Obama’s Weak Recovery from the Depths of Liberal Economic Policies
A basketball player from youth to middle age, President Obama has forgotten what rebounding is all about. Controlling “the boards” in basketball produces opportunity to turn failure into success. It can turn missed shots into scores and an opponent’s similar failures into game-wining fast breaks. Similar things should happen when a free market economy falls into recession. Falling raw material prices and falling interest rates give businesses new opportunities to correct the mistakes of the past, as well opportunities to take advantage of their competition’s failures. The innovative and efficient thrive; the obsolete and lethargic do not. Deep recessions have produced spectacular recoveries with the current economy being a notable exception. Yet Obama repeatedly warns that we must go forward with what he has done and not return to the policies that got us into the financial “mess” of 2008. He ignores similarities between his efforts and liberal programs which brought on the “mess” that turned a ten-month downturn into the Great Recession.
Imagine basketball with little rebounding: The refs blow a whistle on every missed shot, return the ball to the shooter and send him to the free-throw line. The game would be as lethargic as an economy where government bails out failure and subsidizes underperformance. The massive Obama stimulus efforts and other excessive officiating including EPA regulations, have taken the rebound out of our economy and saddled us with stubborn unemployment, high energy costs, and soaring indebtedness. And, similar over-officiating caused the “mess” in the first place.
To suggest that the “mess” was caused by “top-down” policies which permitted under-regulated trading of derivative investments is to confuse a symptom with the disease. A Democrat-controlled Congress created the Community Reinvestment Act during the Carter presidency and the Clinton administration doubled-down on its enforcement. This weakened banks by requiring lending practices that never would have been used in a genuine free-market. Efforts to manage the consequent risks brought the packaging of loans into derivative investments and other unsound practices that collapsed like a house of cards. Yet blaming the entire “mess” on the Community Reinvestment Act is similarly myopic.
The “mess” that Mr. Obama describes is more than a banking failure. It is a sickness contracted by a fundamentally weak economy that had gone into recession some ten months before the “mess.” The weakness involves excessive dependence on foreign production of both finished goods and basic resources including oil. The dependence kills good-paying jobs thereby reducing both household purchasing power and government revenue. It creates a serious trade imbalance righted by the sale of paper securities. Yet the value of those securities depends on a dollar whose strength has been steadily diminishing as our debt increases and the Federal Reserve maintains unusually low interests rates. The Fed’s resort to “quantitative easing” similarly weakens the dollar. If the dollar’s value is preserved only through its status as a global reserve currency used for international transactions, loss of that status will make the “mess” of ’08 look trivial.
The Community Reinvestment Act began as a well-intentioned effort to eliminate the “red-lining” which had prevented persons in poorer communities, especially minorities, from getting home loans. However, this was no way to deal with the underlying poverty that made such communities a bad risk for banks. It would have been far better to address the decline of America’s industrial dominance that was becoming obvious even before the Carter presidency. Born in Newark, N.J. and raised in a blue-collar suburb, I remember that decline all too well. My father earned decent pay at a chemical plant and so did I working summer and winter breaks from school. Meeting expenses at state universities was within our means. But that plant which made products for finishing metal and painting cars, has long been an empty shell, a victim of the decline of the American auto industry.
Newark had built a modern seaport that should have been the core of an industrial renaissance. With enough good-paying industrial jobs to go around, “red-lining” would have been less of an issue. But there was too much one-way traffic at the port: fuel-efficient Japanese cars—well-built by robots originally designed in America–signaled a loss of market share for GM, Ford and Chrysler that would never be recovered. Related industries including steel-making experienced similar declines. Our economy permanently lost much of its ability to turn basic resources into valuable finished goods. The resulting loss of good-paying industrial jobs from skilled production workers to managers diminished the pool of persons genuinely qualified to assume home loans.
