Martin Wolf recalls his cry of Feb. 2009, and bites Obama

Sometimes, consolidating conventional wisdom is clarifying -- when the weight of evidence pushes convention toward consensus. That's what Martin Wolf's column assessing the Obama administration's economic performance to date does, or purports to do.

Wolf's conclusion: the stimulus, coupled with the Fed's emergency measures, was effective but inadequate.  Notwithstanding Larry Summers' dictum, "when markets overshoot, policymakers must overshoot too," the stimulus undershot. Citing the well-circulated conclusions of the study by Alan Blinder and Mark Zandi, as well as CBO estimates, Wolf consolidates mainstream economists' consensus that the stimulus, bailouts and Fed measures averted catastrophe, boosted GDP, mitigated the plunge in employment  --  but, as Wolf himself judged in February 2009 (and happily highlights here), was "too small, too wasteful and too ill-focused." It therefore left the country with a sputtering recovery -- and left the Democrats holding the bag.

Obama's "loose ends" theory of leadership

Many economists, advocates of free trade and students of the Great Depression have understandably been on red alert for signs that that countries worldwide will respond to economic crisis by raising trade barriers, as they did in the 1930s. Alarms have been sounded about the "buy American" provisions in the stimulus bill, softened though they were by stipulation that the U.S. would honor WTO and other treaty obligations; by the postponement of a pilot program to allow Mexican trucking in the U.S.; and by various protectionist measures taken by countries around the world.

In an interview with the Financial Times, Obama effectively suggests that democracies will have to toss out a few protectionist bones, but that the impulses can be contained. In the process, he sketches out an interesting theory of democracy:

FT: You mentioned the risks and dangers of protectionism. 73 separate measures have been identified by the World Bank since the last G20 summit so what again in practical terms can your administration do at the G20 to stop this - and I’m thinking to whether there are real risks that people worry in Europe a lot about what is going on, on Capitol Hill, with “Buy American” provisions.

Obama: Well first of all I think it’s important to note that here in the United States, despite some protectionist rhetoric and very real economic frustration growing out of the collapse of the financial markets and the huge rise in unemployment that the “Buy American” provision that was in the stimulus package was specifically written that had to be consistent with WTO. That the Mexican trucking provision is now subject to negotiations to ensure that we don’t see an escalating trade war.

I have sent a very clear signal that now is not that time to offer hints of protectionism and I will continue to discourage efforts to close off the US market. I think that in a democracy, there are always going to be some loose ends out there. That’s true here, that’s true around the world but overall I don’t think that we’ve seen a huge rush to protectionism that that isn’t the rhetoric that is emanating from the leaders that will be gathering in London.

And to the extent that the American people or Europeans or Asians, Africans, Latin Americans all feel confident that their leaders are doing everything that they can to encourage and promote economic [..] and that they have their populations interests at heart, I think we are going to be able to hold the line on any significant slippage (my emphasis).

Throughout the interview Obama expresses a similar confidence that he can ride the tiger of populist rage on several fronts - contain the anger over Wall Streeet bonuses if executives accept some constraints on pay, and win popular support for bailouts if people see the banking system begin to reboot:

I think it is very important for us to show that the money that has already been authorised is being well spent. That it is helping to result in loans going to small business and large business that are in turn investing and creating jobs. If voters perceive that it’s a one way street that we are just pouring more and more money into institutions and seeing no return other than avoiding catastrophe then it’s harder to make an argument for further intervention.

If on the other hand people start saying that they can refinance their house, and their child can get a student loan and that small business is able to retain its credit line, so that there is a tangible and meaningful result from our measures, then I think we can win back the confidence of the American public.

Obama also expresses tolerance for the way that democratic pressures shape different policies in different countries, suggesting that the G20 can embrace common goals without moving in policy lockstep. His respect for political process is similar in the international and national arenas. There's always going to be some loose ends out there.

"It is whatever Obama wants" -- a counternarrative peeks out

Most of what I read about the House-Senate negotiations on the stimulus bill emphasized what was cut out of House appropriations: aid to states, some subsidies for Cobra healthcare benefits, $16 billion for school buildings. Also, dilution of the total by including the $70 billion patch to the alternative minimum tax, rather than handling that separately, later. Rolled, rolled, rolled by Republican 'moderates,' went the narrative.

Politico's David Rogers tells a different story:

“Basically, it is whatever Obama wants,” said one House staffer up all night sorting through Appropriations accounts. From investments in new energy initiatives, broadband, high speed rail, and health information technology, Obama gained a foothold. Yet with continued market turmoil and a troubled economy, action was a first priority for the administration.

