Tuesday, March 1, 2011

Obama and the State of Economic Policy

One of the really wonderful things about casting a vote for Barack Obama in 2008 was the belief that he would be a more curious, a more interested, and a more studious president than had been George W. Bush.

It was not a high bar to clear. Yet to look at the wasteland of economic policy over the course of Obama's first term in office, one wonders whether anyone on the Obama team has really read or understood anything about economics in the last 20 years.

It's not as if one has to go off the beaten path to find pertinent analysis that might address the economic malaise in which we find ourselves. One of the foremost students of Japan's long stagnation in the 1990's is Paul Krugman, who also happens to be one of the most famous economists alive.

What did Krugman recommend at the beginning of the Obama presidency? A bigger stimulus, gambling that reducing unemployment would prove to be more important to the economy than fighting inflation.

Today inflation stands at record lows while unemployment remains stubbornly stuck at its highest rate in over a generation. No one today could argue that Krugman was wrong in his diagnosis, yet very few of his critics have bothered to notice that he was right.

If it were only theory on which our leaders were ill-informed, we might forgive them. After all, it is the executive's job to run the government, not pontificate about it. Yet key members of the Obama team, including the President himself, sound vague and confused on the basic operational details of the economic institutions they control.

In 1998 L. Randall Wray, a brilliant young economist at the University of Missouri, published a book called Understanding Modern Money. It is not a work of theory; it is a textbook description of the operational details of the modern currency system, backed by economic, historical, and anthropological research.

Based on the administration's policies and public utterances, it would be surprising if a single member of the Obama economic team had ever read this book. Wray had a diagnosis and prescription in 2009 as well - bigger deficits and a laserlike focus on full employment of the entire work force, with price stability protected by structural changes in the government's participation in the labor economy rather than by union-busting and threatened shutdowns of vital services.

Unfortunately Obama and the Democrats can't go back in time and follow this prescription before losing the House, their Senate supermajority, and Obama's sky-high postelection approval ratings. Those advantages are already squandered.

But forgive me if I continue naively to hope that someone in the Obama White House might pick up a book and thumb through it to see if they can get some kind of clue about how to steer this ship. We've been a long time at sea, and we could use a course correction.

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