The Obama State of The Union Address is tonight, and presents what could be the beginning of the end of his problems depending on his course of action. President Barack Obama, normally politically brilliant, has made a critical intellectual error in the decision to place a freeze on discretionary spending for three years.
It's a proposal President Obama claims will save $250 billion. The problem with his proposal is its timing; there's no evidence that the freeze is needed now. While U.S. debt level is high at 11.4 trillion, the country's debt load capacity is by no means threatened. The need is to increase economic production, thus lowering the percentage of Gross Domestic Product that is the U.S. Debt.
That's the objective missing in the Congressional Budget Office's irresponsible debt statement today. Irresponsible because it failed to discuss the need to grow the economy to reduce the debt.
What President Obama and his economic team needs is a refresher course in basic economics. Aggregate Demand (AD) is Consumption plus Business Investment, plus Government Spending, minus Imports, plus Exports. Right now, Consumption, Business Investment, and Exports are all lower than they were even three years ago; so low the overall economy contracted where GDP was less than that three years before, thus the recession. The need is to rapidly increase AD and the only way to do that is via Government Spending.
The problem is that the Economic Stimulus Package was not large enough; it should have been $2 trillion in size. It is focused too much on maintaining the social safety net and helping local government infrastructure. But the vast majority of America's economy is based on small service businesses. We now have the cottage-industry economy futurists like Daniel Bell predicted decades ago in The Coming of Post-Industrial Society.
In a 21st Century America where technical jobs and services have been creamed by the credit-crunch, the Obama path ignores the post-industrial sector purely in favor of construction. Even as roads and bridges are built, the small business service sector goes without assistance. The idea was for service firms to be helped by spending in infrastructure, but that trickle-down concept does not have the same wide-spread impact as in saving an auto plant or General Motors.
The Economic Stimulus package is missing direct subsidies for firms that make products in the United States, and a basic "tax-payer bailout" of $5,000 for every American taxpayer below $100,000 in income. That amount, even if some use it to pay off credit card debt, will result in improved credit ratings.
The President could issue a controversial executive order establishing credit card rate controls. The end result would be a dramatic spending spur that would save jobs, create new ones, and fuel business development investment. The consumer is key but needs Government's help to be effective.
Somewhere in the course of the first year of his first term, President Obama got bad advise, probably from Larry Summers, who has no business being the head of Obama's Economic Team. Larry Summers and U.S. Treasury Secretary Tim Geitner should be fired and replaced by Princeton Economist Paul Krugman and TIAA-CREF CEO Roger Ferguson, respectively.
It's time for Obama to right his ship and get back on course. The President will not do it with the State of The Union Address, but he can do it before the year is over.
Stay tuned.
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