According to Rogers, Obama got much of what he wanted by agreeing to shave his middle class tax cut, "to $400 for individuals and $800 for couples — down from $500 and $1000, respectively. This was estimated to save at least $20 billion and was seen as a good faith effort to move the negotiations along."

Moreover, Rogers claims that Obama may end up with his 80 Senate votes after all. That sounds pretty rich now that Gregg Judd's withdrawn, the Republicans have circled the wagons, and people wonder whether a fillibuster in the Senate may yet be possible. But who knows which way the wind will blow by next Monday?

Today's Times story also showed some of the cuts in proposed spending to be more of a compromise than original reports suggested. It seems that $25 billion, not $40 billion, was cut from the House's proposed $79 billion in direct aid to states. The shave on Cobra health insurance subsidies to the unemployed was relatively moderate, from 65% of the cost over 12 months to 60% of the the cost over nine months - though temporary Medicaid coverage for the jobless who have no Cobra to fall back on was cut entirely.

Obama may have given up least on alternative energy investment. An advocate I know was thrilled with this synopsis from RenewableEnergyWorld.com:

The bill will be a boon for the renewable energy industry. All of the provisions that were contained in the Senate version of the bill were retained. In addition, the grants in lieu of tax credits clause that the House version of the bill contained made the final package.

The renewable energy, transmission and energy efficiency measures of the bill are outlined below.

The new bill contains $20 billion for tax incentives for renewable energy and energy efficiency over the next 10 years including:

• A three-year extension of the production tax credit (PTC) for electricity derived from wind (through 2012) and for electricity derived from biomass, geothermal, hydropower, landfill gas, waste-to-energy and marine facilities (through 2013).

• Grants of up to 30 percent of the cost of building a new renewable energy facility to address current renewable energy credit market concerns. The grant money was originally slated to go through DOE, but RenewableEnergyWorld.com is now hearing that the money will be distributed through the Treasury Department.

• Establishment of a new manufacturing investment tax credit (ITC) for investment in advanced energy facilities, such as facilities that manufacture components for the production of renewable energy, advanced battery technology and other innovative next-generation green technologies.

• Clean renewable energy bonds for state and local governments.

• Extensions for tax credits through 2010 for purchases such as new furnaces, energy-efficient windows and doors or insulation.

• A tax credit for families that purchase plug-in hybrid vehicles of up to $7,500 to spur the next generation of American cars.

In addition, $30 billion will go to smart power grid, advanced battery technology and energy efficiency measures including the Smart Grid Investment Program to modernize the electricity grid to make it more efficient and reliable, U.S. development of advanced vehicle batteries and battery systems through loans and grants.

If there's another turn of the screw and Obama does indeed get a fat handful of Republican Senators on board, ththe country may get used to him getting his way, as it did to Reagan early on. The money carved out of the stimulus may prove to be money well unspent.

Poison pill in the stimulus bill

Suppose the Democratic Congress passes and President Obama signs a stimulus bill that triggers a worldwide Depression rather than forestalling one? We may be on the brink.

Like many Obama supporters, I've spent a lot of time lately fretting about what Republican opposition might do to the stimulus. Will they cut out $200 billion? Will they raise the ratio of tax cuts to spending?

But those concerns pale beside the "buy American" provisions in the bill. In the House version, these stipulate that any iron and steel used for projects funded by the bill be produced in the U.S. The current Senate version extends the requirement to all manufacturing products.

Leaders in Europe and Asia are warning that these provisions could trigger a global trade war -- a cascade of "beggar-thy-neighbor" protectionist measures. Economists and financiers across the political spectrum echo that warning (two are noted in the prior post). As the world looks to the Obama Administration for leadership, a protectionist stimulus would cause swift and widespread disillusion -- and equally widespread retaliation.

Most galling, as a new Peterson Institute study makes clear, the provision would trade U.S. global credibility for a pittance -- approximately 1,000 steel industry jobs in a labor force of 140 million people.

The negative effects of the provision may be moderated in various ways. It may be jiggered to remain in nominal compliance with WTO and NAFTA commitments. Specifically, additional cover could be built into its current public interest waiver, stating that the "buy American" provision will be waived where it proves "inconsistent with the public interest." The Peterson brief suggests that negative effects could be mitigated "by stating explicitly...that the public interest waiver is intended to be used to avoid violations of US trade obligations." Another option, according to the Peterson brief, is a presidential statement (signing statement?) that the U.S. will respect its international obligations.