Government over-officiating contributed to this decline. For example, labor unions which did not oppose automation or robotics in principle could still look to collective bargaining and friendly politicians to preserve outmoded jobs. The National Labor Relations Act imposed a broad scope of collective bargaining on management and also enabled unions to become virtual monopolies for the supply of labor in unionized companies. Union shop environments became very costly and impeded retooling and replacement of obsolescent operations. This even enabled foreign auto-makers to build profitable new assembly plants in “right-to-work” states in the South. This further diminished the market share of American companies required to recognize unions as exclusive bargaining agents for labor.
Arguably, near-sighted management, not labor, bears more responsibility for the failure of American auto-makers to adapt to rapidly rising world oil prices during the 1970’s. However, over-officiating of corporate relations with the Saudi monarchy during the Truman administration contributed greatly to the loss of energy independence and the ultimate vulnerability of our nation to these price increases. The Truman administration negotiated the “50-50 split” or “Golden Gimmick” between the four huge oil companies of the Aramco consortium and the Saudi dynasty. This, combined with Truman’s written guarantee of American protection for the Saudi kingdom, made Saudi oil artificially cheap. This reduced market incentives for both domestic oil production and the building of fuel-efficient cars in the United States.
The “50-50 split” rewarded the largest American oil companies for sharing more revenue with Saudi Arabia by affording them credits against taxes owed our government. This greatly reduced taxes collected by the United States while greatly expanding the wealth transferred to the Saudis. Accordingly, the price of Saudi oil produced by Aramco did not include a reasonable amount of revenue to the United States despite its commitment to protect the kingdom. While Saudi oil never constituted a sizable portion of total U.S. consumption, the Saudis became the pricing leaders in a global market where domestic producers in the United States remained at a competitive disadvantage. Moreover, the enormous military expenses of defending sea lanes and oil fields would not be adequately defrayed by revenue from the Aramco consortium. These expenses would eventually include conflict with Iran in the Persian Gulf and war with Iraq where priceless lives were lost for the protection of Saudi Arabia.
In 2004, the Wall Street Journal noted a study which asserted that if military costs were added at the pump, gasoline prices would have been over $ 5.00 per gallon at that time. (Please see, “In Quest for Energy Security, U.S. Makes New Bet: On Democracy,” by Andrew Higgins, Wall Street Journal, February 4, 2004. Collecting more revenue from Aramco and allowing its constituent companies to pass this burden on to the global marketplace would have been a logical means of adding military costs to oil prices. Presumably, gasoline prices would have been higher since the early 1950’s had our government not abdicated an obvious responsibility to collect adequate revenue from the companies which benefitted most from over a half-century of military commitments in the Middle East. However, higher market-adjusted prices would have enabled the United States and its neighbors to retain a hemispheric energy independence with considerable benefits for our economy and national security.
Domestic oil production would have been more competitive and fuel-efficiency would have been an important aspect of automobile design at least two decades before the gasoline shortages of the 1970’s. Presumably, higher prices at the pump would have been offset by lower taxes on the average American. However, the “over-officiating” Truman administration had effectively subsidized a despotic regime and a huge oil consortium in the world’s most volatile region with low-cost military protection. America became addicted to global oil prices kept artificially low by a military commitment supported by American taxpayers without fair contribution from the increasingly wealthy producers of the oil. The addiction left American industry unable to rebound from the sudden oil price increases of the 1970’s and the loss of manufacturing dominance contributed to the “mess” of ’08.
The Saudis have shown their gratitude for the enormous wealth transferred them by allowing their society to become “fertile ground” for the funding of terrorism. The causes of 9-11 and other terrorist attacks cannot be reduced to any single factor. Accordingly, Truman administration policies which enriched the Saudi dynasty while committing America to its protection should not be forgotten. If a Republican administration had acted this way, its “evil schemes” would still be an obsession of liberal pundits and academics. In any event, Mr. Obama has failed to pin the tail on the donkey in assessing blame for the “mess” of ’08. The tail of blame belongs on the symbol of his party which still obstructs the domestic fossil-fuel production that can revitalize our economy.