Friday, October 29, 2010

Roubini wishes Obama had done it all

Nouriel Roubini may have a keen macroeconomic insight into what the world economy needs and what the U.S. economy needs. But he has little appreciation for the realities of U.S. politics. Or rather, he suppresses his awareness of those realities while assessing the performance of President Obama.

In his contribution to the Financial Times' series of such assessments (Obama at Bay), Roubini credits Obama with preventing another Depression, via the stimulus and the bailouts, and with understanding the need for more stimulus now and a timed plan for deficit reduction later. He also gives him points for forming the deficit commission. He blames the President, though, for what has not happened and what will not happen:
In an ideal world Mr Obama would also have been able to move towards reforming and reducing entitlement spending, with commitments to measures that could be phased in over the next few years, therefore avoiding short-term fiscal pain. He would also have committed to increase, gradually over the next few years, less distortionary taxes such as a VAT and a carbon tax. This would have reduced the fiscal deficit, and created a climate in which no investor would worry about additional stimulus.

Sadly, this has not happened. In fact the opposite will now take place. The term stimulus is already a dirty word, even within the Obama administration. After the Republicans make significant electoral gains further stimulus is even less likely. Medium-term consolidation, meanwhile, will be all but impossible as the 2012 presidential election begins to loom large.
A VAT and carbon tax. In what political universe?  Does Roubini not understand that Republicans not only pursue their own insane economic prescriptions -- tax cuts today, tax cuts tomorrow, tax cuts forever -- but poison the well for serious engagement by Democrats with ideas such as a VAT -- and cow centrist Democrats on common sense  propositions like further stimulus or ending the Bush tax cuts for the wealthiest? As far a carbon tax, it might be worth noting that cap-and-trade is one of the 400+ bills passed by the House and bottled up -- now, apparently, forever -- in the Senate.

Of course, Roubini is aware of these political currents. In fact, he acknowledges them, backhand, with a phrase for the ages:

The Obama administration did the right thing early, and avoided another depression. He is still doing the right thing now in pointing out the risks of early austerity. And he is limited by an uncooperative Republican party trapped in a belief in voodoo economics, the economic equivalent of creationism (my emphasis).
But he doesn't let that awareness get in the way of judgment. Next sentence:

Even so, he and his party have been unwilling to tackle long-term entitlement spending. Two years in, and this means the US remains on an unsustainable fiscal course.
If Roubini is unimpressed by the cost-control measures in the PPACA, he should find room to say so.  Meanwhile, to simultaneously credit Obama for forming the deficit commission and blame him for not already have proposed measures such as a VAT in the current U.S. political environment makes no sense.

In outline, Roubini's assessment is similar to Krugman's (and Martin Wolf's): Obama's response to the financial meltdown was correct in outline but too timid.  Krugman, however, has a coherent narrative accounting for Obama's alleged failure in political terms: if he had asked for far more stimulus, he would have got more, and if he had got more, the recovery would have been stronger and he'd have far more political capital today. That counterfactual might be questioned, but it's logically coherent.  Roubini, however, simply blames Obama for not accomplishing the politically impossible -- on several fronts -- in the space of two years.

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