Even with such a caveat, however, as the Peterson brief and Jagdish Bhagwati point out, the provision would cut out major steel suppliers hat have not signed the WTO's Agreement on Government Procurement -- namely China, India and Brazil. Yes, the measure with the appropriately positioned waiver could be used to "encourage" those countries to sign on. But it will more likely prompt them to impose their own import restrictions.

It's distressing that the Peterson brief appears to assume that the political imperative to include this poison bill is too strong to resist. What an opportunity this is for Obama to walk the bipartisan walk and outflank even most Republicans from the "right" -- though part of his broader political message should be that getting a free trade/fair trade balance right does not fall into "the tired categories of left and right." The real issue, framed trenchantly by the Peterson brief, is leadership:

Buy American provisions would particularly damage US reputation abroad since they would come just a few months after the United States pledged to reject protectionism at the G-20 summit on November 15, 2008. The world is carefully watching the first moves of President Obama to gauge the tone of the new administration's trade policy...

Based on our economic and legal analysis, the Buy American provisions would violate US trade obligations and damage the United States' reputation, with very little impact on US jobs. In a country of 140 million workers, with millions of new jobs to be created by the stimulus package, the number of employees affected by the Buy American provision is a rounding error.

In other words, there is little bang for the buck, and on balance the Buy American provisions could well cost jobs if other countries emulate US policies. Most importantly, the Buy American provisions contradict the G-20 commitment not to implement new protectionist measures--a commitment that was designed to forestall a rush of "beggar-thy-neighbor" policies.

Very early in his presidency, George W. Bush's free trade credibility was gutted when he kowtowed to the steel industry and imposed tariffs on steel imports. What a bitter irony if Obama makes the same mistake in his first month in office - selling the U.S.'s global leadership birthright for a mass of protectionist pottage.

UPDATE: Buy American provision has been softened but not dissolved - FT:

The Senate narrowed the Buy American provisions, which require that federal money be spent on goods from US companies, to ensure they would be compatible with US commitments under existing trade treaties. But it rejected an amendment from John McCain, the defeated Republican presidential candidate, to strike Buy American from the bill altogether.

The head of the European steel industry trade group said the Senate had not done enough to head off a potential trade war. “Unfortunately the Senate’s vote does not go further and overturn the Buy American clause,” said Gordon Moffat, director of Eurofer. Countries such as China, India, Russia, the Ukraineand Turkey, which have not signed the World Trade Organisation’s government procurement agreement, would still be excluded, he said.

The "softening" was prompted by Obama, who had this exchange with Charlie Gibson on Feb. 3:

CHARLES GIBSON: A couple of quick questions. There are "Buy America" provisions in this bill. A lot of people think that could set up a trade war, cost American jobs. You want them out?

PRESIDENT OBAMA: I want provisions that are going to be a violation of World Trade Organization agreements or in other ways signal protectionism. I think that would be a mistake right now. That is a potential source of trade wars that we can't afford at a time when trade is sinking all across the globe.

CHARLES GIBSON: What's in there now? Do you think that does that? Do you want it out?

PRESIDENT OBAMA: I think we need to make sure that any provisions that are in there are not going to trigger a trade war.

But Obama stopped short of calling for the provision to be removed entirely. Clive Crook explains why the "softening" is not enough:

President Obama and his spokesmen said this week that the bill's language will be changed as necessary to prevent a trade war. The revised Senate language is helpful, but does not go far enough. Protectionism that is technically consistent with treaty obligations is still an attack on trading partners. The spirit of co-operation is as important as the letter. In the current climate, legal protectionism could quickly degenerate into a cycle of illegal retaliation and counter-retaliation.

What Republicans should be good for

Andrew Sullivan has recently written something to the effect that we need Republicans to referee spending and hack fat off the stimulus bill. I seriously doubt the party's ability for constructive input on that front (so does Andrew; today he writes that they should understand that they have no crediblity on fiscal discipline). But Republicans could do the country a real service right now by standing up for one of the party's historic core principles: free trade. Today, Jagdish Bhagwati in the FT and Burton Malkiel in the WSJ sound the alarm about starting a Depression-triggering cascade of protectionist actions worldwide with the "buy American" provisions in the stimulus bill. Those warnings are timely and should be a matter of bipartisan consensus.

