest and choosing not to do so. Given that London is also raising tax rates, this policy may not necessarily drive job creators to Britain. But the administration’s pro-tax policy will drive them somewhere — into a pout at home or to tax havens abroad.
Another disturbing movement has been the administration’s bid to control more student loans. Some have argued that this policy may make for cheaper loans in the shorter term. Long-term, however, it would give government tighter control of the loan market, providing yet more opportunity for redistribution. Under the guise of good government, the loan proposal is a credit-market power grab.
The uncertainty the administration has generated with its stimulus package and bank bailouts. President George W. Bush and Treasury Secretary Hank Paulson did much to strengthen crisis-related market uncertainty by treating the economic downturn as a problem requiring Executive Branch action. In this sense, Obama’s first “Hundred Days” were Bush’s. But the Obama administration signaled early on it would sustain the Bush posture when the president’s chief of staff, Rahm Emanuel, spoke of using the economic crisis as an opportunity to promulgate long-planned reform. What Emanuel was saying is that anything is on the table, from health-care reform to . . . who knows what? As long as investors aren’t sure what government will do, they sit tight.
Why should this past matter if the market goes up and unemployment’s rise slows, as may happen this year? Even the dollar seems to suggest we’re on the right course. With every bit of unsettling news, from Mexican drug raids to swine flu, world investors are fleeing to the dollar, not from it.
One answer is that the quality of growth we get from stimuli will disappoint. The other is that this dollar dynamic could reverse. The world now makes the dollar its reserve currency less by choice than because there’s no alternative. In the longer run, alternatives may arise — monies of other lands or even of companies (imagine Visa or Nokia dollars). China has made it clear that it’s deeply disappointed in the dollar’s instability. Its withdrawal from our currency would be a Katrina, making our current troubles look like a shower.
As he learns on the job, Obama is likely to look for models beyond Roosevelt and his other hero, Abraham Lincoln. They do exist, including among Democrats: the later Bill Clinton, who ended welfare, Harry Truman, who helped create the state of Israel, and even Jimmy Carter, who put Paul Volcker at the head of the Federal Reserve. Sure, talk about “Hundred Days” plans stirs nostalgia. But the reality is that one “Hundred Days” session per president is more than enough.
Amity Shlaes, a senior fellow at the Council on Foreign Relations, is author of “The Forgotten Man: A New History of The Great Depression.”