Update: the FT reports this afternoon that the buy American provisions have been softened but may still do harm:

The Senate narrowed the Buy American provisions, which require that federal money be spent on goods from US companies, to ensure they would be compatible with US commitments under existing trade treaties. But it rejected an amendment from John McCain, the defeated Republican presidential candidate, to strike Buy American from the bill altogether.

The head of the European steel industry trade group said the Senate had not done enough to head off a potential trade war. “Unfortunately the Senate’s vote does not go further and overturn the Buy American clause,” said Gordon Moffat, director of Eurofer. Countries such as China, India, Russia, the Ukraine and Turkey, which have not signed the World Trade Organisation’s government procurement agreement, would still be excluded, he said.

Moffat's criticism tracks with Bhagwati's:

Yet some do worry about thus undermining the WTO, which has inherited from the General Agreement on Tariffs and Trade the many roadblocks to re-enacting that history of mutually harmful outbreaks of trade barriers. They have argued, therefore, that the US can enact WTO-consistent procurement rules by excluding from US procurement China and India, among other developing countries, which have not signed the optional procurement code. But remember that these nations can also retaliate in WTO-consistent ways. They often have “bound tariffs” – ceilings, which are significantly above the “applied”, that is, actual, tariffs; and it is possible to raise the applied tariffs towards the bound levels without any restraint at all.

Nothing would prevent India and China from choosing to raise tariffs thus on items of export interest to the US. Besides, they could shift their own purchases of aircraft away from Boeing to Airbus, and of nuclear reactors from American to French companies. The response would, of course, be for the enraged US congressmen to start enacting their own retaliation. The game would become lively.

While I have found Bhagwati's free trade championing a bit imperious at times (and been imperiously slapped back), his warning now is timely and well-informed. Not passing a strong stimulus bill could be disastrous. But so could passing one with this poison pill.

Obambi chorus rising again...

This lament by Michael Hirsch is well-informed, but it also reminds me a bit ofDemocratic hand-wringing in the dark days following the Republican Convention:

Obama's desire to begin a "post-partisan" era may have backfired. In his eagerness to accommodate Republicans and listen to their ideas over the past week, he has allowed the GOP to turn the haggling over the stimulus package into a decidedly stale, Republican-style debate over pork, waste and overspending. This makes very little economic sense when you are in a major recession that only gets worse day by day. Yes, there are still some very legitimate issues with a bill that's supposed to be "temporary" and "targeted"—among them, large increases in permanent entitlement spending, and a paucity of tax cuts that will prompt immediate spending. Even so, Obama has allowed Congress to grow embroiled in nitpicking over efficiency when the central debate should be about whether the package is big enough.

Impression seconded by Nate Silver:

with the important caveat that there are many more chapters to be written in this saga -- the final bill is likely to come out looking closer to what the Greg Mankiw's of the world might have advocated for and less the Paul Krugman's.

Perhaps it was inevitable that this would happen once the details of the bill became known and the Republicans began to pick over them like vultures. Perhaps the bill could have been better written. Still, in essentially passing off both narrative and literal control of the contents of the package to the Congressional Democrats, the Obama administration may have played it too cute by half. Obama is popular; Nancy Pelosi and Harry Reid aren't. The trajectory of the bill might have been different if Obama had devoted a prime time speech toward selling it, with graphs and pie charts and the like. But there hasn't been a Big Obama Moment like that -- a show of force -- something that really resonated outside the Beltway. The closest Obama came, oddly enough, was during his inaugural address, but the references to the stimulus there were abstract, oblique.

I'm a rather nervous and pessimistic sort myself, but I also feel that we've learned by experience that Obama is a master of timing, and strategy, and rhetoric. My hope is that he's gamed out when to weigh in heavily on this debate, and that the stimulus will look far less Mankiwist that Nate Silver fears.

On the other hand: Obama has never been President before, and I don't want to do this overwhelming-faith-in-one-man routine. But I've been watching for two years, and my trust has only grown.

Our Stimulating ex-President

Riffing on the difficulties we all sometimes have in processing newspaper headlines - those condensations of heavyweight monosyllables -- Gideon Rachman shares his fruitful misprision of the term 'stimulus bill" and suggests that it's "an excellent name for the former president." This thought was so stimulating that it spontaneously generated collateral damage:

Stimulus Bill,
that Hillary shill,
gives the pundits a thrill
when he goes for the kill.
As his voices rises shrill
few believe that he will
get down and lie still
when commanded by Hill.